Taxation of rights registered in domestic registers
BMF letter dated February 11, 2021
When licensing rights entered in domestic registers between foreign licensors or licensees, must withholding tax be withheld and paid to the German tax authorities? Yes! With the BMF letter dated February 11, 2021, the tax authorities are focusing on these circumstances. Primarily affected are groups of companies with foreign IP holding companies.
Basic problem
Let's imagine the following example: A US company (licensor) grants its subsidiary in the Netherlands (licensee) rights (e.g. a single trademark or a bundle of trademarks, patents, etc.), which are registered in German registers (e.g. trademark register) in addition to foreign registers, for an agreed remuneration. Although both companies are not resident in Germany, the US company nevertheless has a limited tax liability in Germany. The Dutch company must withhold the tax payable (here: 15%) from the license payment, pay it to the German tax authorities and file a tax return. Similar obligations arise in the case of the sale of rights; here, too, a tax return must be filed, but withholding tax is not provided for here. Even if Germany has no right of taxation under the double taxation agreement (DTA) between Germany and the country of the taxpayer (here: USA), these obligations must be complied with. In this case, however, only the tax paid can be refunded in a downstream procedure or, for example, an exemption certificate can be applied for before the license payment is realized.
Such foreign cases, where German taxation is only linked to the registration of the IP in a domestic register, have not been in focus for a long time, probably also because bilateral agreements often effectively lead to a (later) exemption of the license proceeds in Germany. Now, in a letter dated February 11, 2021, the German Federal Ministry of Finance has, on the one hand, indicated relief for past cases, but, on the other hand, has once again emphasized that registrations and, if applicable, the payment of the tax must also be made for the past.
Relief for payments until September 30, 2021
However, the BMF letter contains a simplification at least for the past and for payments up to September 30, 2021, according to which the tax deduction can be omitted. This simplification applies if the following conditions are met cumulatively:
Foreign Licensee: At the time of the inflow of the license fee, the licensee must have neither domicile nor habitual residence nor management nor registered office in Germany.
DBA to be applied:When the remuneration is received, the licensor must be unambiguously entitled to the benefits of a double taxation agreement and the agreement must provide for exemption of the payment in Germany.
Request for exemption: The licensor must submit an application for exemption from tax deduction to the BZSt by December 31, 2021.
Disclosure of contractual relationships: With the application for exemption, the contractual relationships must be disclosed in German.
For remuneration received after September 30, 2021, the general statutory regulations apply, such as those affecting domestic licensees with payments to foreign licensors: The licensee must declare the tax. If Germany is not allowed to tax this royalty payment or is only allowed to tax it at a lower rate under a supranational agreement, the licensor can apply to the BZSt for a withholding tax refund (after payment) or (before payment) for exemption from tax deduction.
Determination of the assessment basis
Finally, in the letter, the BMF also explains how the remuneration subject to German tax deduction is to be determined. Accordingly, the point of reference is the total remuneration of the license (top-down approach). If the right is entered in several (foreign) registers or if several rights are combined in the remuneration (bundle licenses), the remuneration must be apportioned in accordance with the circumstances. However, the letter does not specify how this is to be done. If the tax authorities are unable to determine the basis for taxation, they will estimate the license income for the German right.
Conclusion
The BMF letter dated February 11, 2021 simplifies the procedure of tax deduction, tax withholding, as well as tax filing in DTA cases for royalties flowing between foreign licensors and licensees up to and including September 30, 2021. However, the tax deduction, which is based solely on the domestic registration of the IP, poses administrative challenges for foreign licensees and licensors or buyers and sellers. On the one hand, this concerns the complex procedure of applying for exemption and the associated expense for the taxpayer. On the other hand, the concrete determination of the tax base, especially when bundles of licenses are transferred or licensed, is unclear and therefore potentially subject to dispute.
It is undisputed that foreign taxpayers should now take urgent action to avoid penalties. This applies in particular to groups of companies that have bundled their IP in foreign subsidiaries, for example, and should represent one of the main cases of application for the regulation.