Royalty taxation of IP registered in Germany

On July 14, 2021 the German Ministry of Finance published updated Revenue guidelines for the German taxation of income from IP registered in a German register. The guidelines essentially extend the filing deadline for the applications for retroactive exemption.

Background

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. 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. After a number of developments concerning this provision, last on February 11, 2021 the German Ministry of Finance issued Revenue guidelines for proceedings in such cases.

Latest developments

On July 14, 2021, the German Ministry of Finance issued further Revenue guidelines in relation to this provision. Based on the previous guidelines dated February 11, 2021, they essentially extend the filing deadline. Therefore, it is still to proceed as follows:

Proceedings regarding licensing of rights

Basically, royalties in relation to rights entered in a German register shall be subject to tax in Germany. The licensee is required to levy the tax by way of withholding. In order to reduce the administrative burden in tax treaty cases where Germany should not be entitled to retain any tax, the Revenue guideline offers the following relief. Under the Revenue guidelines the licensee can refrain from declaring and withholding of taxes for relevant payments up to June 30, 2022 (previously up to September 31, 2021), if the following conditions are met:

• The licensee’s residence (individual) or registered office and place of management (corporation) is not in Germany at the time of receipt of the payment
• The licensor is a resident of a country with which Germany concluded a double taxation treaty (DTT) at time of the receipt of the payment.
• The licensor has access to the tax treaty,
• The licensor is the beneficial owner of the royalty,
• The requirements of the German Anti-Treaty-Shopping rules are fulfilled
• Licensor files an application of exemption until June 30, 2022.

In case of royalties based on several contracts but paid between the same parties, these royalties can be summarized within one application. The licensee is also allowed to file such a retroactive exemption request in case the contractual relationship does no longer exist.

The simplification would not be applicable, if the licensor’s treaty access or entitlement for refund is doubtful due to anti-treaty-shopping rules (e.g. hybrid entities or double residency).

In case of a rejection of the exemption request by the tax authorities, the licensee must file respective tax returns for the royalties paid within one month after rejection. The rejection can be appealed.

Further steps

As already presented in our previous tax alerts, the following steps should be furthermore taken:

For the past, non-German-residents should check whether royalty payments for, or disposals of German registered IP were made. It should be checked carefully, if the simplification of the new Revenue guidelines apply for royalty payments. If so, a retroactive exemption should be applied for June 30, 2022.

If the simplification does not apply, WHT returns on corresponding royalties need to be filed, and corresponding tax payments should be made to avoid potential consequences under German criminal law. If eventually a DTA provides for an exemption, a refund of over-paid withholding tax could be applied for. In addition, Taxpayer´s right for appealing the application of withholding tax in these cases applies.

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 withholding tax respectively reduced withholding tax.

For the sale of rights registered in a German register a tax return has to be filed. If an applicable DTT provides for an exemption, and the simplification requirements of the new Guideline are fulfilled the capital gains would however not need to be determined.

It is still unclear whether amendments to Section 49 (1) No.2 letter f) will be revisited at a later point in time. It seems – also due to the new Revenue guidelines – however rather unlikely that this happens before the next German Election in September 2021.