On January 11, 2021 the German Ministry of Finance published an updated government draft law concerning the modernization of withholding tax relief and extraterritorial taxation of intellectual property (IP) tackling also the issue of German taxation of income from IP registered in a German register. The deletion of the terms “registered in a German register” from the wording of the law has now been cancelled.
At the beginning of the second quarter of 2020 the discussion started 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.
According to the wording of the German domestic tax law, 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 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. Therefore, this Section shall also cover royalties/capital gains that are paid between parties resident outside Germany. On November 6, 2020, the German Tax Authorities issued revenue guidelines for handling such matters. Due to these guidelines, royalties paid between non-resident parties 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. 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 required to file a tax return.
On November 20, 2020, the German Ministry of Finance issued a working draft law concerning the modernization of withholding tax relief and extraterritorial taxation of intellectual property which moreover deals with the provisions of Section 49 (1) No. 2 letter f) of the German Income Tax Act. This draft law proposed to eliminate the non-resident taxation of royalty income and capital gains relation to rights registered in a public German register without any further nexus to Germany by the deletion of the terms “registered in a German register” from the wording of the law. The implementation of the draft law would have eliminated the taxation of royalty income or capital gains income derived by IP registered in a German register without further German nexus.
However, after discussion of the working draft law within the German Cabinet, the amendments to Section 49 (1) No. 2 letter f) of the German Income Tax Act were deleted as part of a Government draft law dated January 11, 2021. According to this Government draft law, no amendments section 49 (1) No.2 (letter f) seem to be planned anymore.
The positive lookout for the future indicated by the working draft law of November 20, 2020 must now be abandoned for the time being. However, it still has to be noted that also the government draft law is not yet legally effective. It is currently still unclear whether and when the draft law will become actual law, so that further amendments could be possible.
Nevertheless, according to the present status, the guidelines from November 6, 2020 are to be applied more urgent so that the following steps must be continued to be worked on intensively.
For the past, non-German-residents should check whether royalty payments for or disposals of German registered IP were made. If necessary, WHT returns on corresponding royalties and/or capital gain tax returns 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 withholding tax 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 withholding tax respectively reduces withholding tax.
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