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.
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:
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:
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:
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.