On February 11, 2021, the Federal Ministry of Finance (GFMF) published a decree (the decree) confirming their position that the German withholding tax (at a rate of 15.825%) on the gross licenses payable is due and payable to paid to a taxable recipient who is not resident in Germany, even if:
- The licensee is not taxable in Germany and
- The only connection with Germany is that the intellectual property rights on which the license fees are based are entered in a German public register.
The decree also contains detailed procedural guidelines, particularly with regard to past tax periods.
According to the decree, affected taxpayers must comply with earlier tax periods September 30, 2021and for all royalties paid after September 30, 2021. Before the decree, the German legislature issued a plan to demand a stronger German connection in these cases. While the original proposal for a draft law published in November 2020 (prepared by the GFMF) contained such a plan, this is not the case in the currently amended version of the draft law published in January 2021.
Legal basis of the decree
In principle, according to the German Income Tax Act (GITA), any person who is not subject to unlimited income tax liability in Germany (usually due to their German residence) can be subject to German income tax on income from certain German sources (i.e. limited income tax liability). In the latter case, German taxation is usually carried out through tax withholding (i.e. a payer must withhold the applicable withholding tax and transfer it to the relevant German tax office for the account of the payer – the tax debtor). Such payments of the German withholding tax to the responsible German tax office therefore generally have a relieving effect. According to several GFMF decrees that have been confirmed by the Federal Fiscal Court or the BFH, the withholding tax liability of the debtor does not require that the debtor is tax resident in Germany.
According to a provision of the GITA, which historically received little or no consideration with regard to payments in which only non-German parties were involved, the income from a non-German tax arising from the licensing of intellectual property rights in originate from a German public register to German income. and thus subject to a limited income tax liability (see Section 49 (1) no. 2 letter f, no. 6 GITA).
In the German legal literature, the prevailing view was that this provision of the GITA is interpreted narrowly and only applicable if one of the parties is resident in Germany so that it is compatible with German constitutional law, European law and German fundamental law. e.g. transfer pricing principles). Notwithstanding these legal concerns, the decree confirms the intention of the German tax authorities to apply and enforce this provision in plain English with regard to any license fees paid between taxable parties not resident in Germany, provided that there is underlying intellectual property rights will become German Register registered.
General direction of the decree
The decree primarily aims at withholding taxation of royalties, as described in the following scenario (base scenario):
A tax licensee not resident in Germany (who does not maintain a German permanent establishment) pays a tax licensee not resident in Germany license fees for licenses to use intellectual property rights (i.e. patents, utility models, trademarks and designs) registered in a German public register ( ie the register of the German Patent and Trademark Office) and possibly in other non-German registers.
The base scenario usually occurs with multinational groups, where licenses for the use of IP rights are often passed on over several group levels.
Note: The German tax authorities have made it clear that license fees to a tax licensor not resident in Germany for patents registered in the German patent register on the basis of patent applications filed with the European Patent Office are also subject to German withholding tax. In contrast, license fees to a licensor not based in Germany with regard to trademarks of the European Union (ie uniform rights) are not subject to German withholding tax, as these rights are not entered in a German register (but in a European register). maintained by the European Intellectual Property Office in Spain).
If royalty payments to a tax licensor not resident in Germany relate to a bundle of IP rights that are entered in the IP registers of several jurisdictions, including Germany, only the portion of the license fees that is attributable to the German IP rights is subject to the German withholding tax. If this part is not evident from the documents disclosed to the German tax authorities (e.g. license agreement, etc.), the total amount of license fees may have to be appropriately estimated (top-down approach). The sales generated on the basis of the licenses can, for example, be used as the basis for the estimate.
Procedural guidelines according to the decree to which contractual services apply
Process relief for tax periods up to and including September 30, 2021
For the basic scenario, the decree offers a simplified way of adding and ending the German withholding tax procedure. This simplified procedure is available for all tax periods (not yet statute-barred) up to and including September 30, 2021and does not require tax payments provided the non-resident tax licensor is entitled to contractual benefits (i.e. tax exemption) under a German income tax treaty (and certain additional formal requirements are met).
Note: This simplified procedure only applies to licensors who are (1) resident for tax purposes in a contracting state (ie in a state with which Germany has an income tax treaty, e.g. the USA). (2) are entitled to contractual services and (3) whose contractual advantages are not limited unilaterally by German tax law. In addition, the following problems can prevent the simplified procedure from being used:
- Beneficial Ownership: The licensor must qualify as the beneficial owner of the underlying intellectual property rights under the contract, as determined by the German tax authorities.
- There must be no justified doubt about the availability of contractual services: The decree expressly states that the simplified procedure is not available in the case of hybrid structures, double residences or other contractual qualification conflicts or if there are indications of such circumstances.
- Substance test: The simplified procedure does not apply if the licensor does not comply with the German substance test (which is relevant if and to the extent that the end shareholder is not entitled to contractual services and the licensor (intermediate company) does not provide any essential services of its own business).
The licensor or the licensee, if this has been approved by the licensor, must submit the tax returns to the Federal Central Tax Office using the simplified procedure December 31, 2021, no later than. The licensee is also entitled to submit these declarations without authorization if the contractual relationship with the licensor no longer exists, and the licensee can prove that the licensor is prevented from submitting or does not want to.
