German IP enough to trigger royalty tax

Tax Hot Topics newsletter The German Ministry of Finance recently issued guidance providing that the registration of intellectual property (IP) in Germany alone is sufficient to trigger taxation of related royalty income or capital gains, even if no further German tax nexus is present.

The German Income Tax Act provides that domestic source income is earned if generated from the rental, lease or disposition of rights entered in a German register. It is not necessary that the rights be exercised in Germany or have any other tax nexus. Although the law has existed in its current form for several years, questions were recently raised about whether this language subjected payments between non-residents relating to German-registered IP to taxation.

The German Ministry of Finance has appeared to interpret that it does. The new guidance provides that royalties and capital gains arising from transactions between non-residents are subject to tax in Germany if they are derived from rights entered in a German register. For royalties, the licensee is required to levy the tax through withholding. For capital gains, the licensor must file a tax return. The guidelines also apply to rights registered in the European Patent Register to the extent they are protected in Germany.

The development could have major implications for non-German taxpayers. While the withholding tax rate is zero under most double-taxation agreements, taxpayers may still have to remit and report it if they do not have a withholding exemption certificate. No withholding is required in the case of capital gains, but the seller must file a German tax return even if the taxation right is allocated to the seller’s country under a double taxation agreement. Non-German taxpayers may also be required to disclose whether royalties for or disposals of German registered IP were made dating back to 2013.

For more details, see Warth & Klein Grant Thornton’s story, “Royalty taxation of IP registered in Germany.”

David Sites
National Managing Partner
Washington National Tax Office
T +1 202 861 4104

Cory Perry
Senior Manager
Washington National Tax Office
T +1 202 521 1509

Yasmin Dirks
Washington National Tax Office
T +1 202 521 1506

Olivia Arnold
Atlanta Office
T +1 678 515 2490

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