The recent US tax reform introduces a special regime for foreign-derived intangible income (FDII). Now the question arises of whether these new provisions constitute a preferential tax regime in the above sense, resulting in a (partial) non-deductibility of license fees paid by German licensees to US licencors. Given the wording of the law and the reasoning and history of the license barrier, the authors conclude that the FDII provisions do not constitute a preferential tax regime. Flick Gocke Schaumburg, Taxand Germany, explores.
Background – The FDII rules
The FDII rules are designed to give taxpayers incentive to bring IP income – and with it the relevant functions and jobs – to the US. To this end, they allow a partial deduction for FDII when determining the income, resulting in an effective tax rate for this income of 13.125%.
The FDII is calculated on a mere fiction in two steps; in simplified terms: First, the deemed intangible income is determined by deducting a routine return of 10% on the tangible assets from the overall income. The foreign part of this income, the FDII, is then calculated by multiplying the deemed intangible income by the ratio of foreign income from sales and services to the overall income.
Authored by Benedikt Ellenrieder & Dr. Tim Zinowsky
For similar content to our Global Guide, subscribe to our mailing list and keep up to date.
The German license barrier rules should not apply to license expenses whose corresponding revenues are subject to low taxation in the US under the FDII regime. Although it must be expected that the German tax authorities will take a different position on the issue, taxpayers are well advised to take legal measures against potential claims of the tax authorities given that Sec. 4j ITA obviously breaches constitutional and EU law.
