German IP nexus rules: Ministry of Finance circular simplifies WHT & capital gains tax procedures

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February 2021

Overview

The German Ministry of Finance issued a circular on February 11 that provides updated filing and withholding procedures for royalties attributable to IP registered in a German book or register. By taking advantage of this new simplified process within the prescribed time limits, taxpayers have an opportunity to avoid penalties that may otherwise be imposed.  

The updated procedures provide a simplified process for royalties received by taxpayers who are eligible for treaty benefits under the relevant German tax treaty. Pending meeting certain criteria and qualifications, taxpayers can apply for a retroactive withholding exemption certificate which will be effective for all open tax years. However, the circular provides a limited time period for taxpayers to take advantage of these simplified procedures.  

As discussed in more detail below, the circular notes that no withholding tax (WHT) is applied to capital gains realized on dispositions of German-registered IP. Instead, taxpayers are instructed to file a German tax return with respect to such disposition, irrespective of whether the disposing taxpayer is eligible for treaty benefits under a treaty with Germany. 

Set forth below is a table summarizing various income streams impacted by the German withholding tax rule and pertinent updates that the circular provides for such income streams.  

The takeaway

The new circular allows a simplified procedure to file for foreign-to-foreign withholding taxes for a limited time period. Non-resident taxpayers should consider the option to reduce tax compliance obligations, being mindful of the preconditions and exceptions.

The simplified procedure is only available where a licensor is unambiguously entitled to the benefits of a German tax treaty that eliminates German tax on the payments associated with the licensed IP. The circular does not provide any simplified procedures in non-treaty cases, nor does it include any specific rules that provide additional simplification in the case of royalties paid between unrelated parties.

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Doug McHoney

International Tax Services Co-Leader, PwC US

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