It is important to us to inform you across legal fields when it might be relevant for you. The topic of this information is the taxation of your profits from the licensing or transfer of rights entered in a German register (e.g., registered trademarks and designs, patents, utility models; hereinafter “domestic register rights”).
Below you may find (1.) a short summary of the relevant novelties (2.) an explanation in detail and (3.) our final recommendation as to what you and your companies should do next.
1. Summary of the relevant novelties
The current development concerns the obligation to tax profits deriving from the licensing or transfer of domestic register rights, even if the registration in Germany is the result of an International Registration or a registration under the European Patent Convention. Relevant register rights are primarily registered trademarks, designs and patents, but also rights deriving from German utility models and plant variety protection.
This development is only relevant for your company, if
- the use of a domestic register right (trademarks, designs, patents, etc.)
- has been licensed or transferred
- for a fee
- within the past 7 years and
- both of the parties (licensor/transferor and licensee/transferee) have neither a registered office nor management in Germany
or if such a licensing or transfer is planned in the future.
In the cases above, income generated from the licensing or transfer of domestic register rights may lead to a limited tax liability in Germany. In principle, the licensee is subject to limited tax liability in the case of a licensing of the use of the domestic register right for a limited period of time (hereinafter “licensing”), and the licensor/transferor in the case of a licensing for an indefinite period of time (from a tax law perspective, depending on the individual facts, considered a transfer of rights) or a transfer (hereinafter jointly referred to as “transfer”).
Should such transactions have been conducted within your company, we recommend that you immediately contact your tax department or your tax advisor/expert, to avoid legal consequences, that may be incurred.
2. Explanation in detail
With official letter dated 6 November 2020, the German Federal Ministry of Finance (hereinafter referred to as “BMF”) stated, that income generated from the licensing or transfer of domestic register rights may lead to a limited tax liability of the licensee/transferee and/or the licensor/transferor, even if neither licensor/transferor nor licensee/licensor have a place of business nor management in Germany. In addition, the BMF letter applies retroactively and, therefore, also covers transactions that have already been completed but which are not yet subject to the 7-year tax fixation deadline, after the expiry of which the collection of taxes by the German financial authorities is excluded.
Therefore, anyone who – while having neither a place of business nor management in Germany –
- is granted a license to a domestic register right as licensee for a limited period of time by a 3rd party without place of business or management in Germany either
or
- grants a license for an indefinite period of time to or transfers a domestic register right as licensor/transferor to a 3rd party without place of business nor management in Germany either
is also subject to limited tax liability.
In the individual case, the risk of limited tax liability and the ensuing financial consequences shall, therefore, largely be determined by identifying whether the domestic register right was (2.1.) licensed or (2.2.) transferred. In addition, (2.3.) exceptions to the limited tax liability may apply in specific cases in accordance with international tax law regulations.
2.1. Licensing of domestic register rights
Should a domestic register right be licensed to you for a limited period of time, you as the licensee are required to deduct the tax before paying the license fee to the licensor and to pay the tax to the German Federal Central Tax Office and submit a tax statement. The tax rate to be withheld is 15{1c502c4e1e1b7ff5687e142ea847928a3a0330004eb49fa220ca63e79f6a7746} of the gross fee. Furthermore, an additional solidarity surcharge of 5.5{1c502c4e1e1b7ff5687e142ea847928a3a0330004eb49fa220ca63e79f6a7746} shall be withheld on the tax due. The remaining net fee is to be paid to the licensor.
Example: The agreed (gross) license fee is 10,000 Euros. The tax deduction of 15 {1c502c4e1e1b7ff5687e142ea847928a3a0330004eb49fa220ca63e79f6a7746} amounts to 1,500 Euros and the solidarity surcharge of 5.5{1c502c4e1e1b7ff5687e142ea847928a3a0330004eb49fa220ca63e79f6a7746} amounts to 82.50 Euros. The (net) license fee to be paid is 8,417.50 euros.
If, on the other hand, you grant a domestic register right to a licensee without registered office or management in Germany for a limited period of time, the licensee is obligated to withhold, pay and make a tax declaration to the responsible German tax authority.
2.2. Transfer of domestic register rights
If you transfer a domestic register right to a 3rd party (also in the form of a licensing for an indefinite period of time), you as the licensor/transferor are obliged to withhold the tax. The tax rate is also 15{1c502c4e1e1b7ff5687e142ea847928a3a0330004eb49fa220ca63e79f6a7746} of the (gross) license fee plus the solidarity surcharge of 5.5{1c502c4e1e1b7ff5687e142ea847928a3a0330004eb49fa220ca63e79f6a7746} on this amount.
