On Feb. 11, 2021, the German Ministry of Finance issued new guidance on a law concerning extraterritorial intellectual property (IP) transactions. The new guidance provides potential taxpayer solutions to problems raised by prior guidance provided on Nov. 6, 2020, (New German guidance on withholding tax arising from IP transactions).
The new guidance provides potential taxpayer solutions for license or royalty payments that would be or would have been subject to German withholding tax and that have been paid or will be paid before Sept. 30, 2021. The German Tax Authorities will suspend the German withholding tax obligations for such payments under the following conditions:
- The payor of the license or royalty payment did or does not have a taxable presence in Germany at the time of the payment;
- The payee is tax resident in a country that has a double tax treaty in place with Germany at the time of the payment and the payee has access to treaty benefits, which exempt the payment from German tax withholding. German anti-treaty shopping regulations apply and requirements need to be met accordingly;
- The payee will apply for a withholding tax exemption for the relevant payments before Dec. 31, 2021;
- In the application for the exemption, the relevant contractual relationships and related parties will be disclosed to the German tax authorities; and
- Essential sections of interest in the contractual agreements for the license or royalty payments must be translated into German.
The taxpayer solution is explicitly reserved for applicants whose access to a double tax treaty is not ‘doubtful’ under the German anti-treaty shopping regulations (e.g. hybrid or dual resident entities).
If the German Federal Tax Office rejects the application for a withholding tax exemption, the taxpayer will be obliged to file withholding tax returns for all payments in question within one month after the receipt of the decision and pay all open withholding taxes accordingly regardless whether the taxpayer files an objection against the decision.
Payments after Sept. 31, 2021 will be subject to the general withholding tax rules. Taxpayer may apply for an exemption at the Federal Tax Office.
The sale of IP rights registered in Germany is generally not subject to withholding; however, the recipient of the gain would need to pay tax on gains from the sale and file a tax return with the competent tax office in Germany unless a double tax treaty or European Directive exempts the gain from German taxation.
The new guidance clarifies that every foreign taxpayer who receives gains from the disposal of German registered IP must file a tax return in Germany regardless of potential double tax treaty regulations, which may exempt the gain from German taxation. If the taxpayer is claiming benefits based on a double tax treaty, the tax return may include no taxable income, but the taxpayer must still file a return. Moreover, the tax return would have to include the disclosure of all relevant contractual relationships and related parties. Additionally, the taxpayer would need to translate the essential sections of interest in the contractual agreements into German.
As mentioned in the prior alert, it is not entirely clear how the German Tax Authorities could enforce the law with respect to transactions between non-German parties. However, it is clear that an auditor could ask US taxpayers to book a liability under this provision, creating a potentially substantial financial statement impact. The most recent guidance provides clarity regarding the application of the law to extraterritorial transactions and provides a relatively practical taxpayer solution. However, the risks of the exemption procedure and related disclosures should be carefully assessed since withholding taxes may become due within one month if the German Federal Tax Office does not approve the application.