Germany: New position on tax liability, IP structures without obvious nexus

Germany: New position on tax liability, IP structures

German tax filing and withholding tax obligations can be triggered by intellectual property (IP) structures without an obvious nexus with Germany.


New position on tax liability

Under Art. 49 (1) No. 2 (f) and No. 6 of the German income tax law (Einkommensteuergesetz), a limited tax liability exists even for foreign entities on income generated through:

  • Licensing or the sale of rights (such as trademark, patent or design register etc.) registered at the German patent and trademark office—regardless as to where the IP owner is resident or where the exploitation of the IP takes place, or
  • IP whose exploitation takes place in a German permanent establishment or other German facility

These underlying rules have existed for many years. However, Germany’s Finance Ministry issued guidance—letter (November 2020) (German)—advising that the registration of a transferred right in a domestic register is sufficient to trigger tax obligations (without any other German nexus).

At the same time, German tax audits are increasingly focusing on licensing relationships in group companies, leading to subsequent withholding tax claims. In addition to current transfers of rights, “old cases” within the scope of the fiscal limitation periods may be affected by this increased scrutiny. The tax authorities have also started to data-mine the online register of the German patent and trademark office.

KPMG observation

In light of the new position of and increased scrutiny from the German tax authorities, non-German companies need to evaluate their licensing relationships.

  • The first action point for non-German companies is to clarify their situation and potential exposure by verifying whether any IP is registered in the German patent or trademark office via its website.
  • Next, companies need to verify whether any royalty or license payments have been made to a non-German resident licensor within the group or to third parties within the fiscal limitation period (i.e., seven years).
  • Finally, companies need to determine whether any IP has been transferred within the group or to third parties in the last seven years, keeping in mind that German law does not require a license payment flow from Germany for tax obligations to be triggered.

Read a November 2020 report prepared by the KPMG member firm in Switzerland

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