In 2020, many foreign companies were taken by surprise when they learnt that they might have fallen within the scope of German non-resident taxation with respect to past license and IP sale transactions, even where only non-German parties were involved in such transactions. On the basis of a purely literal interpretation of the domestic tax law, the mere entry of the relevant IP in a German register (German Patent and Trade Mark Office in Munich) appeared to suffice for IP transactions (re licenses and sales) to be subject to German taxation.

New draft bill

In November 2020, the German Ministry of Finance published a draft bill which acknowledged the non-existence of such a purely “register-based” taxation right. This was seen as a step in the right direction - since Germany would otherwise unilaterally claim an international, very unusual and questionable taxation right for non-resident IP transactions, which would also be at odds with the BEPS initiatives (which aim at a more harmonized taxation of intangible assets). The draft bill was positively received by companies and consultants and seemed to be a solution to the legal discussion on this topic. However, according to a revised draft bill, endorsed by the German Government on January 20th, 2021 the relevant provisions of the German Income Tax Act (Section 49) are to remain unchanged. As a result, it remains unclear if solely foreign-to-foreign licensing or IP sale transactions are still subject to German taxation. What is more, the new draft bill further tightens the reporting obligations for foreign taxpayers even in cases which are, under treaty law, exempt from German taxation:

• the German withholding tax payment obligations for IP transactions – even in foreign-to-foreign transactions with no party being tax resident in Germany and irrespective of any treaty protection – can only be avoided in treaty protected cases by applying for an exemption certificate. Starting in 2022, licensees in treaty protected cases will also not be required to withhold withholding tax from royalty payments if the annual royalties do not exceed 5,000 EUR;
• irrespective of any withholding tax payment obligation the draft bill further states that licensees are required to file withholding tax returns. This will even apply to the exemption described above (licensee is in possession of an exemption certificate or annual royalties do not exceed 5,000 EUR) - albeit, according to special regulations, a "zero" withholding tax return will be sufficient.

Implication for practice

The new draft bill has still to be approved by the German Parliament, but it is likely that it will pass for law and thus oblige foreign companies to comply with German withholding tax obligations in case of a German nexus creation of IP registrations in Germany in the future. For foreign taxpayers licensing or transferring German-registered IP, the question of taxation is likely to continue to be an important topic going forward.

Expected developments with regard to reprocessing of old cases

Foreign taxpayers licensing or transferring German-registered IP, as well as their consultants, are reprocessing old cases in coordination with the German tax authorities. Further guidance from the German Federal Ministry of Finance on how to deal with old cases is expected. We will keep you updated on further developments.