On November 6, 2020, the German Federal Ministry of Finance issued a decree addressing certain open questions relating to foreign taxpayers’ obligation to submit tax filings for royalty income derived from intellectual property (“IP”) rights registered with a domestic register. The decree addresses situations, in which both the licensor and the licensee are not tax resident in Germany. Until now, it has been common practice not to withhold and remit taxes on royalties paid in such situations. The decree will change the status quo as it states that a domestic registration alone creates a sufficient nexus to Germany, resulting in an obligation for the licensee to submit tax filings and withhold taxes in connection with royalty payments made by it.
Pursuant to the decree, a limited German tax liability may also exist for capital gains arising from a transfer of legal or beneficial ownership (e.g., by way of an unlimited license) in domestically registered IP. Such capital gains are generally not subject to withholding tax in Germany, and in such cases, the licensor / owner of the IP would generally be obliged to file a tax return in Germany if it transfers ownership of that IP.
A German tax obligation arises for royalty payments and capital gains derived from IP registered with a domestic register. The tax rate is 15.825% (15% corporate income tax plus 5.5% solidarity surcharge thereon).
IP registrable in Germany includes, for example, patents, trademarks and designs. A European registration may also be considered to create sufficient nexus by German tax authorities, at least in cases, in which the European registration is made in Germany or a follow-up registration in a German register is required for effective protection. This is often the case for patents. For other IP not requiring German registration (for example, registration with the European Union Trademark Office in Alicante, Spain), the situation remains unclear, as the domestic protection directly follows from the registration with such European register.
The recent decree does not address cases, in which applicable double tax treaties with Germany provide for a 0% German tax on income derived from German IP. It appears that even in such cases, however, German tax authorities may require the licensee to submit a tax declaration and to withhold taxes. This would then require the licensor to file a refund claim. This would at least be the usual procedure under German law.
Both licensors and licensees should carefully analyze at least for all tax periods beginning with 20131 whether they could be subject to a German tax filing requirement and/or tax liability, either as payment recipient or as a withholding agent as a result of the decree. As a first step, the potentially relevant IP and the beneficial owners should be identified. As a second step, to which extent payments are allocable to Germany and whether there is protection under a double tax treaty with Germany should be analyzed.
With regard to treaty relief, licensors should consider applying for relief from royalty withholding tax going forward. A valid exemption certificate would generally allow the licensee to refrain from deducting withholding taxes.
1 Going back seven years: regular four-year statute of limitation plus three years in cases, in which no tax declaration/ return was filed.