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German foreign-to-foreign IP taxation: Ministry listens to complaints and prepares for an end

On 16 June 2022, the German Federal Ministry of Finance (MoF) submitted to the finance committee of the German parliament its evaluation report of the “register cases” reported since 2020. “Register cases” are instances where, on the MoF’s interpretation of the relevant German law, a German tax liability arises in respect of royalties or capital gains arising from the licence or sale of German-registered IP even though both parties to the transaction are resident in a foreign jurisdiction and the sole nexus to Germany is the registration of the underlying IP in Germany. Where royalties are concerned, the licensee would be subject to a withholding obligation; in respect of capital gains, the seller would have to submit a tax return and pay the relevant tax.

The key messages of the MoF evaluation report (which I discuss in more detail below) are as follows:

  • The MoF maintains its (as yet untested) view of the law, but recommends legislative changes to abolish the non-resident taxation of German registered IP with effect for future tax periods (except for transactions that involve parties resident in tax havens).
  • It is planned that the time limit for the "simplified" procedure in treaty cases (which provides for an exemption from the licensee’s withholding obligation if certain conditions are met) will be extended to 30 June 2023.
  • In the MoF’s view, third party licenses are within the scope of the German rules on non-resident taxation, but the MoF appreciates that licensees may not, in practice, be able to obtain the information required to file proper withholding tax returns and will continue to work on a solution (acknowledging also that third party licenses are rarely granted by non-treaty protected licensors).

The MoF’s view of the law

The MoF maintains its view that a German tax liability arises in respect of royalties or capital gains arising from the licence or sale of German-registered IP even though both parties to the transaction are resident in a foreign jurisdiction and the sole nexus to Germany is the registration of the underlying IP in Germany.

In its reasoning, the MoF does, however, acknowledge that its interpretation of the law regarding the tax liability per se and the determination of the tax base has not yet been tested in the German tax courts. All assessment notices issued so far have been challenged by the taxpayer and appeal proceedings are currently pending on an administrative level.

Proposed legislative change

The MoF proposes that the relevant German law should be changed such that, going forward, register cases would no longer be subject to German tax – unless the income is received in "tax havens" as defined by a decree under the German Defence against Tax Havens Act (which establishes a list modelled on the EU black list). It is proposed that, in such cases, the licensor would remain subject to a tax liability, and the licensee to a withholding obligation.

This proposal can at least partly be seen as a reaction to the criticism that foreign tax authorities and institutions had directed at the MoF’s administrative interpretation of the relevant German law which they considered to be overreaching, extra-territorial and incompatible with the Pillar I discussion. It is further expected that the actual tax revenue from register cases would be too low to justify the associated administrative costs. This is because license income tends to be received in (or has recently been moved to) treaty jurisdictions (on-shoring).

We consider that there is a good chance that the MoF proposal will be implemented (it would need to be approved by the coalition parties in the German parliament). Importantly, the changes would, however, bring relief only for the future; the MoF is not currently proposing that the changes would have retroactive effect.

Planned extension of the simplified procedure

In its February 2021 decree, the MoF established the simplified procedure for clear treaty cases under which, broadly speaking, the licensee’s withholding obligation would fall away in respect of payments made by 30 September 2021, if certain conditions were met. A July 2021 MoF decree then extended the time limit to apply for this simplified procedure to 30 June 2022 and provided that payments (to be) made between after 30 September 2021 but before 1 July 2022 could also benefit.

According to the MoF evaluation report, as of the end of May 2022, approximately 2,500 applications for the simplified procedure had been filed of which 32 had already been granted. The MoF further states that taxpayers and their advisors had indicated that the vast majority of applications would be submitted in June 2022 shortly before the deadline.

The evaluation report confirms that the MoF wants to further postpone the deadline by one year (and also extend the substantive scope of the simplified procedure to cover payments made during that period). This is the first written confirmation of the MoF's intentions in this respect; they had previously been shared only verbally. The format of the statement (i.e. it being included in the evaluation report rather than a binding circular) means that German tax authorities are not (yet) bound by it.

We understand that the extension is still subject to confirmation by the German States (Länder). As the Länder are not expected to reject it, it is probably only a matter of time before a binding circular is issued to confirm the position.

Updates on technical aspects of the procedure can be monitored on the website of the Federal Tax Office where most recently also a new blanket exemption certificate application was introduced.

Distinction between intra-group and third party cases

The MoF acknowledges in the evaluation report that obtaining the necessary information for the German tax filings as to what IP is licensed and what revenues are paid is much easier in intra-group (as opposed to third party) register cases.

In third party register cases, counterparties often appear unwilling to accept the relevance of German taxation and therefore refuse to share the necessary information with the party required to make the filing.

We expect that the fact that the MoF has now acknowledged these difficulties in writing should be helpful in future discussions with the tax authorities as regards compliance with the filing requirement. In addition, the MoF will continue to consider potential practical solutions in relation to this issue.

This is also in reaction to international criticism by foreign tax authorities and institutions directed to the MoF which held the administrative interpretation of the German law as overreaching, extra-territorial and not compatible with the Pillar I discussion.

Tags

sheinrichs, hengelermueller, german tax, intellectual property, non-resident

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