New German tax developments regarding intellectual property (IP)
Corporate structures
New German tax developments regarding intellectual property (IP)
Fri 12 Mar 2021
Decree of the Federal Ministry of Finance dated 11 February 2021 – Remuneration of the temporary transfer and the disposal of rights which are entered in a German public register.
Further information on German tax developments relating to intellectual property (IP) registered in Germany has been released by the German Authorities. This helps to clarify how the German taxing right can apply to non-German users or vendors of this IP. This may be particularly important for multinationals to consider where IP rights are cascaded through group entities some of which may be located outside Germany.
Legal Background:
The Federal Ministry of Finance already stated with decree dated 6 November 2020 that non-resident income pursuant to Sec. 49 para. 1 no. 2 lit. f and no. 6 of the German Income Tax Act (ITA) could be created by the temporary or non-temporary transfer of rights entered in a German register. These rights also include patents that are entered in a domestic (German) register due to an application to the European Patent and Trademark Office in accordance with the European Patent Convention.
Consequently, in cases of a temporary transfer of rights, the payment debtor (licensee) is obliged to withhold taxes, pay them to the Federal Tax Office (FTO) and to file a tax return with the FTO. If the transfer of rights is not limited in time, a tax return needs to be filed by the non-German transferor (payee) with the local tax office in order to declare any capital gains tax that may be due.
According to the Federal Ministry of Finance, these legal consequences do not require unlimited tax liability of the licensee. Thus, the abovementioned obligations also apply for transactions between non-German residents, provided that the transfer includes a right registered in Germany.
With decree dated 11 February 2021, the Federal Ministry of Finance has now released a document providing certain simplifications of the process.
Simplifications:
If the amounts are to be paid to the non-German creditor (licensor) on or before 30 September 2021, the abovementioned obligations can be disregarded provided certain conditions are met.
In cases of a temporary transfer of rights, the following requirements must be met:
- The licensee is not fully tax liable in Germany;
- A double tax treaty (DTT) between the country of residence of the licensor and Germany is applicable and the licensor is entitled to the tax relief within the meaning of the German anti-treaty/ anti-directive-shopping regulations;
- An application for tax exemption is filed with the FTO by 31 December 2021;
- The contractual relationships must be disclosed to the FTO with regard to the amounts paid and the relevant passages dealing with the transfer of rights need to be translated into German.
As for payments made after 30 September 2021, the regulations of Sec. 50d ITA apply in any cases. Thus, where no withholding tax exemption certificate is available, the licensee is obliged to withhold and, consequently, pay the respective withholding tax to be levied on the transaction. Afterwards, the licensor can file an application for a refund of the withholding tax deducted.
With respect to (non-temporary) disposals of rights, the decree also provides these simplifications for transactions that will take place on or before 30 September 2021.
In the event that a DTT assigns the right of taxation not to Germany but to the country of residence of the vendor, the transmission of a German tax return will not be required. Nevertheless, the transaction must be disclosed to the local tax office analogously to temporary transfers.
After 30 September 2021 – provided that a DTT is applicable which denies Germany’s right of taxation – a German tax return, showing a profit of zero Euro, needs to be filed. If no DTT is applicable, the respective profit resulting from the disposal of rights has to be determined and a German tax return submitted.
Tax base:
In both cases – the temporary transfer as well as the disposal of rights – the taxable base is to be assessed in correspondence with the gross amount provided in the contract.
If it is not possible to determine the remuneration amount basing on the contractual agreement, an appropriate allocation needs to be conducted in accordance with the actual total payment of the transfer of rights. Without specifying how exactly such an allocation should be carried out, the Federal Ministry of Finance indicates that the amount of the total income of the licensor generated by the transfer of the rights is substantial for the determination of the tax base.
In the event that the determination of the tax base is still not possible, the tax authorities will estimate the amount of remuneration allocated to Germany pursuant to Sec. 162 General Tax Code, e.g. by assessing the revenue generated in Germany in relation to the total revenue. Subsequently, the percentage out of it will be related to the total amount of remuneration paid for the transfer of rights.
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