Germany is about to discontinue WHT for IP.

The German government is planning to extend the exemption from withholding tax on income from intellectual property, but this could mean that the tax will be eliminated.

After deciding to extend a significant exemption for IP income, the German government may be about to repeal Section 49 of the Withholding Tax Act.


At the US Council for International Business (USCIB) conference on June 28, Martin Kreienbaum, director for international tax at the Federal Ministry of Finance in Germany, stated that officials are still debating whether to completely abolish the 15.8 percent WHT on IP.


The German government is currently streamlining the WHT procedure for companies. With regard to any international transactions involving any IP that has been registered in Germany, the WHT imposes onerous tax compliance obligations on non-resident taxpayers.


This is due to the possibility that the law would prompt the government to question WHT obligations, restrict deductible payments, and report transactions in accordance with European Commission Directive 2018/822. (DAC6).

Among the non-resident businesses impacted by this change are US-based corporations. According to Keith Brockman, vice president of tax at Welbilt in Florida, "the context behind this welcome change appears to be from other countries analogising the current position as having hallmarks of a digital service tax."


German critics who compare the WHT to digital services taxes are dismissed by the Federal Ministry of Finance as being mistaken from a technical tax standpoint. The ministry does acknowledge the importance of taking the political criticisms seriously.


According to Kreienbaum, the ministry has already received tens of thousands of requests for exemptions under double taxation agreements between January and March 2022.


On June 29, the Ministry of Finance released tax guidance for IP, extending the use of a straightforward procedure to settle WHT liabilities until June 30, 2023. Taxpayers can use the streamlined procedure to request a retroactive exemption certificate for payments made before July 1, 2023.


Most other German treaties, including the US-Germany Income Tax Treaty, would offer protection from WHT payments. However, there are some prerequisites, such as substance requirements, to this streamlined procedure.


The Federal Central Tax Office in Bonn is behind on reviewing the exemption requests that are due. This is due to the challenges associated with verifying IP register entries, comparing licensing prices, and examining cross-border licensing agreements.


It is now obvious that the government will not be able to hand out all the exemption certificates in time for the quarterly withholding tax return that must be submitted by October 10th, 2022.


In accordance with a treaty or the EU Interest and Royalties Directive, non-German taxpayers with license fees at 15.8% WHT may be eligible for relief. In order to issue exemption certificates, the Federal Central Tax Office evaluates businesses on an individual basis.


The streamlined procedure enables taxpayers to request a certificate directly from the tax office in Bonn, and it will also be valid for prior payments.


Section 49 of the 1925 WHT law on intellectual property was applied to non-residents by the Federal Central Tax Office in 2020 to charge royalties between foreign businesses that use locally registered IP.


Trademarks and patents registered with the Deutsche Patent-und Markenamt (DPMA), the European Patent Office (EPO), and the EU Intellectual Property Office are among the German-registered IP covered by WHT law (EUIPO).


Since the German authorities expanded the scope of the law, according to Nate Carden, partner at Skadden, Arps, Slate, Meagher & Flom in Chicago, the WHT on IP is troubling his multinational clients.


"Let’s say you have a US multinational company that licenses its IP to its operating headquarters in some other country, not Germany. Then the idea is that to the extent that the royalties relate to local registered rights, Germany would assert the ability to withhold even though they are not on either side of the transaction,"  said Carden.


To ensure that relief from WHT is possible, many multinational organizations have reorganized their IP holdings. Because the protections are no longer necessary, businesses are also deregistering their intellectual property in Germany.


Since the tax on IP income for non-resident companies is against international standards, USCIB members are pleading with German legislators to repeal it.


Regarding the timetable for the law's revision, Brockman continues, "The absence of the withholding tax should, technically and procedurally, ease a transition into the OECD's two-pillar plans."


The WHT has drawn criticism on a global scale for being an extraterritorial unilateral action. Critics argue that this measure, particularly the reallocation mechanism that transfers intangible profits to market jurisdictions, is at odds with the OECD's efforts to establish a global minimum corporate tax.


Even without a nexus, the Ministry of Finance mandated disclosure of IP registered in Germany before June 30th, 2022. The WHT also applies to any licensing rights from a German register.


The Federal Central Tax Office may have a framework to assess the costs of the IP and whether a nexus exists, but this is unclear.


Since there is no set method for calculating costs, economists and tax experts say it is challenging for a company's legal department to benchmark the cost of IP registered in Germany.


