Switzerland: Swiss companies subject to German royalty deduction limitation rule

German Federal Ministry of Finance issued guidance on the application of the royalty deduction limitation rule

Swiss companies subject to German royalty deduction limitation rule

The German Federal Ministry of Finance (BMF) in January 2022 issued two new circulars on the application of the royalty deduction limitation rule (Lizenzschranke). In scope of these circulars are, among others, Swiss companies that benefited from the cantonal privileges or are still preferentially taxed due to individual tax rulings.

Background

Since 1 January 2018, the German royalty deduction limitation rule (Section 4j EStG) reduces the deductibility of expenses for the use of rights in Germany if:

  • The corresponding income received by the foreign licensor is subject to lower taxation deviating from standard taxation
  • The income tax incurred is less than 25%
  • The recipient is a related party of the German payor

However, a deduction limitation does not apply if the preferential taxation applied to the relevant income at the level of the recipient complies with the OECD's nexus approach.

January 2022 circulars

While a prior circular (19 February 2020) only refers to the Nidwalden license box, the circular dated 6 January 2022 extends application of the German royalty deduction limitation rule to the former Swiss cantonal tax privileges (i.e., holding, mixed and domiciliary regimes).

Since the cantonal tax privileges were relevant only until 31 December 2019, any non-deductibility of the royalties paid to companies benefiting from the cantonal tax privileges only relate to the tax periods 2018 and 2019.

In addition, individual tax rulings between the Swiss tax authorities and recipients of royalty payments may also meet the criteria of a harmful preferential taxation.

KPMG observation

In view of the extended focus of the royalty deduction limitation rule, Swiss companies that benefited from any of the Swiss cantonal tax privileges as well as those with a (still) existing preferential tax ruling or a granted tax relief may need to analyze their individual situation against the new BMF circulars and the underlying legislation.

Read a February 2022 report prepared by the KPMG member firm in Switzerland

 

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