Limited tax liability on the licensing or sale of rights registered in German registers amendment due to annual tax law 2022

The Annual Tax Act 2022 contains significant changes, reclassifications and restrictions regarding the taxation of income from rights (IP) entered in a German register ("Register Cases"). It was promulgated on December 20, 2022, and the articles relevant to Register Cases entered into force on December 21, 2022.

In the following, we provide a summary of its content, which is significant for internationally operating corporate groups, as well as any further steps that may be required.

BACKGROUND OF THE REGISTER CASES

The central prerequisite for the establishment of a limited tax liability in Germany is, in principle, the existence of a domestic tax connecting factor. The provisions of Sec. 49 (1) No. 2 (f) and No. 6 of the German Income Tax Act (ITA) cover, among other things, income from the licensing as well as the sale of rights which are entered in a domestic public register. The Federal Ministry of Finance (BMF) clarifies that patents entered in the domestic register based on an application to the European Patent and Trademark Office also fall within the scope of the regulation. It does not require any further domestic reference. This means that the licensing or sale of an intangible asset may be taxa-ble in Germany even if neither the licensor nor the licensee or neither the seller nor the buyer is resident in Germa-ny.

In a letter dated November 6, 2020, the BMF commented on the previous general taxation of register cases. Proce-dural simplifications were defined in the BMF letters dated February 11, 2021, July 14, 2021, and June 29, 2022. Please refer to our client information dated January 26, 2022, for details of the individual provisions.

NEW REGULATION THROUGH THE ANNUAL TAX LAW 2022

With the Annual Tax Act 2022, the taxation of registered cases was newly regulated, according to which a distinction must be made between 3 types of cases in particular:

  • Remunerations from the licensing or sale of so-called other rights to third parties
  • Remunerations from the licensing or sale of so-called other rights to related parties
  • Remunerations from the licensing or sale of so-called other rights to remuneration creditors who are tax resident in a so-called non-cooperative tax jurisdiction within the meaning of § 2 German Tax Haven Defense Act.

A considerable relief applies to remunerations from the licensing or sale of so-called other rights if both the payment creditor and payment debtor are third parties. In these cases, the limited German tax liability ceases retroactively for all open cases. Exceptions exist in the case of § 2 German Tax Haven Defense Act (see case constellation C.). 

Changes introduced by the Annual Tax Law 2022 also apply to transactions between related parties. A related party is generally assumed to exist if the requirements of Sec. 1 (2) Foreign Tax Law are met, which essentially includes a minimum shareholding of 25%. In practice, this applies in particular to group situations.

In the case of remuneration received in this context from January 1, 2023, onwards, the German right of taxation is excluded, provided that there is an entitlement to exemption from taxation under a double taxation agreement and this entitlement is not restricted by national anti-treaty shopping regulations (in particular Section 50d (3) ITA). Thus, no application for exemption from tax deduction has to be filed for this royalty income. The taxation claim also ceases to apply to sales transactions that take place after December 31, 2022, provided that the corresponding treaty protection is in place.

If, on the other hand, the remuneration creditor is not resident in any DTA state or if the substance requirements cannot be met, the previous taxation of the registered cases will continue to apply.

In cases where the remuneration creditor is tax resident in a non-cooperative tax jurisdiction within the meaning of Section 2 German Tax Haven Defense Act, the remuneration is taxed as domestic income in accordance with Section 49 (1) No. 2 lit. f and No. 6 ITA in both licensing and disposal cases. This applies to transactions between third par-ties as well as between related parties. The application of the Tax Haven Defense Act already takes effect retroac-tively as of January 1, 2022, and includes the 12 states listed on the EU blacklist.

NEED FOR ACTION

Against the backdrop of the new provisions of the Annual Tax Law 2022, companies should examine possible tax im-plications. The first step is to take stock of the rights registered by the company in Germany or the EU, analyze their utilization and possible value distribution. In the second step, transactions between related parties in particular should be analyzed to determine whether DTA protection exists and whether there is sufficient substance to satisfy the national anti-treaty shopping rules at the level of the remuneration creditor.

Regarding the applicability of the Tax Haven Defense Act, discussions are already underway to extend the list of countries. Further developments remain to be seen.

EFFECTIVE SUPPORT FROM BDO

Please contact your BDO representative to identify the need for action. We will be happy to work out an appropriate individual recommendation for you. If required, we work together with colleagues from the respective BDO member firms from our international network in more than 164 countries.