According to a German tax provision dating back to 1925 (Sec. 49 (1) No. 2 lit. f EStG), the mere fact that IP owned by foreigners is either exploited in a German permanent establishment or registered in a German register could trigger non-resident taxation in Germany, even if there is no further nexus in Germany (e.g. none of the affected parties – payer and payee – are German tax residents). Even though the wording of the relevant German tax provision seems to be quite clear with respect to this, it has never been applied in that way in the past. As German tax authorities started to apply the provision according to its literal meaning in 2020, it was proposed to amend the respective provision and to exclude such cases from the scope of limited tax liability. However, at least to date, there was no political agreement on such approach.
E.g. patents that are registered with the German patent register, but are owned by tax non-residents generally fall under the provision. This means that income and capital gains derived from such patents are generally subject to German non-resident taxation. In case of the payment of royalties, the payer is generally obliged to withhold taxes, file a withholding tax return and remit the taxes to the German tax authorities.
In case a double taxation agreement (DTA) is applicable, provided tax reliefs will be available only upon application. Nevertheless, the application for a tax relief would require a careful analysis with respect to German anti-treaty shopping rules.
The German tax authorities recently published a guidance for ongoing cases, which makes clear that action is required now. For payments which are made before 1 October 2021 and which benefit from a DTA relief, the tax authorities provide a simplified application procedure (to be filed up to 31 December 2021). For payments after 30 September 2021, licensors should file a regular application before July 2021 as the application procedure could take several months. In any case, foreign owners of IP registered or exploited in Germany are advised to check their arrangements with a German tax lawyer to mitigate adverse implications for the past and the future.
Update of German anti-treaty shopping rules
If a foreign company claims any tax reliefs for German withholding taxes (refund, reduction or full exemption), the German Federal Tax Office will in principle assess whether the anti-treaty shopping rules do apply. As the current rules are partially incompatible with EU law, the German legislator envisages amending and tightening the rules and has published a draft new wording of the German anti-treaty shopping rule (Sec. 50d (3) EStG).
With respect to the current draft bill, the foreign company is entitled to a WHT relief only to the extent that:
- persons hold shares in the foreign company who would be entitled to the relief on the same legal basis in case they earned the income directly (personal entitlement); OR
- the income subject to withholding tax has a nexus to an economic activity at the level of the foreign company (factual entitlement).
This anti-treaty shopping rule would not apply if the foreign company:
- could prove that none of the main purposes of its involvement is the obtaining of a tax benefit (motive test), OR
- could prove that there is substantial and regular trading in its main class of shares on a recognised stock exchange (stock exchange exemption clause).
Based on a preliminary analysis, we envisage that in a lot of cases the proof of the personal or factual entitlement would hardly be possible. Thus, in our view, the evidence of the motive test will become more important.
It is envisaged that the draft bill will have passed the legislative procedure by the end of May 2021.
Read the WTS Global International Corporate Tax Newsletter here.
