As of the second quarter of 2020 a discussion evolved regarding Section 49 (1) No. 2 letter f) of the German Income Tax Act (“Einkommensteuergesetz”) which according to the wording justifies the taxation of royalty payments between non-residents relating to IP registered in a German register (“German-registered rights”). According to the wording of the provision, it is not necessary that the right must be economically exploited in Germany, or that the licensor or licensee is resident in Germany or have any other tax nexus, e.g. branch, in Germany. It should be sufficient that the rights are entered in a German register.
According to the provision, royalties in relation to rights entered in a German register paid between non-resident parties shall be subject to tax in Germany. Further, capital gains arising from the sale of a right entered in a German register shall be also subject to tax in Germany.
In November 2020, the German Ministry of Finance already initiated the elimination of the provision of Section 49 (1) No. 2 letter f) within a draft law. However, this draft was not implemented. Instead, there was a “simplified procedure” published for the treatment of such “German-registered right”. Deadline for this “simplified procedure” was recently extended by one year until June 30, 2023.
The Federal Council of Germany approved on December 16, 2022 the Annual Tax Act (JStG) 2022, which, among other things, newly regulates the taxation of registered rights. The new regulation essentially comprises:
For payments from the leasing or sale of so-called other rights (inter alia patent, trademark or plant variety rights), which are made to third parties (not to related persons within the meaning of section 1 para. 2 AStG), the tax liability is retroactively waived for all open cases.
In future, only payments made to third parties resident in a so-called non-cooperative tax jurisdiction within the meaning of section 2 StAbwG will remain taxable (section 10 para. 1 no. 5 StAbwG).
The tax liability for payments in connection with the above-mentioned other rights that accrue to related parties within the meaning of section 1 para. 2 AStG after 31 December 2022 is limited to cases in which no exemption can be obtained, i.e. in cases where the remuneration creditor is resident in a non-DTA state or - in the case of residence in a DTA state - if national regulations (e.g. section 50d para. 3 EStG) prevent exemption from withholding tax.
For past periods, it must be checked whether royalty payments for, or disposals of German registered IP have been made to related parties
Payments to third parties resident in a non-cooperative tax jurisdiction within the meaning of section StAbwG that are made after 31 December 2021 are generally subject to German withholding tax.
In the case of payments to affiliated persons, it must also be examined in the future whether the German right of taxation does not apply on the basis of the applicable DTAs and the provisions in section 50d EStG. If this is the case, no exemption certificate must be applied for or be available for payments made as of 1 January 2023.
If it is not clear whether the provisions of section 50d EStG in particular prevent an advantage from the DTA, an exemption for payments made from 1 January 2023 should be applied for as a precaution.
For cases in which Germany has a final right of taxation, German withholding taxes must (continue to) be declared and paid.
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