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Germany updates IP royalties, capital gains guidelines

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Tax Hot Topics newsletter The German Ministry of Finance (MoF) has released additional guidance addressing the German taxation of income from intellectual property (IP) registered in a German register. Shortly after it reversed plans to eliminate a provision in its tax law that imposes tax on royalty income and capital gains flowing from rights registered in a German register even if no further German tax nexus is present. See our prior coverage here.

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 many years, questions early last year began to arise about whether this language subjected payments between non-residents to taxation relating to German-registered IP. There has been a number of developments since the MoF released initial guidance during 2020 that IP did not have to be economically exploited in Germany and that registration in a German register was sufficient to result in taxation.

In November 2020, the MoF issued the initial guidance providing that, under the existing law, the registration of IP in Germany alone is sufficient to trigger taxation (including withholding tax) of related royalty income or capital gains. It also released draft legislation that included an amendment to German Income Tax Act if enacted would have prevented such treatment. However, in January 2021 the proposed amendment was reversed in the government draft law and the original provisions of the German Income Tax Act remain in effect.

On Feb. 11, 2021, the MoF issued guidance that provides procedural relief relating to royalty withholding tax filings and payments in relation to certain nonresidents. Under the new guidance, the process of declaration, withholding and refund has been simplified. A nonresident licensee can abstain from declaring and withholding taxes for relevant payments made up to Sept. 30, 2021, if certain requirements (including qualifying for a German Double Tax Treaty) are met. In addition, an application for an exemption from withholding tax is needed to be filed by the licensor by Dec. 31, 2021.

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

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

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