On February 11, 2021 the German Ministry of Finance published further Revenue guidelines for the German taxation of income from IP registered in a German register. The guidelines include information regarding further steps, the filing procedures, simplification rules and the determination of income.
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. During the last months, there have been a number of developments concerning this provision:
On November 6, 2020, the German Tax Authorities issued first Revenue guidelines according to which royalties in relation to rights entered in a German register paid between non-resident parties shall be subject to tax in Germany. The licensee is required to levy the tax by way of withholding. Further, capital gains arising from the sale of a right entered in a German register shall be subject to tax in Germany. The seller is generally be required to file a tax return. On November 20, 2020, the German Ministry of Finance issued a working draft law which proposed to eliminate the rule completely. After discussion within the German Cabinet, the proposed elimination of the provision was reversed in a Government draft law dated January 11, 2021.
On February 11, 2021 the German Ministry of Finance issued further Revenue guidelines in relation to this provision.
Proceedings regarding licensing of rights
Basically, royalties in relation to rights entered in a German register shall still 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 new Revenue guideline offers the following relief. Under the new Revenue guideline the licensee can refrain from declaring and withholding of taxes for relevant payments 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 December 31, 2021.
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 re-quest 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.
Determination of income
The Revenue guideline also comments on the currently highly discussed question how to calculate the tax basis for potentially payable withholding tax. That applies in particular for cases in which several rights have been licensed, or the same right has been licensed into several countries. Generally, German withholding tax is based on gross income. The Revenue guideline stipulates a top-down approach by which the gross royalty amount paid has to be allocated to the German registered rights based on a causality approach.
According to the Revenue guideline, a de-termination of the tax base purely based on a cost-plus approach or a bottom-up approach should not lead to an appropriate result. In case a specific allocation is not provided by the taxpayer, the tax authority is entitled to estimate the tax base. In this case the allocation will be based on German revenues compared with total (worldwide) revenues realized for the licensing of the rights.
Proceedings regarding sales of rights
Capital gains arising from the sale of a right entered in a German register shall still be subject to tax in Germany. The licensor is required to file a tax return in this respect. A tax return has to be submitted, regard-less of whether or not Germany has a right to tax the capital gain according to a DTT. If Germany does not have a right to tax the capital gain according to the respective DTT, a tax return is nevertheless to be filed, however in the amount of EUR 0,-. A determination of income can be refrained from in this case.
The good news is that the process of declaration, withholding and refund has been simplified for cases in which the licensor has treaty access and further conditions are met. The guidance regarding the determination of the tax base by applying a top-down-approach is however questionable, and to be analyzed on a case-by-case basis. As a result, the following steps should be taken (please refer also to our previous issues “Revenue guidance issued on Royalty taxation of IP registered in Germany, dated November 10, 2020”, and “New developments on Royalty taxation of IP registered in Germany, dated November 20”):
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 by December 31, 2021.
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 Ger-man 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 currently unclear whether amendments to Section 49 (1) No.2 letter f) will be revisited at a later point in time. It seems how-ever rather unlikely that this happens be-fore the next German Election in September 2021.
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