(After all, no) limited tax liability due to the registration of rights in Germany?

Tax, Tax liability, Germany

In Germany, Art. 49 para. 1 no. 2 lit. f and no. 6 of the German Income Tax Act are currently discussion subjects. According to the standard's current wording, the registration of rights in Germany is sufficient to create a limited tax liability. Neither the exploitation of the rights nor a payment out of Germany is required to trigger taxation. After the Federal Ministry of Finance (hereinafter "FMF") reconfirmed its position by issuing a FMF letter on November 6, 2020, the legislator has now reacted. According to the draft bill from November 19, 2020 (Gesetz zur Modernisierung der Entlastung von Abzugsteuern und der Bescheinigung von Kapitalertragsteuer), the relevant passage should now be deleted without replacement. The explanatory memorandum to the draft law states that the new provision should be applicable to all cases still open.

 

Limited tax liability in Germany

Under the German Income Tax Act (hereinafter "ITA"), income derived from, i. a., renting and leasing rights entered in a German ledger or register is subject to limited tax liability. Such rights include, for example, patents that are entered in the domestic register based on the application filed with the European Patent and Trademark Office in line with the European Patent Convention. Under the law's present wording and the German tax authorities' view, no further or additional reference to Germany is required. As a result, the licensing of a right entered in a German register by a foreign (non-German) rights holder to a foreign user for usage abroad also leads to a limited tax liability in Germany.

 

Tax return obligation

According to the law currently in force, the party liable for payment must deduct withholding tax in case of a limited-term licensing of a right (Art. 50a para. 1 no. 3 ITA), pay the corresponding tax to the German Federal Central Tax Office ("FCTO ") and file a tax return with the FCTO. In case of a permanent licensing of rights resulting in a transfer of the beneficial ownership, the license fee recipient has to file a tax return with the competent tax authority.

 

Example

Medi Ltd. holds various patents that are registered in the German patent register.

The Swiss tax resident MediSwiss AG - a subsidiary of Medi Ltd. - uses the patents of Medi Ltd. registered in the German patent register in the context of research and development as well as the production of drugs. In return, MediSwiss AG pays a monthly royalty to its parent company. As a result, Medi Ltd. becomes subject to limited tax liability in Germany. MediSwiss AG - as the debtor of the royalty - is obliged to withhold the German withholding tax, pay the tax, and file a tax return with the German Federal Central Tax Office.

The draft bill proposes to delete the words "or entered in a domestic public book or register" in Art. 49 para. 1 no. 2 lit. f sentence 1 ITA without replacement. As a result, the mere entry into a German register is no longer sufficient to establish a limited tax liability in Germany.

December 2020 | Authors: Dr. Samuel Bussmann, Dr. Hagen Luckhaupt

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