Asset management or commercial activity when transferring the use of domains and trademark rights
Asset management or commercial activity when transferring the use of domains and trademark rights
For a partnership that is not commercial in nature, there are different tax consequences depending on whether its activity is categorized as private asset management or as a commercial activity. The categorization of such income as a commercial activity is quickly a matter of dispute due to the additional trade tax burden. In the dispute at hand, the Rhineland-Palatinate tax court (judgement of 23.05.2023 - Ref. 3 K 2108/18) had to determine the question of whether a long-term transfer of use of domains and trademark rights with additional services provided qualifies as a commercial activity.
Since 2003, the plaintiff - a company under civil law (GbR) - has generated income from the transfer of domain names and trademark rights to an L-GmbH in the amount of a percentage of the turnover of this GmbH. The comparable transfer of use to B-GmbH was made free of charge as agreed, as a positive business result on the part of the leaseholder was initially not to be expected. Both leaseholder GmbHs operated online trading via the internet addresses provided. All domains and trademark rights registered by the plaintiff were sold to a third party in 2017 as part of the business closure of the two GmbHs.
The plaintiff argued that its activities were primarily aimed at profiting from the transfer of use and that it generated income from letting and leasing by transferring the rights. The limit of private asset management was not exceeded. In another case, the BFH had previously ruled that the transfer of domains and trademark rights to third parties in return for payment alone did not exceed the scope of private asset management.
However, in the opinion of the Rhineland-Palatinate tax court, the requirements for qualifying the plaintiff's activity as a commercial activity were met. The GbR carried out a self-employed activity which, due to the continuous transfer of use, was designed for repetition and was therefore sustainable. Pursuant to established case law, all self-employed and sustainable activities of producers, traders or service providers are to be interpreted as participation in the general economic market - based on actual job descriptions. The domain names and trademark rights are not typical commercial products. However, the plaintiff's activities corresponded to the image of a producer and commercial service provider who ‘bundles its own work into marketable goods and services’. Market participation was therefore given, whereby business relationships with two contractual partners are sufficient for this. The plaintiff's intention to make a profit was already established on the basis of the overall positive income.
The Rhineland-Palatinate tax court interpreted the additional activities carried out by the plaintiff as value-enhancing and essential services that gave the activity a commercial character. The plaintiff had registered several alternative domain names with incorrect spellings - which far outweighed the domains provided - in order to ensure the accessibility of the trading platforms even in the event of typing errors and to protect them from free riders. In addition, the plaintiff used these additional domains to redirect Internet users to the online shops operated by the two limited liability companies. According to the plaintiff, this support of the trading activities of the two GmbHs was - in view of the agreed turnover-based remuneration - in its own interest and therefore free of charge. The significance of the effort or the customary nature of these additional services is of secondary importance. The decisive factor is that the ‘producer-like’ activities of the plaintiff had a commercial character - among other things by supporting the advertising measures of L-GmbH with the provision of a logo - and thus contributed significantly to achieving the highest possible turnover-based remuneration from L-GmbH.
Furthermore, pursuant to German federal tax court jurisprudence, an activity is to be regarded as commercial if the leasing of movable assets is combined with their purchase and sale on the basis of a uniform business concept; the utilization of substantial assets through redeployment takes precedence over the use of the assets in the sense of deriving benefit from the substance to be preserved. The tax court based its decision on the fact that, in view of the gratuitous transfer of use to B-GmbH, the plaintiff's entire business concept was geared towards the sale of the domains and trademark rights with corresponding sales proceeds. Ultimately, the plaintiff established the commercial business activity through the sale of the domains and the trademark rights.
Since 2003, the plaintiff - a company under civil law (GbR) - has generated income from the transfer of domain names and trademark rights to an L-GmbH in the amount of a percentage of the turnover of this GmbH. The comparable transfer of use to B-GmbH was made free of charge as agreed, as a positive business result on the part of the leaseholder was initially not to be expected. Both leaseholder GmbHs operated online trading via the internet addresses provided. All domains and trademark rights registered by the plaintiff were sold to a third party in 2017 as part of the business closure of the two GmbHs.
The plaintiff argued that its activities were primarily aimed at profiting from the transfer of use and that it generated income from letting and leasing by transferring the rights. The limit of private asset management was not exceeded. In another case, the BFH had previously ruled that the transfer of domains and trademark rights to third parties in return for payment alone did not exceed the scope of private asset management.
However, in the opinion of the Rhineland-Palatinate tax court, the requirements for qualifying the plaintiff's activity as a commercial activity were met. The GbR carried out a self-employed activity which, due to the continuous transfer of use, was designed for repetition and was therefore sustainable. Pursuant to established case law, all self-employed and sustainable activities of producers, traders or service providers are to be interpreted as participation in the general economic market - based on actual job descriptions. The domain names and trademark rights are not typical commercial products. However, the plaintiff's activities corresponded to the image of a producer and commercial service provider who ‘bundles its own work into marketable goods and services’. Market participation was therefore given, whereby business relationships with two contractual partners are sufficient for this. The plaintiff's intention to make a profit was already established on the basis of the overall positive income.
The Rhineland-Palatinate tax court interpreted the additional activities carried out by the plaintiff as value-enhancing and essential services that gave the activity a commercial character. The plaintiff had registered several alternative domain names with incorrect spellings - which far outweighed the domains provided - in order to ensure the accessibility of the trading platforms even in the event of typing errors and to protect them from free riders. In addition, the plaintiff used these additional domains to redirect Internet users to the online shops operated by the two limited liability companies. According to the plaintiff, this support of the trading activities of the two GmbHs was - in view of the agreed turnover-based remuneration - in its own interest and therefore free of charge. The significance of the effort or the customary nature of these additional services is of secondary importance. The decisive factor is that the ‘producer-like’ activities of the plaintiff had a commercial character - among other things by supporting the advertising measures of L-GmbH with the provision of a logo - and thus contributed significantly to achieving the highest possible turnover-based remuneration from L-GmbH.
Furthermore, pursuant to German federal tax court jurisprudence, an activity is to be regarded as commercial if the leasing of movable assets is combined with their purchase and sale on the basis of a uniform business concept; the utilization of substantial assets through redeployment takes precedence over the use of the assets in the sense of deriving benefit from the substance to be preserved. The tax court based its decision on the fact that, in view of the gratuitous transfer of use to B-GmbH, the plaintiff's entire business concept was geared towards the sale of the domains and trademark rights with corresponding sales proceeds. Ultimately, the plaintiff established the commercial business activity through the sale of the domains and the trademark rights.
Notice:
The ruling - also due to its lengthy reasoning - shows once again that the classification of a tax activity depends on the facts of the individual case. As the Federal Fiscal Court has not yet issued any criteria for distinguishing private asset management from a commercial activity for use of rights and other intangible assets such as domain names, the Rhineland-Palatinate tax court has allowed an appeal.