The German Federal Ministry of Finance (BMF) confirmed twice within the last few weeks that an IP arrangement between foreign entities shall in accordance with sec. 49 (1) no. 2 lit. f) GITA trigger a limited tax liability of the creditor in Germany, provided that subject to the arrangement the IP is (also) registered in Germany with no other nexus required such as a German debtor, etc. (foreign to foreign IP arrangements):
- In a decree dated November 6, 2020 the BMF initially confirmed this view in a formal manner and consequently requested concerned parties to comply with German regulations, i.e. submit complete and correct German filings and pay the appropriate tax to the German authorities for all tax years which have not yet become time barred. The decree was silent on how the assessment basis should be determined.
- On November 20, 2020 the BMF published a draft bill to modernize the provisions around WHT, where it was reconfirmed that in accordance with the current wording of the law foreign to foreign IP arrangements shall trigger a German limited tax liability. The amendments relate, among other things, to the sec. 49 (1) no. 2 lit. f) GITA. With respect to the proposed changes it is suggested to delete the wording pursuant to which a limited taxation is triggered in foreign to foreign IP arrangements, where there is no other nexus to Germany as the pure registration of IP rights. The draft bill foresees that this change should apply to all open tax years, which have not yet become time barred. Interesting to note is that in the explanatory notes of the draft bill, the BMF provides the view that the historic legislator from 1925, when the law was initially enacted, had no intention to subject foreign to foreign IP arrangements to German limited taxation. Further in cases where double tax treaties are in place generally Germany has no right to tax such income and thus following the mechanics of the domestic law, i.e. determining the facts, submitting filings and paying the tax to the competent authorities followed by a formal refund procedure, leads to a considerable but unnecessary administrative effort. However, a change of the law is required in order to avoid a German taxation right in foreign to foreign IP arrangements.
This view has been confirmed by a former chief judge who was responsible for the chamber at the German Federal Tax Court handling cases like this (Gosch in Handelsblatt – Steuerboard 04.09.2020). Whereas Mr. Gosch is not in charge at the German Federal Tax Court anymore and (only) presented his personal view, other judges can in theory take a different view, however, this view has also been presented by others in the professional literature (Andresen, Gericke, Holtrichter, Reul in IStR 2020, 833). Other authors presented a different view, pursuant to which foreign to foreign IP arrangements should from the outset not attract a limited taxation in Germany, in particular due to historic and teleological reasons (Altenburg in DStR, 561; Schönfeld, Ellenrieder in IStR 2020, 567).
Provided that the draft bill in its current version will be adopted by the legislator, foreign to foreign IP arrangements should no longer attract a German limited tax liability and on this basis no current and past filing obligations should be applicable. However, the draft bill on a stand-alone basis should not provide any protection to the parties concerned in case the draft bill will never be adopted by the legislator or adversely amended during the legislation procedure. Therefore, for the time being while the further legislative process should be closely monitored, concerned parties should continue with developing a defence position.
Hereinafter, you find an extract of the draft bill in German and English language. Extract of draft bill (AbzStEentModG) – Convenience Translation