According to German tax law, IP rights with a connection to Germany can raise a variety of tax issues. This includes aspects of German or foreign intellectual property rights that generate “income from German sources”, questions of withholding tax liability, a possible limited deductibility of license fees in Germany and reporting obligations according to “DAC 6”. This LawFlash briefly describes some important aspects of the German taxation of intellectual property rights for companies that are not tax resident in Germany.
GERMAN SOURCE INCOME FROM IP RIGHTS
Companies that are neither registered in Germany nor have their headquarters in Germany are considered non-resident for tax purposes and are subject to German taxation on income from German sources, the so-called “limited tax liability”, unless there is tax treaty protection. The different types of German income are described in Chap. 49 Income Tax Act (EStG). Sec. 49 EStG applies to non-residents as well as companies and covers various scenarios of IP-related German income.
All income, including license fees and sales proceeds from German or foreign intellectual property rights or know-how, which are attributable to a German permanent establishment (PE) that is maintained by the non-resident owner (or user) of the intellectual property rights, is released by a German Taxation according to both German tax law and German tax law from most German tax treaties. This typical PE scenario results in proper allocation and allocation of assets, income and expenses to the PE vis-à-vis headquarters. Income attributable to a German PE is subject to taxation of 29% to 32%, which is made up of 15% corporate income tax plus 5.5% solidarity surcharge and trade tax levied by the municipality in which the PE is located and local prices .
Even without their own PE in Germany, the non-resident owner of the rights receives German sources of income from renting or usufruct leasing or the sale of rights that are in Germany or are entered in a German public book or register or in which they are used a German (third party -) PE or another German base. For example, IP rights licensed by a non-resident owner to a German licensee who uses them in a German PE are sufficient to provide the owner with German source income under German domestic tax regulations. Except in the case of contract protection, German taxation includes corporation tax of 15% plus 5.5% solidarity surcharge, but no trade tax.
The same applies if a non-German owner sells his intellectual property rights to a German or a non-German tax resident buyer. According to Article 13, Paragraph 5 of the OECD Model Tax Agreement and the respective provisions of the German tax agreement, capital gains from the sale of intellectual property rights should only be taxable in the area in which the seller is domiciled, unless the intellectual property is a German PE of the seller.
According to a leading decision by the Federal Court of Justice, the term “sale” in the sense of Section 49 EStG requires payment / consideration (consideration). A contribution of such rights to a company or partnership without consideration, in particular without the granting of newly issued shares, should therefore generally not be considered a sale and should not trigger any German sources of income.
Furthermore, Sec. 49 EStG includes income from rental and usufruct leasing that are not already covered by the above if the intellectual property rights are located in German territory or are entered in a German public book or register or if they are in a German (third-party) PE or another domestic company refer to Base.
The German tax regulations for IP rights do not precisely define the term “IP rights”. Sec. 49 EStG only mentions “rights” that are registered or used in Germany. The “central” IP rights, however, include patents, trademarks, utility models and design rights.
After all, Sec. 49 EStG deals separately with German source income from “know-how” – although it neither defines nor expressly uses the term “know-how”. It is only stipulated that income from German sources is income from “… the provision and use of commercial, technical, scientific and similar experience, knowledge and skills such as plans, models / patterns and processes that are or have been used in the household [i.e. German] Territory… ”Therefore, under German tax law,“ know-how ”is viewed as a so-called“ open term ”that requires“ detailing and refining ”- a typical approach in German law that offers a certain degree of uncertainty.
Withholding tax aspects of royalty
A German licensee of intellectual property rights is required to withhold German taxes at source on behalf of and on the basis of a non-resident licensor if no exemption applies. Sec. 50a EStG lists the types of income from German sources that are subject to withholding tax. This includes “Income from remuneration for the provision of the use (and enjoyment) or the right to use (and enjoyment), in particular copyrights and property rights for commercial, technical, scientific and similar purposes, experience, knowledge and skills such as plans, Models / examples and processes that are or have been used in the household [i.e. German] Territory … “
The tax rate is 15% plus 5.5% solidarity surcharge on the gross amount of the license fee.