If the tax returns are rejected by the Federal Central Tax Office according to the simplified procedure (e.g. due to doubts about the existence of contractual benefits or for formal reasons such as expiry of the deadline), the licensee must submit the corresponding withholding tax return and payment of the declared withholding tax within a Month after rejection, regardless of any objections to the rejection.
No procedural relief for tax periods after September 30, 2021
The regulation also clarifies that with regard to the base scenario, the normal withholding tax procedure applies for periods after September 30, 2021, even if contractual benefits are available. This means that from this deadline:
- The German withholding tax of 15.825% must be withheld by the licensee, reported and paid to the Federal Central Tax Office, unless the licensor has received an exemption certificate on the basis of the contractual advantages of the German tax authorities and this has been forwarded to the licensee beforehand License fee paid (in this case the licensee's obligation to submit withholding tax returns remains, even though the tax due is zero)
- If the German withholding tax has been withheld and paid, the licensor must apply for a refund, provided that there is contractual relief.
Should a licensee fail to withhold and pay the German withholding tax, the licensee is directly liable for the payment of the withholding tax (i.e. secondary tax liability) in addition to the licensor. The obligation of a licensee to pay the German withholding tax can be enforced by the Federal Central Tax Office through separate tax assessments. In addition, the withholding tax liability can also be enforced directly against a licensor (i.e. the tax debtor) through separate tax assessments.
Procedural guidelines according to the decree that do not apply to contractual benefits
The tax ramifications in the base scenario are much more severe when no contract relief is available. The decree confirms that in such a case only the normal withholding tax procedure applies, ie the licensee must withhold, report and pay the German withholding tax of 15.825% without the licensor being able to refund the withholding tax. This applies not only to the future, but also to earlier tax periods that have not yet expired.
German taxation of profits from the sale of intellectual property rights
The sale of IP rights entered in a German register by a taxable owner who is not resident in Germany is not subject to German withholding tax, but is subject to limited German income tax liability. As a result, the decree confirms that such a non-Germany resident tax resident seller must file a German income tax return and declare a gain on such sale, regardless of where the buyer is resident for German tax purposes. According to the decree, this also applies if Germany has no contractual tax rights. In this case, however, filing a zero tax return (without calculating the capital gain) is sufficient.
Note: For German tax purposes, a license (as opposed to a sale) requires that the use of the licensed IP rights is limited in time. However, if the right to use IP rights is unlimited in time, the license is deemed to be the sale of the licensed IP rights for German tax purposes.
Eversheds Sutherland observations: Despite limited enforcement options for German tax authorities outside Germany, an increasing number of cases are expected in which German withholding tax on license fees is levied between non-German tax licensees and non-German tax resident licensors. Indeed, the decree follows public reports on filings from non-resident taxpayers attempting to comply with the position of the German tax authorities. Compliance with the decree can also become relevant in the context of due diligence or other compliance checks.
As mentioned above, the position of the decree is subject to legal challenge and is expected to be challenged in the German tax courts, probably due to the excessive interpretation of the legal basis (i.e. section 49 (1)) No. 2 letter f, No. 6 GITA) of the German tax authorities violates German constitutional law, European law and fundamental German tax law principles. However, such a legal challenge will last for many years, leaving taxpayers with limited options besides complying with the decree, especially with regard to the base scenario (as described above).
Need for action from a procedural point of view
First of all, it should be noted that in the basic scenario there are obligations for both the licensor (tax debtor) and the licensee (debtor) to be dependent on one another. Both parties must therefore coordinate their actions, which can lead to difficulties or commercial problems, especially outside of group situations. In the basic scenario in particular, the licensee is only exempt from the retrospective payment of German withholding tax for periods up to and including September 30, 2021 if the licensor (successfully) carries out the simplified procedure according to the decree or can prove that the licensor is not in the Able or willing to perform this procedure and perform this procedure instead (on his own behalf).
It is also important to note that the issuing of the decree (and also the previous decree, which was published in November 2020) effectively eliminates a lack of knowledge as a viable defense for taxpayers who do not comply with the open tax years and on the fly. Forward basis. At least in the future, any consequences of German tax law with regard to tax offenses must also be taken into account.
With regard to past tax periods that are subject to the simplified procedure according to the decree or for which the German withholding tax may have to be declared and paid retrospectively (e.g. without contractual services or if the deadline for the simplified procedure has expired), please note: that according to German procedural tax law the limitation period for tax assessments is:
- Usually four years,
- Five years for negligent tax reduction and
- Ten years of tax evasion.
However, the limitation period does not begin before the end of the third calendar year following the calendar year in which the withholding tax was payable.
In addition, in the event of tax evasion, the withholding tax amount to be paid retrospectively is also subject to interest at six percent.
Affected taxpayers, especially those in the base scenario, in which there is no discharge of the contract, can consider whether they should file an appeal together with the submission of the German withholding tax return.
Need for action from a tax point of view
In addition to the above measures to comply with the decree, the following aspects should be considered:
- Review of existing and future commercial license agreements and the distribution of withholding tax liability as well as any reduction obligations if the rights include intellectual property registered in Germany;
- Deregistration of IP rights in German registers (if IP protection is no longer needed in Germany or can be sufficiently achieved in another way – e.g. German trademarks remain enforceable under certain circumstances even if they are not registered); and
- Review of ownership of German intellectual property rights within the multinational group.