On 6 November 2020, the German Tax Authorities issued guidance on the German taxation of income from intellectual property (IP) registered in a German register. The guidance states that the registration of intellectual property in a German register is sufficient to trigger taxation of royalty income or capital gains income derived from such IP, and that no further German tax nexus is required.

Background

At the beginning of the second quarter of 2020, a discussion begun as to whether Section 49 (1) No. 2 Letter f) of the German Income Tax Act (“Einkommensteuergesetz”) justifies the taxation of royalty payments between non-residents relating to IP registered in a German register; i.e. cases where neither the licensor nor the licensee are resident in Germany or have any other nexus to Germany.

According to the wording of this regulation, domestic source income is earned, if income is generated from renting or leasing or from the disposal of rights entered in a German register. According to the wording of the regulation, 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. Therefore, the regulation shall also cover royalties that are paid between persons resident outside Germany (e.g. Ireland and Netherlands or any other country).

If the rules are applied, the royalty would be subject to German withholding tax (WHT), unless a corresponding certificate of exemption has been granted by the German tax authorities. The WHT rate amounts to 15 % plus 0.825 % solidarity surcharge. This results in a total burden of 15.825% that the licensee must deduct for the licensors’ account from the royalty payment and remit to the German tax authorities.

Capital gains resulting from the sale of such IP shall not be subject to WHT but may require a German tax return filing by the licensor.

In this context, it may be considered that this regulation received little attention from professional literature or from the tax authorities before the second quarter of 2020, albeit the regulation in question has already been in place for decades. Recently published articles in professional literature contest the applicability of this rule to payments between non-residents. Therefore, there were so far sound arguments that the rule in question was not applicable to payments between non-residents. Nevertheless, due to the wording of the regulation, the risk of applicability could not be excluded.

Latest developments

Revenue guidelines for handling such matters have been issued on November 6, 2020 by the German tax authorities.

The Revenue guideline stipulates the following:

  • Royalties paid between non-resident persons shall be subject to tax in Germany, if they are paid in relation to rights entered in a German register. The licensee is required to levy the tax by way of withholding.
  • Capital gains arising from the sale of a right entered in a German register shall be subject to tax in Germany. The licensor is generally required to file a tax return in this respect.
  • Rights registered in the European Patent Register based in Munich should also be affected to the extent that they have a protective effect for Germany.

It is a statement of the tax authorities’ view and does not comment on any further explanations of the complex issue around the German Nexus.

What you need to know

The tax authority’s guidance is now to be taken into account for corresponding cases. A foreign taxpayer now has an obligation to disclose affected cases with the German tax authorities once he becomes aware of such structures. 

In principle, it should be acknowledged that special caution is required for all persons that have either registered rights in Germany or at the European Patent Register with a protective effect for Germany.

Potential tax effects

In relation to royalties most German Double Tax Agreements (“DTA”) provide for a zero rate of WHT. Therefore, in these cases a refund / exemption certificate should be available, if the licensor is entitled to a treaty benefit and complies with German Anti-Treaty-Shopping rules. It has nevertheless to be considered that treaty benefits apply (inter alia) only, if the licensor obtains a certificate of exemption prior to actual payment of the royalty. As a result, WHT generally also applies and need to be declared and remitted to the German tax authorities in DTA cases, where no WHT certificate is on file yet.

In relation to capital gains arising from the sale of IP registered in Germany, it should be noted that no withholding tax requirement exists. Instead the seller is required to file a tax return in Germany, unless the taxation right is allocated to the seller’s country of residence under a DTA, which most German DTAs do. Specific attention should therefore be given to IP registered in Germany, and sold by persons resident in non-DTA countries.

Next steps

For the past (basically all years as from 2013), non-German-residents should check whether royalties for or disposals of German registered IP were made. If necessary, WHT returns on corresponding royalties and / or capital gain tax returns in non-DTA cases need to be filed and the corresponding tax payments should be made to avoid consequences under German criminal law. If an applicable DTA provides for an exemption, a refund of overpaid WHT could be claimed.

For future royalties it should be considered to apply for a withholding tax exemption certificate in Germany. With a valid exemption certificate in place, royalties can be paid free of WHT respectively at a reduced WHT.

If you would like to discuss further, please contact any of the contacts below:

Note: This information is of a general nature, and no decisions should be taken without obtaining further legal advice. Warth & Klein Grant Thornton AG does not assume any legal responsibility for the consequences of any decision or measures taken as a result of the information provided. You are encouraged to seek professional advice. We would be happy to discuss the specific application to your own case with you.

© 2020 Warth & Klein Grant Thornton AG – all rights reserved

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