If, in the opposite case, you are transferred a domestic register right, the other party as the licensor/transferor is obligated to withhold, pay and make a tax declaration to the responsible German tax authority.
2.3. Exemptions from the limited tax liability
However, in accordance with international tax law, it is possible that your business may not be subject to limited tax liability, or only within certain limits, if (2.3.1.) a double taxation agreement (hereinafter “DTA”) is applicable and (2.3.2.) the further requirements determined by the BMF are met. Furthermore, a tax exemption may be granted in cases of minor tax significance (2.3.3.).
2.3.1. Exclusion due to double taxation agreement (DTA)
If a DTA is applicable, the tax burden may be reduced or even be excluded entirely in specific cases. For instance, if the taxable person is granted an exemption certificate for the specific transaction in accordance with the applicable DTA and pursuant to the German Federal Income Tax Act upon prior request with the tax authorities. Such an exemption certificate may limit the tax burden in the specific case or even reduce it entirely.
Example: The agreed (gross) license fee is 10,000 Euros. According to the relevant DTA, the tax burden in Germany is restricted to a maximum of 10{1c502c4e1e1b7ff5687e142ea847928a3a0330004eb49fa220ca63e79f6a7746} and (due to previous application) a corresponding exemption certificate has been obtained: The licensee/transferee must withhold and pay 1,000 Euros in income tax resp. corporation tax for the foreign remuneration creditor, but no solidarity surcharge.
2.3.2. Exceptions for licensing
The BMF has determined exceptional cases, in which the obligation to declare or pay taxes may desist.
For remunerations already paid to the licensor or which shall be paid to the licensor before 1 July 2023, it is possible to refrain from deducting the taxes, remitting them and filing a tax statement if the following conditions are met cumulatively:
- the licensee has neither a registered office nor its management in Germany;
- the licensor is seated in a DTA member state and is entitled to relief under the applicable DTA and the remuneration is also attributable to him for tax purposes (in the case of transparent partnerships, it depends on where the parties involved have their domicile or registered office);
- the licensor or the licensee authorized by him submits an application for exemption from withholding tax to the German Federal Central Tax Office by 30 June 2023;
- Contractual relationships including sub-licensing must be disclosed to the German Federal Central Tax Office with the application;
- regarding the disclosure of contracts, relevant passages must be translated into German.
For further details, please refer to the BMF letter dated 29 June 2022.
Please note: If the license payment is received after 30 June 2023, the general regulations apply. However, if you have received an exemption certificate for the respective license grant with effect from this date at the latest, at best no tax deduction may incur.
2.3.3. Exemption option
Since 1 January 2022, there is an exemption option for cases of minor tax significance. The exemption applies to cases, in which the remuneration for the licensing or transfer of domestic register rights was/is paid after 31 December 2021. A special request with the tax authorities is not required for this exemption to apply. The simplification essentially consists in the fact that no request for exemption by the foreign remuneration creditor is required, but the remuneration debtor does not have to make the tax deduction in this respect or has to make it at a lower tax rate. The latter is the case if the applicable DTA contains a so-called residual tax rate in its license provisions. The exemption option is subject to an exemption limit of 5,000 Euros per remuneration creditor and calendar year.
For further details, please refer to the information provided by the German Federal Central Tax Office on its website, which can be accessed via the following link:
3. Our recommendation
In conclusion, if you have licensed for an indefinite period of time or transferred German domestic register rights within the past 7 years to 3rd parties who have neither place of business nor management in Germany, or if domestic register rights have been licensed to you for a limited amount of time by such 3rd parties in the past 7 years, or if you are planning such transactions in the future, we recommend that you contact your tax advisor or your tax expert immediately in order to counteract impending tax liability risks at an early stage, as the tax is not due at the end of the year but directly upon conclusion of the taxable event.
Unfortunately, we cannot support you in the area of tax law ourselves and, therefore, recommend that you contact your tax department or your tax advisor or expert. If you wish, we would also be happy to put you into contact with a German firm of tax advisors.
For further information, please refer to the relevant BMF letters of
- 6 November 2020 – IV C 5 – S 2300/19/10016:006 – DOK 2020/1009219
- 11 February 2021 – IV B 8 – S 2300/19/10016:007 – DOK 2021/0003450
- 14 July 2021 – IV B 8 – S 2300/19/10016:007 – DOK 2021/0549633 and
- 29 June 2022 – IV B 8 – S 2300/19/10016:009 – DOK 2022/0490278
Nevertheless, we are of course at your disposal for any questions and comments.
