New report (Report)1 published by the German Federal Ministry of Finance (MOF) suggests that there may be some relief for taxpayers affected by a nearly century-old tax provision requiring extraterritorial withholding tax on certain royalty payments between non-resident taxpayers. The Ministry of Finance previously issued a circular confirming its position that German withholding tax (at the rate of 15.825%) is due and payable on royalties payable or paid to a tax recipient who is not a resident of Germany, even if :
- The licensee is not a tax resident in Germany, and
- The only connection with Germany is that the intellectual property (IP) rights, which are basically royalties, are registered in the German public register.
The licensee is obliged to withhold, report and pay German tax unless the German tax authorities have issued an exemption certificate to the licensor based on an agreement (or on a European Union Directive). With regard to payments made in 2013 and later, without confirmation, but where the contract clearly applies, the German tax authorities introduced a “simplified procedure” whereby licensors could apply to the Federal Central Tax Office for an exemption certificate that would apply on past payments. Later, other simplifications were introduced to allow taxpayers to apply for general exemption certificates covering a group of separate license arrangements at the same time. The US-German agreement and most other German treaties would provide protection for such payments.
Please see our previous Eversheds Sutherland legal notices HERE and HERE for further information and detailed background on the Circular, including the Circular’s legal basis and procedural guidance.
As explained in more detail below:
- The deadline for submitting a request for retroactive exemption has been extended until June 30, 20232;
- The legal and factual complexities related to the submission of exemption requests have resulted in a significant administrative burden and significant backlog for the Federal Central Tax Office;
- In 90% of cases, it is unlikely that there will be any future tax revenue;
- The withholding tax has been criticized internationally as being inconsistent with the OECD’s Inclusive Framework Agreement; and
- Declining revenues combined with international criticism of the withholding tax may support the elimination of the withholding tax in the future.
The application deadline has been extended for previous years
Most importantly, the Ministry of Finance extended the period in which taxpayers can apply for exemption from withholding tax for past years in accordance with the provisions of the current tax treaty in a circular issued on June 29, 2022. The application deadline was June 30, 2022, but that deadline has now been extended to June 30, 2023.
Evaluation of the position of the Ministry of Finance for the coming years
The report reaffirms the MoF’s overall legal position that the withholding tax applies and notes that the Federal Fiscal Court has ruled in favor of the MoF regarding some of the legal issues raised by the application of the tax. The report confirms that there are still legal and political reasons. In addition to the complex legal and factual considerations related to individual cases, the determination of the tax base for the purposes of applying the tax is hampered, among other things, by the lack of a specific distribution formula. According to the report, these complexities have resulted in many submissions being at least partially inaccurate.
Given the complexity of submissions, the existence of complex cross-border licensing arrangements and the difficulty of dealing with past tax years, the review by the Federal Central Tax Office of both exemption requests for previous years and current applications is complicated and time-consuming. there is a significant backlog. In this context, the Report recognizes that in the vast majority of cases no additional tax revenues are expected due to the application of the tax agreement and that the Federal Central Tax Office will not be able to timely process even the requests for exemption from last year that have been received so far, let alone a significant number applications that were expected to be submitted by June 30. It has become clear that the tax authorities were unable to issue exemption certificates in time for the quarterly withholding tax return until 10 October 2022.
Is change expected in the future?
The report notes that multinational entities have largely restructured their intellectual property ownership since 2018 to ensure the availability of withholding tax benefits. Therefore, it is expected that in almost 90% of cases there will be no future tax revenue.
Furthermore, the Report acknowledges that the withholding tax has been criticized internationally and is perceived as a unilateral extraterritorial measure, which is inconsistent with international efforts related to the Organization for Economic Co-operation and Development’s Inclusive Framework Agreement (i.e., agreements related to by introducing a global minimum tax and redistribution of certain tax rights). While the Report refutes criticisms comparing the withholding tax to taxes on digital services as “incorrect from a technical tax perspective”, the criticisms must be “taken seriously from a policy point of view”. Falling revenues combined with international criticism may support the elimination of the withholding tax in the future, although the Report does not make an explicit recommendation. Even if the tax is prospectively eliminated, there is no indication that there will be any change in the application of the law to prior years, as the Report suggests that the additional tax revenue in past non-treaty cases is expected to be significant.
1Report of the Federal Ministry of Finance on the assessment of the existing legal situation with regard to the taxation of persons with limited tax liability who derive German income from the assignment of rights entered in the German public records or register (so-called register cases) (English translation) ).
2Letter from the Federal Ministry of Finance regarding compensation in terms of Article 49(1)(2)(f) and (6) of the Income Tax Act for the temporary transfer of rights entered in a domestic public book or register (English translation).