BMF issues guidance on tax compliance obligations relating to German-registered IP rights
Germany’s Federal Ministry of Finance (BMF) has published two circulars (one dated 6 November 2020 and the other 11 February 2021) that address the German taxation of nonresidents relating to income from intellectual property (IP) that is registered in a German public registry. The November guidance states that the mere registration of IP (e.g., patents, trademarks, utility designs, etc.) in Germany is sufficient to allow Germany to claim taxing rights to income from the licensing or sale of the IP even if none of the parties is resident in Germany, giving rise to compliance obligations on the part of nonresident recipients of such income. This guidance created some concerns about the tax compliance obligations, as well as the potential withholding tax burden where the rate is not reduced under a tax treaty. The February 2021 circular provides procedural relief relating to tax withholding and tax return filing requirements.
According to Germany’s Income Tax Act (ITA) section 49 (1) no. 2 lit. f and no. 6, income derived from the licensing or sale of rights that are registered in a German public registry is considered domestic-source income, regardless of where the IP owner is resident, thus giving rise to limited tax liability in Germany where the IP owner is a nonresident. Registered rights for these purposes include patents entered in the domestic register on the basis of an application submitted to the European Patent and Trademark Office.
The German legislator’s intent in enacting section 49 is for all income flows that are connected to a right registered in Germany to be recognized as German-source income—it is not necessary that there be any further nexus with Germany for German taxing rights to be triggered. Consequently, income derived by a nonresident from the licensing or sale of an intangible asset that is registered in a Germany registry may be taxable in Germany even if neither the licensor/licensee nor the seller/purchaser is resident in Germany. It should be noted that, although this rule has been in existence for many years, it is only recently that the German tax authorities have officially commented on it.
6 November 2020 circular
As stated above, the November 2020 circular released by the BMF allows the German taxation of income from the licensing or sale of German-registered IP rights even where none of the parties is tax resident in Germany. The circular distinguishes between licensing and sale transactions:
- Where there is a temporary transfer of IP rights, the payer of royalties must withhold tax at the applicable rate (currently 15.25%, including the solidarity surcharge) in accordance with ITA section 50a (1) no. 3, remit the tax withheld to the Federal Central Tax Office (BZSt) and file a tax return with the BZSt.
- Where there is an indefinite or permanent transfer of rights, a sale of rights is presumed, so a tax return must be filed with the responsible tax office.
The November circular is brief and only addresses the items above. However, it potentially has implications for the application of tax treaties, the sublicensing of IP and the sale of IP rights:
- If a tax treaty applies, it may be possible to avoid the withholding of tax on royalties, provided the licensor has sufficient substance and obtains an exemption certificate from the BZSt. If withholding tax already has been paid, it will be necessary to determine whether the nonresident is entitled to a refund. In the case of a sale of German-registered IP, a tax treaty (typically article 13) may result in the restriction of German taxing rights if the seller is a resident of a treaty partner state, but other tax compliance obligations still must be observed.
- Special attention should be paid to cases of sublicensing. For example, assume a company based in Jersey develops IP, which subsequently is registered in Germany. The Jersey company licenses use of the IP to an active company based in Ireland in consideration for the payment of a fee. The Irish company sublicenses the rights to use the IP to a German company.
Payments from Germany to Ireland fall within the scope of ITA section 49 (1) No. 2 lit. f, so the withholding tax and compliance obligations apply. However, if the relevant conditions under the Germany-Ireland tax treaty are fulfilled, the payments may be exempt from withholding tax (if tax already has been withheld, the recipient can request a refund of the tax). Based on the wording of the ITA, the flow of payments from Ireland to Jersey generally will give rise to limited tax liability of the Jersey company in Germany because the IP rights are registered in a German registry. Tax treaty protection cannot be claimed in this case because the relevant treaty would be between Jersey and Germany, but there is no treaty between Jersey and Germany.
It should be noted that even if the holder of the IP rights is resident in a treaty country, either an exemption certificate will have to be applied for or, if an exemption certificate is not obtained, the refund procedure will have to be completed to obtain protection from double taxation.
- As noted above, the registration of IP rights in Germany gives rise to limited tax liability. Based on the wording of the ITA, this also may capture situations where IP is disposed of that has not been licensed but that is nonetheless considered to have value. The BMF does not comment on this issue. If, in the above example, the Jersey company sells the IP to a U.S. company rather than licensing it to Ireland, any gain on that sale would be taxable in Germany.
11 February 2021 circular
The 11 February circular acknowledges that the November circular gave rise to some issues, and provides for some procedural relief in certain cases where the income would have been subject to withholding tax in Germany. Specifically, the obligation for the payer to withhold tax will be suspended where:
- There is a temporary transfer of IP rights registered in Germany, there is no other nexus with Germany, the income is received by 30 September 2021 and the payer is neither domiciled (residence/habitual stay for individuals) nor has its place of effective management in Germany at the time the payment is made;
- The recipient of the payment is resident in a country that has a tax treaty with Germany;
- The licensor is eligible for benefits under the treaty and the license payments are attributed to the licensor under the treaty; and
- The recipient of the payment requests a withholding tax exemption certificate from the BZSt by 31 December 2021 and discloses all relevant contractual relationships/circumstances in the application (which mostly must be in German).
For license payments made after 30 September 2021, the general compliance rules in ITA section 50d para. 1-4 apply. The BZSt can reject an application for an exemption or a refund if it has doubts about whether the nonresident is entitled to relief from withholding tax under the tax treaty. In such cases, tax must be withheld and paid and the payer must file a form with the German tax authorities that sets out the amount of tax withheld and paid.
Where German-registered IP rights are sold, the February 2021 circular provides for simplified compliance procedures. Specifically, a tax return declaring a zero gain may be filed if (i) the purchaser and the seller are residents of countries that have concluded a tax treaty (and are eligible for benefits under that treaty); (ii) the income from the “fictitious sale” is attributed to the seller under the treaty; and (iii) the treaty allocates exclusive taxing rights with respect to the income to the seller’s country of residence.
In these cases, if the zero gain is reported by 30 September 2021, no formal return has to be filed electronically (unless the tax authorities specifically request it). However, any sale of German-registered IP rights still must be reported to the tax authorities. In all other cases, the profit arising from the sale of the German-registered IP rights must be calculated to determine the German-source income.
Affected companies should examine the potential tax implications of the BMF’s clarifications; this would include making an inventory of IP rights registered by the company in Germany or the EU and conducting an analysis of the exploitation of the rights and possible value allocation. This should be done in a timely manner to ensure that any deadlines relating to tax relief are met, and if the IP has been sublicensed, the company should clarify which party is the actual owner of the rights and whether there are any potential tax obligations.