- According to the German Federal Ministry of Finance (BMF), the licensing of rights registered in a German register is subject to limited tax liability, even if there is no other connection with Germany.
- Depending on individual circumstances, taxpayers may benefit from temporary procedural relief on the basis of Double Taxation Agreements (DTAs).
- A thorough analysis of the relevant facts and, if necessary, a disclosure/application until June 30, 2023 in accordance with the relevant BMF circular are required.
History and practical legal training
The question of whether the licensing of intellectual property registered in Germany is sufficient to trigger limited taxation in Germany has been the subject of much controversy since 2020, in particular due to partly contradictory statements by tax authorities and bills. . This controversy has particular consequences for multinational groups that do not exploit intellectual property (IP) in Germany, but whose rights have been registered in a German register. In this context, rights registered in a national register also include, for example, patents which are registered in a German register following an application to the European Patent Office in accordance with the European Patent Convention. In a BMF circular dated November 6, 2020, the tax authorities supported the view that mere registration in a national register would be sufficient to trigger a limited tax liability in Germany and that no other German tax connection is required. However, the so-called German Withholding Tax Relief Modernization Act (AbzStEnt-ModG) bill released two weeks later stated that mere registration in a German register should no longer be sufficient to trigger liability. limited tax. However, this legislative change was not adopted in the final version of the German law of 20 January 2021 on the modernization of withholding tax relief. Therefore, no changes to the law are to be expected on the current basis and the question regarding the correct interpretation of the relevant provisions remains in focus.
This development shows the uncertainty surrounding the practical application of the law, which both tax advisers and those responsible for tax law in multinational groups have been and still are confronted with. Historical transactions must be reviewed in order to comply with relevant reporting obligations to the German tax authorities. Under current agreements, even in purely foreign cases (licensing of a right registered in the country by a foreign licensor to a foreign licensee), a foreign licensee would be obliged to withhold taxes for the foreign licensor’s account. In addition, the treatment of any withholding tax in new agreements should be regulated.
This withholding tax obligation should also be considered in the context of potentially applicable double taxation agreements (tax treaties), where a German right to tax is often excluded. Nevertheless, it should be noted from a tax procedure point of view that a withholding tax is initially required, which would be refunded later (subject to the right to treaty benefits).
In terms of tax procedure law, a BMF circular of 11 February 2021 provides for certain procedural simplifications, even if — as explained in more detail below — the simplified procedure remains subject to a number of obligations.
License payments until June 30, 2023 inclusive
With regard to remuneration already due to the grantor or to come until June 30, 2023, the tax authorities have provided for a simplified procedure similar to the so-called exemption certificate procedure, but which at the same time has a real retroactive effect in that all compensation (including past compensation) is included. This deadline for the application of this simplified procedure was initially September 30, 2021, but was extended by the BMF circular of July 14, 2021 until June 30, 2022. On June 29, 2022, the BMF published another circular and further extended the deadline for applying the simplified procedure until 30 June 2023.
In these cases of simplified procedure, the tax authorities authorize the exemption from withholding tax and tax declaration under the following conditions:
- Debtor of the foreign remuneration: the licensee is neither domiciled nor has its place of management in Germany.
- Remuneration creditor CDI exemption: the licensor residing for tax purposes in a CDI country is entitled to German tax relief under the applicable CDI (in the case of partnerships, the right of the partnership partners under CDIs is relevant )
- Registration deadline: the licensor (or the licensee, if authorized by the licensor) must file an application for exemption from withholding tax with the German Federal Central Tax Office (BZSt) no later than late June 30, 2023.
- Disclosure of relevant contractual relationships (if applicable, a summary thereof as part of the application) and translation of relevant passages into German.
According to the BMF Circular, if there is a reasonable doubt as to entitlement to treaty benefits under the DTA or Article 50d ITA, the tax deduction cannot be waived. The BMF circular sets out certain cases of doubt, which must therefore be checked beforehand. A case-by-case analysis is also possible, therefore a sufficient explanation of the justification of the application under tax law is useful. If the application is rejected, the fee must be paid within one month of the rejection.
License payments after June 30, 2023
Generally, if payment for the license is received after June 30, 2023, the fee must be withheld and a refund claim filed later. However, the withholding tax obligation does not apply if a valid exemption certificate has been issued, which can be requested.
The BMF circular of February 11, 2021 provides guidance on how to determine the tax base of the withholding tax, in particular in cases where the total remuneration is paid for the use of the rights in several territories and, therefore , the rights granted are registered in several jurisdictions. It should be noted that according to this BMF circular, a simple cost-based approach (including profit mark-up on these (registration) costs, if any) is not acceptable. In this case, the total remuneration must be “distributed taking into account the principle of causality” (so-called top-down approach). It is debatable whether the latter is consistent with general guidance on transfer pricing.
Sale of rights registered in Germany
The sale of intellectual property rights registered in Germany is not subject to withholding. However, the seller is still legally required to file a tax return. Indeed, even if Germany has no right to tax under a double taxation agreement, a so-called zero tax return must be filed. Also in this case, according to the BMF Circular of February 11, 2021, disclosure of the relevant contractual relationships, including a German translation of the relevant passage, is required.
BMF report assessing the current legal situation
On June 28, 2022 (one day before the extension of the application deadline), the BMF published a report and assessed the situation.
The BMF reached the following main conclusions:
- The legal situation with regard to the temporary assignment and disposal of rights registered in German public registers is complex in the case of taxpayers with limited tax liability. Very few of the fundamental legal questions that arise have been decided by a court, so legal risks remain with respect to the cases that have been decided to date (by administrative authorities only) or are awaiting decision.
- Even if the tax jurisdictions confirm the tax administration‘s legal interpretation, considerable factual and legal uncertainties remain due to the complex circumstances of each individual case, in particular with regard to the calculation of the tax base for withholding tax. source.
- The handling of registry cases revealed that the existing legislation creates a very high administrative and compliance burden. This is the case despite the procedural simplifications granted by the BMF through the various BMF circulars in order to take into account the advantages in double taxation agreements.
- With regard to third-party licenses, in particular, companies continue to face significant practical difficulties when it comes to obtaining information from the past.
- Intensive work is required at the level of the competent tax authorities and substantial tax payments from multinational companies are to be expected for past tax periods, based on the files processed so far.
- In many cases, structural changes were observed in the years 2019 and 2020 which lead to transfers of rights to DTA (onshoring) countries.
- Germany’s rule is criticized internationally and is seen as a unilateral extraterritorial measure, especially given the international consensus to introduce a global effective minimum tax (Pillar 2) and to partially reallocate taxing rights (Pillar 1) .
These key findings from the BMF show that the tax authorities are aware of the factual issues and criticisms regarding the filing of claims.
conclusion and perspectives
Affected market participants, who have granted license rights which have been entered in a German register, now have an additional year to file the corresponding application before 30 June 2023 in order to avoid withholding tax obligations. German. In summary, the BMF circular of February 11, 2021 can positively be considered as having at least created a framework for action, but many areas of doubt remain. In practice, the determination of the tax base will be difficult and it may only be possible to clarify this conclusively in the tax courts at a later date. Moreover, from a simple legal point of view, one can wonder whether the simple registration of a right in a national register is sufficient to trigger a German tax obligation, whereas in practice it is recommended to comply with the circulars BMF described above. With regard to the drafting of future license agreements with the German link, as in the case of the license of a right protected and registered in several countries, it may be wise to contractually break down the license fee by country (case of license fee) or establish contractual parameters on the basis of which the share of license fees attributable to Germany can be determined.