International Tax Newsflash: non-German royalties on any IP merely registered in Germany soon to be subject to German withholding tax!
Locations
Due to a new interpretation of an existing law, that residence nexus has been replaced by a registration nexus, where it is sufficient for an IP right to be entered in a German register or public book to trigger German withholding tax charges.
The move has been heavily criticised by advisers but there is no sign that the German ministry of Finance will change its view on this. The German ministry tried to levy a similar withholding tax charge in relation to use of knowledge (e.g. databanks) in the past. In that case the argument was much more difficult as there was no legislation which could clearly be read to lead to such a withholding tax charge. Nevertheless, this issue took over 10 years to resolve and non-compliance during the time before it was eventually abolished lead to widespread enforcement actions and criminal tax charges against individual directors of companies. Similar actions may thus follow in the present case where the legislative basis for the interpretation is much stronger.
The way in which the tax base for German withholding tax is calculated is not yet fully decided, but the German authorities are arguing that the percentage of the sales volume in Germany compared to total sales volume in all jurisdictions covered by the licence should be applied to royalty payments and that amount should be subject to German withholding tax. It is also unclear what the tax base should be in disposals of IP rights. These are issues that will need to be discussed with the German authorities upon disclosure of the factual background.
In great many cases the only obligation on companies with IP rights registered in Germany (or IP licences relating to IP rights registered in Germany) will be to apply for retrospective (from 2013 on) and prospective exemption from withholding tax (by complying with some formalities). This will be the case where the Double Tax Treaty (“DTT”) Germany has concluded with the state of residence of the IP owner contains a clear and unconditional withholding tax exemption in relation to IP revenue (e.g. UK, France, Spain and Belgium). This will also be the case in most IP transaction which are intra-group transactions involving a company resident in an EU Member State as the Interest and Royalties Directive will apply.
However, there will be certain cases where the effects will not be as clear cut: in cases where the DTT with Germany contains limitation of benefits clauses (such as for instance with the USA) an analysis will have to be carried out to ascertain whether the Treaty exemption applies. Where the DTT does not contain a withholding tax exemption but only a withholding tax limitation (such as for instance Italy) some tax will likely be payable, unless another exemption (such as group exemption under the Interest and Royalties Directive apply). Where there is no DTT with Germany in place in the state of residence of the IP owner, German withholding tax is likely to apply.
The deadline for compliance is 30 June 2022 for the past seven years.
The move has been heavily criticised by advisers but there is no sign that the German ministry of Finance will change its view on this. The German ministry tried to levy a similar withholding tax charge in relation to use of knowledge (e.g. databanks) in the past. In that case the argument was much more difficult as there was no legislation which could clearly be read to lead to such a withholding tax charge. Nevertheless, this issue took over 10 years to resolve and non-compliance during the time before it was eventually abolished lead to widespread enforcement actions and criminal tax charges against individual directors of companies. Similar actions may thus follow in the present case where the legislative basis for the interpretation is much stronger.
The way in which the tax base for German withholding tax is calculated is not yet fully decided, but the German authorities are arguing that the percentage of the sales volume in Germany compared to total sales volume in all jurisdictions covered by the licence should be applied to royalty payments and that amount should be subject to German withholding tax. It is also unclear what the tax base should be in disposals of IP rights. These are issues that will need to be discussed with the German authorities upon disclosure of the factual background.
In great many cases the only obligation on companies with IP rights registered in Germany (or IP licences relating to IP rights registered in Germany) will be to apply for retrospective (from 2013 on) and prospective exemption from withholding tax (by complying with some formalities). This will be the case where the Double Tax Treaty (“DTT”) Germany has concluded with the state of residence of the IP owner contains a clear and unconditional withholding tax exemption in relation to IP revenue (e.g. UK, France, Spain and Belgium). This will also be the case in most IP transaction which are intra-group transactions involving a company resident in an EU Member State as the Interest and Royalties Directive will apply.
However, there will be certain cases where the effects will not be as clear cut: in cases where the DTT with Germany contains limitation of benefits clauses (such as for instance with the USA) an analysis will have to be carried out to ascertain whether the Treaty exemption applies. Where the DTT does not contain a withholding tax exemption but only a withholding tax limitation (such as for instance Italy) some tax will likely be payable, unless another exemption (such as group exemption under the Interest and Royalties Directive apply). Where there is no DTT with Germany in place in the state of residence of the IP owner, German withholding tax is likely to apply.
The deadline for compliance is 30 June 2022 for the past seven years.
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Please do not hesitate to contact Geoffroy Galéa, Andre Happel or Philippe Freund who will be co-ordinating this initiative on behalf of Fieldfisher's International Tax Group.