The German register cases have been the subject of discussions in the public and also in this blog for almost three years, from the start over intermediate steps to something close to a solution. Now they have drawn the ire of Republicans in the US Congress who wrote a letter to the US Secretary of the Treasury, Janet Yellen, urging her to act. Randy Feenstra, a Republican in the US House of Representatives who led the initiative behind the letter, followed up on the letter and assumed that Germany together with much of the world views America’s companies as "their piggy bank".

Recap and current status

A 1925 legislative act was "discovered" in 2020 by foreign taxpayers with significant IP portfolios to be on-shored. Under this law, the mere “entry in a German register” sufficed for IP transactions (licensing and sales) to be subject to German taxation and withholding obligations, even in foreign-to-foreign transactions. An existing treaty protection would not have suspended a withholding obligation of the licensee but only entitled the licensor to a refund.

At the end of 2022, the German legislator repealed the provision going forward for most transactions. Exceptions are:

• Transactions with certain tax havens
• Transactions with a related party in a non-treaty state

The law was also repealed retroactively for third party transactions but not for related party transactions. However, for transactions with related parties in treaty states, the simplified procedure should apply.

Criticism by the Republicans in Congress

Republican members in Congress see a competitive disadvantage for US companies and violations against some fundamental principles:

"Generally, tax jurisdiction over intangible returns should be allocated according to the location of certain functions and economic risks, both of which are absent in the case of simple IP registration."

The criticism is also rightly aimed at the valuation where German authorities apply a top-down approach starting from the overall revenue related to the registered IP:

"Putting aside the primary concern about taxation without nexus, the German government is failing to value the transactions using generally accepted transfer pricing guidelines and IP valuation principles. Despite multiple attempts by the companies, trade associations and legal advisors to demonstrate the divergences from long-standing guidelines and principles, the German government is unwilling to relent on its incorrect methodology, resulting in inflated assessments directed principally at U.S. multinationals."

The German approach has been seen as a direct reduction of US tax revenue:

"The financial and administrative impacts of enforcing this provision cannot be understated. The German government has tacitly acknowledged the imposition of Section 49 is merely a revenue grab and has publicly reported over $1 billion in assessments. Some U.S. taxpayers have placed the aggregated estimate much higher — in the range of $6-10 billion. It is important to note that the U.S. has the primary right of taxation on these earnings through the U.S. transition tax and GILTI tax provisions. At the end of the day, these funds come from the U.S. fisc at the expense of U.S. taxpayers."

The German point of view

In Germany, the perception is that only an administrative burden should remain for US companies as they are generally entitled to treaty benefits. The practical issue is for entities to determine whether they are actually entitled to treaty benefits which may be hard to do especially in light of limitation on benefits clauses. While under the old law an exemption certificate clearly confirmed the status, the uncertainty now remains with the taxpayers who need to self-assess their treaty status in related party transactions.

In its evaluation report of the register cases from June 2022, the Federal Ministry acknowledged that the taxation of mere register cases is in conflict with Pillars One and Two (there are no public concerns as to the reduction of the US GILTI tax base).

It remains to be seen whether any official US approach to the German tax administration would bring further help for foreign taxpayers. However, the introduction of the global minimum tax may bring some further justification to drop the ancient German register tax case law completely shortly before its centennial anniversary.