Limited tax liability in Germany due to IP registrations
Since several weeks there have been discussions around intellectual property rights (IP) registered at the patent and trademark office in Germany and that such registrations may trigger a corporate limited tax liability in Germany according to § 49 (1) No. 2 Letter f and No. 6 German Income Tax Law, GITL. While this topic was not of practical relevance so far, the discussion continued with a lot of uncertainty how German tax authorities indeed envisage to handle this topic. On Friday, 6 November 2020, the German Ministry of Finance published an official guidance on this topic (BMF-Schreiben 6. November 2020: Verpflichtung zur Abgabe von Steueranmeldungen/ Steuererklärungen zur beschränkten Steuerpflicht bei der Überlassung von in inländischen Registern eingetragenen Rechten). As such, there is now clarity on the German tax authorities’ official view.
In a nutshell, based on the interpretation of the new official guidance tax filing and withholding tax obligations in Germany could be triggered by IP structures without an obvious nexus with Germany as illustrated below:
Transfer pricing considerations
Companies have undoubtedly to act in line with applicable tax laws and fulfill their compliance and reporting requirements. This applies with no limitations to the case at hand. This article will not comment on these formal German requirements but elaborate on some transfer pricing considerations. In the last years a strong focus by international organizations and governments was put on fair taxation of global multinational companies. The allocation of taxable profits within multinational companies should be in line with value creation and the underlying functions performed, risks borne and assets contributed. Artificial structures and the allocation of IP rights to offshore-letterboxes have been put on the spotlight and are in general not accepted by many tax authorities. Considering recent transfer pricing best practices and assuming that the IP owner performed all key activities to develop the IP and has borne all relevant costs, no or only very little IP related profit should be allocatable to the pure formal IP registration. From a conceptual transfer pricing perspective the above license fee payments would need to be bifurcated as follows:
In summary, given the latest actions to prevent base erosion and profit shifting it appears from a transfer pricing and economic perspective in general difficult to argue that for the pure registration of intellectual property a significant amount of profit should be taxed in Germany. Thus, it seems that the focus of the new BMF circular from 6.November 2020 is somewhat contrary to the spirit of the BEPS initiative. Companies need to carefully analyze if it is indeed only a formal registration that creates a nexus in Germany. Transfer pricing will not reduce formal compliance obligations that companies need to take care of now, but is essential when it comes to determine the fair taxable basis. A first step is to get a clear overview about IP registrations in Germany, the role of IP registered in Germany in the current value chain and transfer pricing model and decide on appropriate actions to handle this topic. This includes notifications to the German tax authorities.