An exemption may apply to royalties paid by a related party, typically within a group of companies resident in the European Union.
Another important exception is provided by the tax treaties that follow the OECD model tax treaty. According to Article 12, Paragraph 1 of the OECD Model Tax Convention, license fees should only be taxed in the area in which the recipient is domiciled. This applies to the extent that the license fees are levied at standard market conditions. Art. 12 (2) of the OECD model tax treaty defines license fees as “payments of any kind received in return for the use or the right to use a copyright in literary, artistic or scientific works including motion pictures, patents, trademarks, designs or model, plan , secret formula or process or information related to industrial, commercial or scientific experience. “
Even if there is contract protection for the license fees, certain German tax formalities must be observed.
In accordance with Section 50d EStG In order to benefit from a tax agreement that restricts or abolishes the German law on taxation of license fees, an exemption from withholding tax must be applied for at the Federal Central Tax Office (CTO) in Bonn. The official form of the CTO must be used. One element of the exemption procedure is the provision of a certificate of residence from the recipient of the license fees (in a contract area). If the CTO issues an exemption certificate, the licensee is entitled to limit the withholding tax at source. Since this process usually takes a few weeks, it should be started in good time. If taxes have already been withheld, they can be refunded. From the beginning of 2021, a legislative process will be underway in Germany to “modernize” the tax regulations for withholding taxes on dividends and license fees, which will change the current process.
In addition, in accordance with Section 50d (3) EStG, which is generally understood as a kind of unilateral “contract override”, certain additional requirements apply to exemption from withholding tax. According to this rule, the release is triggered under a tax treaty to the extent that (i) the ultimately beneficial recipients of a license fee (in particular the shareholders of a company that licenses the IP right) are entitled to a contractual performance if they have the receive payment directly (instead of the licensor) or (ii) the licensor, as the receiving company, has its own business and has sufficient economic substance, or there are good business reasons for the interposition of this company.
RESTRICTIONS ON ROYAL PAYMENT DEDUCTION
Although German tax law generally provides a very broad concept of deductible business expenses for income tax purposes, there are some exceptions. In addition to the restrictions on the deduction of interest payments, restrictions on license fees also apply. Sec. 4j EStG lays down restrictions on the tax deductibility of “expenses for the provision of the use or for the right to use rights, in particular copyrights and property rights, for commercial, technical, scientific and similar experience, knowledge, and skills such as plans, models / Samples and processes are independent of the provision of an existing double taxation agreement. “
This affects the deductibility of license fees to a recipient who is resident in a “low tax area” and is a “related person” of the licensee within the meaning of the German Foreign Tax Act. An area is classified as a “Low Taxation Area” if the taxation on the license fee received is less than 25%. In this case, the license fee is only partially deductible. Complicated extensions of this rule and exceptions apply, which contain a reference to Chapter 4 of the 2015 OECD Final Report and the “nexus concept” contained therein. According to the provisions of Section 4j EStG, particular caution is required if, for example, IP rights are licensed from a foreign group “Patent Box” to a German group unit as a licensee.
‘DAC-6’ TAX REPORTING OF BORDER-BORDER TRANSACTIONS
The European Union has introduced a directive on tax reporting requirements for cross-border transactions, which has now come into force in all EU member states. In short, the DAC 6 reporting requirement for cross-border transactions aims to identify and report what cross-border tax planning is deemed “aggressive” (but not necessarily illegal). Cross-border means that at least parties who are resident in an EU member state and a non-EU country or in two or more EU member states are involved in a transaction that fulfills one or more specific “characteristics”. For the details of DAC-6, refer to the Morgan Lewis LawFlashes on the subject.
Cross-border transactions that relate to IP rights can meet a number of different “characteristics” depending on the structure of the transaction. For example, the transfer of intellectual property rights to a company resident in an area that has a “patent box” regime with preferential taxation of intellectual property income income can trigger a reporting requirement. Consequently, every transaction that contains an element of intellectual property rights should be carefully checked in order to avoid fines – not only if Germany but also an EU member state is involved.