Because there is no set apportionment formula, the process to determine the tax base to apply the levy is also difficult. Many filings may end up being at least partially incorrect as a result of these complications.


To make it clear that the authorities do not only want to consider the registration process as a component of the IP's value that will be subject to WHT, the Ministry of Finance has issued a circular.


According to a tax director at a Berlin-based asset management company, any sums paid for IP that is registered in Germany should be taxed based on an individual's income.


 According to the tax director "all taxpayers with nexus to German IP must live with some risk because there is little certainty on whether taxpayers are in scope of this tax under legal checks and balances."


"Even a Chinese company entering into an agreement with an Indonesian company with the scope to use IP from various locations including Germany, at least conceptually, could be at risk of WHT and penalties even if they never use the German IP for business operations," they add.


The tax authority might search the IP register for an Indonesian company that has permission to use the IP in Germany. The tax director, however, asserts that it is "almost impossible to do this in my view."


Taxpayers should keep reviewing their IP structures and transactions to find any potential German-registered IP and understand the associated compliance obligations. The tax authorities are currently re-evaluating a backlog of cases that involved the WHT rule.


It is very challenging for the authorities to refute the German constitutional court's ruling that if a tax law cannot be applied equally, it is unconstitutional and violates the principle of equal treatment.


According to a tax manager at a German fashion company, the company's IP use strategy must be reasonable to the extent that risk can be evaluated using various TP methods. The pursuit of perfect information requires constant resource exchange.


The tax manager claims that it is "almost impossible to investigate the facts" and "unlikely" that the tax authorities will have a plan in place to treat every taxpayer equally.


However, there are methods that could be employed to adhere to the equal treatment standard, such as focusing only on transactional patterns that could meet the requirement.


The Federal Fiscal Court has ruled in favor of the Ministry of Finance on some of the legal issues raised by the application of the tax, despite the fact that the WHT is unlikely to generate any additional revenue in 90% of cases.


However, the WHT may be eliminated in the future due to declining revenue and international criticism of the levy. This regulation may be eliminated under pillar one, but in the interim, German tax authorities may adjust taxes or audit taxpayers.Germany is about to discontinue WHT for IP.


The German government is planning to extend the exemption from withholding tax on income from intellectual property, but this could mean that the tax will be eliminated.


After deciding to extend a significant exemption for IP income, the German government may be about to repeal Section 49 of the Withholding Tax Act.


At the US Council for International Business (USCIB) conference on June 28, Martin Kreienbaum, director for international tax at the Federal Ministry of Finance in Germany, stated that officials are still debating whether to completely abolish the 15.8 percent WHT on IP.


The German government is currently streamlining the WHT procedure for companies. With regard to any international transactions involving any IP that has been registered in Germany, the WHT imposes onerous tax compliance obligations on non-resident taxpayers.


This is due to the possibility that the law would prompt the government to question WHT obligations, restrict deductible payments, and report transactions in accordance with European Commission Directive 2018/822. (DAC6).


Among the non-resident businesses impacted by this change are US-based corporations. According to Keith Brockman, vice president of tax at Welbilt in Florida, "the context behind this welcome change appears to be from other countries analogising the current position as having hallmarks of a digital service tax."


German critics who compare the WHT to digital services taxes are dismissed by the Federal Ministry of Finance as being mistaken from a technical tax standpoint. The ministry does acknowledge the importance of taking the political criticisms seriously.


According to Kreienbaum, the ministry has already received tens of thousands of requests for exemptions under double taxation agreements between January and March 2022.


On June 29, the Ministry of Finance released tax guidance for IP, extending the use of a straightforward procedure to settle WHT liabilities until June 30, 2023. Taxpayers can use the streamlined procedure to request a retroactive exemption certificate for payments made before July 1, 2023.


Most other German treaties, including the US-Germany Income Tax Treaty, would offer protection from WHT payments. However, there are some prerequisites, such as substance requirements, to this streamlined procedure.


The Federal Central Tax Office in Bonn is behind on reviewing the exemption requests that are due. This is due to the challenges associated with verifying IP register entries, comparing licensing prices, and examining cross-border licensing agreements.


It is now obvious that the government will not be able to hand out all the exemption certificates in time for the quarterly withholding tax return that must be submitted by October 10th, 2022.


