A new report (the Report)1 released by the German Federal Ministry of Finance (MOF) suggests that there may be some relief forthcoming for taxpayers affected by a nearly century-old tax provision that requires offshore withholding tax on certain tax payments. royalties between non-resident taxpayers. The Ministry of Finance has previously issued a circular (the Circular) confirming its position that German withholding tax (at the rate of 15.825%) is due and payable on royalties which are due or have been paid to an unpaid beneficiary. German tax resident, even if:
- The licensee is not tax resident in Germany, and
- The only connection with Germany is that the intellectual property (IP) rights underlying the royalties are registered in a German public registry.
Licensee is liable to withhold, report and remit German tax unless a treaty-based (or European Union directive) exemption certificate has been issued to Licensor by the German tax authorities. With regard to payments made in 2013 and later, without a certificate, but where a convention clearly applies, the German tax authorities introduced a “simplified procedure” whereby licensors could ask the Central Office federal tax exemption certificate that would apply to previous payments. Further simplifications were later introduced to allow taxpayers to apply for blanket exemption certificates covering a group of separate license agreements at a time. The US-German treaty and most other German treaties would provide protection for these payments.
Please see our previous Eversheds Sutherland legal alerts HERE and HERE for additional information and a detailed history of the circular, including the circular’s legal basis and procedural guidelines.
As discussed in detail below:
- The retroactive exemption application deadline has been extended to June 30, 20232;
- The legal and factual complexities associated with exemption requests have resulted in a significant administrative burden and a significant backlog for the Federal Central Tax Office;
- Future tax revenue is unlikely in 90% of cases;
- The withholding tax has been criticized internationally as inconsistent with the OECD’s Inclusive Framework Agreement; and
- Falling revenues combined with international criticism of withholding tax may support the elimination of withholding tax in the future.
Filing deadline extended for past years
In the immediate term, the MOF has extended, through a circular issued on June 29, 2022, the period during which taxpayers can file a request for exemption from withholding tax for past years under an applicable tax treaty. The deadline to apply was June 30, 2022, but this deadline has now been extended to June 30, 2023.
Evaluation of the MOF position for the coming years
The report reaffirms the general legal position of the Department of Finance that the withholding tax applies and notes that the Federal Tax Court ruled in favor of the Department of Finance with respect to some of the legal issues raised by the application of the tax. The report recognizes that there remain legal and political considerations. In addition to complex legal and factual considerations related to individual cases, the determination of the tax base for the purposes of applying the tax is complicated, among other things, by the absence of a specific apportionment formula. According to the report, these complexities have resulted in many filings being at least partially incorrect.
Given the complexity of the declarations, the existence of complex cross-border license agreements and the difficulties in dealing with previous tax years, the examination by the Federal Central Tax Office of requests for exemption from previous years and pending declarations is complicated and time consuming and there is a significant backlog. In this context, the report recognizes that in the overwhelming majority of cases no additional tax revenue is expected as a result of the application of a tax treaty and that the Federal Central Tax Office will not be able to timely processing even the previous year’s waiver requests that have been received so far, not to mention the significant number of requests that were due to be filed by the June 30 deadline. It became apparent that the tax authorities were unable to issue exemption certificates in time for the quarterly withholding tax return due by October 10, 2022.
Is a change planned for the future?
The report observes that multinational entities have extensively restructured intellectual property holdings since 2018 to secure exemption from withholding tax. Thus, it is expected that in almost 90% of cases, it is unlikely that there will be future tax revenue.
Furthermore, the report acknowledges that withholding tax has been criticized internationally and is seen as a unilateral extraterritorial measure, which is inconsistent with international efforts related to the United Nations Inclusive Framework Agreement. economic cooperation and development (i.e. agreements relating to the introduction of a global minimum tax and reallocation of certain taxing rights). While the report refutes criticisms that liken the withholding tax to digital services taxes as “technically inaccurate from a fiscal perspective,” the criticisms should be “taken politically seriously.” Falling revenues combined with international criticism may support the elimination of withholding tax in the future, although the report stops short of specifically making that recommendation. Even if the tax were to be eliminated prospectively, there is no indication that there would be any change in the application of the law to previous years, as the report suggests that the additional tax revenue in previous cases outside treaty should be significant.
1The report of the Federal Ministry of Finance assessing the current legal situation with regard to the taxation of persons subject to limited tax liability who derive German income from the assignment of rights registered in a German public register (so-called register cases) ( English translation ).
2Letter from the Federal Ministry of Finance regarding remuneration within the meaning of Section 49(1)(2)(f) and (6) of the Income Tax Act for the temporary transfer of rights entered in a book or National Public Registry (English translation).