Germany: Limited tax liability for foreign companies through exploitation of rights listed in German public register
Germany: Limited tax liability for foreign companies
Companies domiciled abroad may generate domestic income in Germany through the granting of rights and thereby be subject to non-resident tax liability if there is a domestic nexus to Germany. Apart from establishing a domestic nexus through exploitation of the rights in Germany—for example by using them in a German permanent establishment—the tax liability also applies to rights that are listed in a domestic public register. The question is whether this also applies when the rights are granted and used exclusively abroad.
The German Federal Ministry of Finance (BMF) in February 2021 issued guidance to simplify the application of tax if certain conditions are satisfied.
The BMF in November 2020 guidance confirmed a tax liability in situations when the right is solely entered into a domestic public register.
The ministerial draft of an Act to Modernise the Relief from Withholding Tax and the Certification of Capital Gains Tax of 20 November 2020 provided for the repeal of non-resident tax liability for granting of rights based on the mere entry in a domestic register. This legislative change was not, however, adopted in the government bill of 20 January 2021.
The BMF in the guidance of 11 February 2021 issued a simplification rule for certain cases and for a limited period. If the conditions of the simplification rule are met, a tax must not be withheld. The simplification rule covers cases which are subject to non-resident tax liability and withholding tax solely on the basis of entry in a domestic register and for which, on account of an income tax treaty, no German tax liability ultimately arises. No other domestic nexus (use of the rights in a domestic permanent establishment) may exist.
The rule applies for considerations already received by the licensor (creditor) or still to be received up to and including 30 September 2021. In these instances, the withholding of tax, remittance of tax, and reporting of tax to the German Federal Central Tax Office (BZSt) may be waived if certain requirements regarding the payment debtor and creditor are satisfied. For example, the payment debtor may not be resident (residence or habitual abode or place of management) in Germany at the time the receipt consideration is received.
The basis of assessment for the withholding tax is generally the respective gross consideration for the granting of the right registered in Germany. If necessary, the consideration paid is to be apportioned appropriately.
The sale of rights entered in a public register in Germany also fulfils the condition of non-resident tax liability. For these sales transactions—which are not subject to withholding tax—tax returns must be submitted by the non-resident taxpayer (licensor). There need be no electronic submission until 30 September 2021, unless the tax authority explicitly requests it. If an income tax treaty accords the sole right to taxation for these capital gains to the country of residence, a “nil” tax return can be submitted.
The possibility of a future legal amendment is still given. According to reports, the number of cases affected (both for tax treaty and non-tax treaty countries) and the total amount of the tax incurred must first be evaluated by the BMF. Any amendments are expected to be decided by the new German federal government only after the parliamentary election in September 2021.
Read a March 2021 report [PDF 353 KB] prepared by the KPMG member firm in Germany
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