Developments in Taxation of German-Registered Intellectual Property

Under the German Income Tax Act, Section 49 paragraph 1 no. 2f, as it applied before Jan. 1, income derived from the licensing or sale between nonresidents of intangible rights—in particular, patents and trademarks—registered in Germany was deemed to be subject to limited tax liability in Germany (the situations in which this applied were known as “registration cases”).

The German Ministry of Finance issued circulars on Nov. 6, 2020, Feb. 11, 2021, July 14, 2021, and June 29, 2022, concerning extraterritorial intellectual property transactions with the German Annual Tax Act 2022 (Jahressteuergesetz 2022), and Section 49 paragraph 1 no. 2f of the Income Tax Act was comprehensively amended.

Income Received Before Jan. 1

In the four circulars mentioned above, the German tax authority confirmed its position to the effect that income from the transfer of intangible rights is subject to limited tax liability in Germany—even where neither party to the transfer is a German tax resident—if the rights are registered in a German public book or register (for example, the German Patent and Trademark Office). This also encompasses patents registered with the European Patent and Trademark Office under the European Patent Convention as long as registration in Germany is opted for.

Income derived from licensing of patents and trademarks to a German-resident licensee or, if the intangible rights are registered in Germany, to a nonresident licensee, is subject to German withholding tax at the rate of 15%. The withholding tax burden may be mitigated under the terms of an applicable German double tax treaty or under an EU directive, in which case the licensor has to file a formal application for an exemption certificate or a refund of taxes overpaid with the Federal Central Tax Office.

To ease the process, the German tax authorities have provided, by way of a circular, for a simplified procedure for royalties paid prior to Jan. 1; further details can be found here. If treaty protection applies, and all relevant documents are submitted, (exceptional) retroactive exemption from German withholding tax will be granted by the federal central tax office. Applications for exemption from the obligation to deduct tax must be filed with the federal central tax office no later than June 30. IP sales should be declared as soon as they are identified.

Since income derived from the transfer of rights registered in Germany isn’t subject to withholding tax, the transferee isn’t liable to account for tax on any gain on the transfer. A transferor of rights that is domiciled outside Germany is generally subject to corporate income tax in Germany at a rate of 15%. However, gains from the transfer of rights registered in Germany are usually exempt from German taxation under an applicable double tax treaty. A significant tax risk remains where the transferor is domiciled in a jurisdiction that doesn’t have a double tax treaty with Germany, for example, Bermuda, Brazil or Hong Kong.

It should be noted that restructuring, for example merger or spin-off, involving a licensor of intangible rights also may qualify as a transfer of the rights for purposes of Section 49 paragraph 1 no. 2f, with any gain potentially being subject to limited tax liability in Germany.

Amendments

While the Annual Tax Act 2022 introduces significant changes to and restrictions on the taxation of income from rights registered in Germany, the provisions in their final form deviate from those in the first draft of the 2022 Act.

It was initially intended to abolish entirely the taxation of income from IP rights registered in Germany received on or after Jan. 1, with a retroactive exemption for such income received from third parties. Shortly before promulgation of the final Annual Tax Act 2022, it was decided instead to retain and modify Section 49 paragraph 1 no. 2f of the Income Tax Act so that the position with effect from Jan. 1, is as follows:

Payments arising from the licensing or transfer of rights registered in Germany to third parties are no longer within the scope of Section 49 of the Income Tax Act and therefore aren’t subject to limited tax liability in Germany—this applies to all open cases.
Payments arising from the licensing or permanent transfer of rights registered in Germany to related parties (with a minimum shareholding of 25% in the transferor) are generally still within the scope of Section 49 paragraph 1 no. 2f.
However, such payments are excluded from German taxation if the payments are exempt from German taxation under an applicable German double tax treaty, and entitlement to such exclusion isn’t restricted by national anti-abuse rules (in particular, Section 50d paragraph 3 of the Income Tax Act). In these circumstances, no application for the exemption of such payments from German taxation need be filed with the German tax authorities.
In the case of payments arising from the licensing or transfer of rights registered in Germany made to a resident of a “non-cooperative tax jurisdiction” as included in the EU blacklist, the beneficiary is subject to limited tax liability in Germany whether the payments are made between third parties or related parties.

From a practical viewpoint, eliminating tax liability in registration cases involving third parties is a particularly positive development, as it was typically very difficult to enforce compliance in these circumstances.

Key Takeaways

The approaching June 30 deadline makes prompt action an imperative. Reviewing IP rights registered in Germany and analyzing how such rights are used, the availability of treaty protection, and whether substance requirements are met going back as far as 2013, is a time-consuming process. If they fail to produce the requisite documentation on time, taxpayers subject to these rules potentially face significant cash and financial statement impacts.

Taxpayers that haven’t taken the appropriate steps may be required to book substantial tax liability reserves and—in the worst case—may be exposed to the potential risk of a criminal investigation.

While the rules have been substantially eased, they haven’t been entirely repealed, as initially intended. Going forward, therefore, particularly in light of the risk of misinterpreting the availability of protection under an applicable double tax treaty, taxpayers should continue to give extra scrutiny to transactions involving German-registered IP rights with a view to possibly having to disclose them to the German tax authorities.

This article does not necessarily reflect the opinion of Bloomberg Industry Group, Inc., the publisher of Bloomberg Law and Bloomberg Tax, or its owners.

Author Information

Lars H. Haverkamp is a partner and Simone Kristin Schmalhofer is a senior associate at Eversheds Sutherland (Germany) Rechtsanwälte Steuer-berater Solicitors Partnerschaft mbB.