International Tax

Draft law on Royalty taxation of IP registered in Germany

On July 28, 2022 the German Ministry of Finance published a draft law with new regulations for the German taxation of income from IP registered in a German register “German-registered rights”. The draft law essentially leads to extensive elimination of the “register cases” for the future and retroactive elimination of taxation of income from IP for third-party royalties.
Contents

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 (“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.

Latest developments

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 German Ministry of Finance published a further draft law on June 28, 2022 suggesting a new regulation of Section 49 (1) No. 2 letter f). Essentially, the suggested new provision contains the following:

  • The new version of Section 49 (1) No. 2 letter f) differentiates the previous term “rights” into rights within the meaning of Section 21 (1) Sen. 1 No. 1 of the German Income Tax Act (mainly ships and real estate) and other rights (including patents or trademarks).
  • With regard to rights within the meaning of Section 21 (1) Sent. 1 No. 1 of the German Income Tax Act (ships and real estate), Section 49 (1) No. 2 letter f) should be applicable without any changes to the previous version.
  • However, with regard to royalties for other rights paid until and including December 31, 2022 the provisions of Section 49 (1) No. 2 letter f) should be only applicable for payments between related parties within the meaning of Section 1 (2) of the German Foreign Tax Act (“Außensteuergesetz”).
  • Royalties for other rights between third parties (not related parties as mentioned before) paid until December 31, 2022, however, should not be taxable at all. This regulation should be applicable in all still open cases.
  • Further, the draft law suggests a limited tax liability for such “German-registered rights” occurring after December 31, 2022 within a new Tax Act – Steueroasenabwehrgesetz (“StAbwG”). According to Section 10 (1) No. 5 of the StAbwG, taxation of royalties paid for other rights after December 31, 2022 should only arise in cases in which the remuneration creditor is resident in a so-called non-cooperative tax jurisdiction within the meaning of Section 2 StAbwG (“tax havens”).

Further steps

At the moment, it is not possible to make final estimation of the implementation of this new draft law, as there can still be made further changes within the course of legislative process. For the time being, the German Ministry of Finance has asked selected associations for comments on the suggested draft law until August 11, 2022. Further developments remain to be awaited.

For currently open cases, the currently applicable legal interpretation should continued to be considered.

Accordingly, non-German-residents should check whether royalty payments for, or disposals of German registered IP were made for the past. If so, it should be checked, if the “simplified procedure” is applicable. In principle, these are cases in which Germany has no final taxation right according to an applicable DTT. For these cases, a (retroactive) exemption should be applied for until June 30, 2023.

Cases in which Germany has a final taxation right according to the currently applicable legal interpretation, are particularly relevant. In these cases, withholding tax on the respective royalties has to be declared and paid in order to avoid possible criminal consequences. However, such cases should be kept open against the background of the possible new regulation.

 

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