New Developments Regarding Taxation of IP Registered in Germany

After the Federal Ministry of Finance (FMoF) issued a letter of guidance on the taxation of IP merely registered in Germany on 6 November 2020, concerns grew on the correct treatment of such matters. Subsequently, two legislative drafts touching this issue were passed, the first draft aiming at eliminating the relevant phrase in the law regarding IP registered in Germany and the second draft refraining from doing so, thus leaving the section unchanged.

Finally, the Federal Ministry of Finance issued an additional letter of guidance on 11 February 2021, giving some clarity on the handling of this matter in the future.

Federal Ministry of Finance states opinion of limited tax liability regarding IP

On 6 November 2020, the FMoF issued a letter of guidance with respect to a limited tax liability of the licensor in Germany in case of a licensing/transfer of rights registered in a German register. Although the law already exists for a long time, this regulation has been paid little attention to in the past. According to the letter of guidance, there is no need for an additional nexus in Germany beyond the registration in a German register, leading to a tax liability in Germany even in cases of contracts between non-residents, if the agreement (also) touches IP registered in Germany. Under this interpretation an unforeseeable spectrum of contracts would be affected. In cases of licensing agreements, the tax is levied as withholding tax at the level of the licensee.

This letter of guidance sent a shockwave through many companies dealing with IP as it left many questions unanswered, especially what the basis of assessment for such a tax should be and, subsequently, whether or not there was a need to file tax returns for licensing agreements of the past in order to avoid the risk of committing tax fraud.

On 11 February 2021 after the above mentioned back and forth on how to deal with this recent change in opinion by the fiscal authorities, the second letter of guidance was issued, addressing some of the topics:

Temporary simplified approach and guidance on assessment

According to the new letter of guidance it is, under certain circumstances and on application, possible for the licensee to refrain from having to withhold taxes for the licensor and to file a tax return, if the remuneration is received by 30 September 2021 at the latest, granting a temporary simplification of the process. The additional requirements are, however, very strict, e.g. covering only cases in which the licensee is not subject to unlimited tax liability in Germany and the double taxation treaty between Germany and the country of residence of the licensor grants relief of the taxation in Germany. If the requirements are not fulfilled, the tax needs to be withheld and a tax return is to be filed. This also applies to license agreements concluded in the past where the remuneration has already been paid.

In general, the basis of the tax amount to be withheld is the gross remuneration for the licensing of the IP registered in Germany. The remuneration attributed to the IP registered in Germany has to be determined according to the underlying contractual provisions. In case such a determination is not possible, e.g. due to a lack of specifications in the contract, an appropriate allocation of the remuneration needs to be made. The starting point for such an allocation is the total remuneration paid, which then has to be allocated according to its cause. Relevant for the allocation is the total revenue generated by the licensor due to the IP registered in Germany.

However, the fiscal authorities may, in cases where the assessment basis cannot be determined, estimate the share of the remuneration attributable to Germany, based on the revenue generated by the licensee in Germany in comparison to the revenue generated in the other countries.

Practical implications

The new letter of guidance simplifies the process for remuneration paid until 30 September 2021 in some cases, but certainly not all. Under certain circumstances, especially if the right is in fact only registered in Germany but not utilized in any way by the licensee, it seems to be possible, in the light of the new letter of guidance, to argue that no revenue is attributable to the IP registered in Germany. However, this means that tax payers will have to check every license agreement in order to determine if actions are required or not.

Dr Marion Frotscher

Simon Bauer