The German Ministry of Finance (BMF) published the first guidance on one of the most hotly discussed German tax issues of the year on Friday, 6 November 2020.
Background: Entry in German register as nexus to Germany
In spring 2020, many foreign companies with significant IP portfolios became aware of the exact scope of the potentially far-reaching non-resident taxation rules in Germany which always require some form of nexus to Germany. Rather surprisingly, the mere “entry in a German register” should suffice for IP transactions (licensing and sales) to be subject to German taxation, even in foreign-to-foreign transactions. This meant for instance that a licensing transaction between an Irish company and a Hong Kong company would be subject to tax in Germany if (part of) the underlying IP is also protected in Germany after it was registered with the German Patent and Trade Mark Office in Munich.
Most international taxpayers were caught by surprise. Due to the perceived lack of a nexus, German advisors were often not involved in the initial transaction. The parties also felt (in most cases) treaty protected. In licensing transactions, however, the treaty protection usually gives the licensor a right to ask for a refund or apply for an exemption beforehand. There was no guidance on the suspension of the initial withholding obligation of the licensee. Against this background, many taxpayers informed the authorities as a matter of precaution in the summer.
The BMF remained silent for a long time but has now published the following guidance:
- The entry in a German register actually suffices as a nexus for a German taxation right despite public international law concerns (genuine link principle; establishing a withholding obligation for non-residents as overreaching).
- The entry in a European register which provides IP protection also for Germany should equal the entry in a German register. This administrative interpretation is against the previous understanding in legal literature and tests the boundaries of the wording of the law. It will certainly become disputed in a court challenge.
- The licensee has to withhold and pay the withholding tax to the Federal Tax Office and file a corresponding tax return. An exemption for treaty protected cases is not provided. This requires significant efforts from the licensee and the German administration without any additional German tax revenue.
Many practical questions remain open such as the treatment of complex transactions involving diverse IP bundles. At this point, the best news for taxpayers are informal remarks from officials: There is no intention to commence criminal proceedings against taxpayers, at least not against those that have approached the authorities already.