In accordance with a treaty or the EU Interest and Royalties Directive, non-German taxpayers with license fees at 15.8% WHT may be eligible for relief. In order to issue exemption certificates, the Federal Central Tax Office evaluates businesses on an individual basis.


The streamlined procedure enables taxpayers to request a certificate directly from the tax office in Bonn, and it will also be valid for prior payments.


Section 49 of the 1925 WHT law on intellectual property was applied to non-residents by the Federal Central Tax Office in 2020 to charge royalties between foreign businesses that use locally registered IP.


Trademarks and patents registered with the Deutsche Patent-und Markenamt (DPMA), the European Patent Office (EPO), and the EU Intellectual Property Office are among the German-registered IP covered by WHT law (EUIPO).


Since the German authorities expanded the scope of the law, according to Nate Carden, partner at Skadden, Arps, Slate, Meagher & Flom in Chicago, the WHT on IP is troubling his multinational clients.


"Let’s say you have a US multinational company that licenses its IP to its operating headquarters in some other country, not Germany. Then the idea is that to the extent that the royalties relate to local registered rights, Germany would assert the ability to withhold even though they are not on either side of the transaction,"  said Carden.


To ensure that relief from WHT is possible, many multinational organizations have reorganized their IP holdings. Because the protections are no longer necessary, businesses are also deregistering their intellectual property in Germany.


Since the tax on IP income for non-resident companies is against international standards, USCIB members are pleading with German legislators to repeal it.


Regarding the timetable for the law's revision, Brockman continues, "The absence of the withholding tax should, technically and procedurally, ease a transition into the OECD's two-pillar plans."


The WHT has drawn criticism on a global scale for being an extraterritorial unilateral action. Critics argue that this measure, particularly the reallocation mechanism that transfers intangible profits to market jurisdictions, is at odds with the OECD's efforts to establish a global minimum corporate tax.


Even without a nexus, the Ministry of Finance mandated disclosure of IP registered in Germany before June 30th, 2022. The WHT also applies to any licensing rights from a German register.


The Federal Central Tax Office may have a framework to assess the costs of the IP and whether a nexus exists, but this is unclear.


Since there is no set method for calculating costs, economists and tax experts say it is challenging for a company's legal department to benchmark the cost of IP registered in Germany.


Because there is no set apportionment formula, the process to determine the tax base to apply the levy is also difficult. Many filings may end up being at least partially incorrect as a result of these complications.


To make it clear that the authorities do not only want to consider the registration process as a component of the IP's value that will be subject to WHT, the Ministry of Finance has issued a circular.


According to a tax director at a Berlin-based asset management company, any sums paid for IP that is registered in Germany should be taxed based on an individual's income.


 According to the tax director "all taxpayers with nexus to German IP must live with some risk because there is little certainty on whether taxpayers are in scope of this tax under legal checks and balances."


"Even a Chinese company entering into an agreement with an Indonesian company with the scope to use IP from various locations including Germany, at least conceptually, could be at risk of WHT and penalties even if they never use the German IP for business operations," they add.


The tax authority might search the IP register for an Indonesian company that has permission to use the IP in Germany. The tax director, however, asserts that it is "almost impossible to do this in my view."


Taxpayers should keep reviewing their IP structures and transactions to find any potential German-registered IP and understand the associated compliance obligations. The tax authorities are currently re-evaluating a backlog of cases that involved the WHT rule.


It is very challenging for the authorities to refute the German constitutional court's ruling that if a tax law cannot be applied equally, it is unconstitutional and violates the principle of equal treatment.


According to a tax manager at a German fashion company, the company's IP use strategy must be reasonable to the extent that risk can be evaluated using various TP methods. The pursuit of perfect information requires constant resource exchange.


The tax manager claims that it is "almost impossible to investigate the facts" and "unlikely" that the tax authorities will have a plan in place to treat every taxpayer equally.


However, there are methods that could be employed to adhere to the equal treatment standard, such as focusing only on transactional patterns that could meet the requirement.


The Federal Fiscal Court has ruled in favor of the Ministry of Finance on some of the legal issues raised by the application of the tax, despite the fact that the WHT is unlikely to generate any additional revenue in 90% of cases.


However, the WHT may be eliminated in the future due to declining revenue and international criticism of the levy. This regulation may be eliminated under pillar one, but in the interim, German tax authorities may adjust taxes or audit taxpayers.

By fLEXI tEAM