Germany: Withholding tax on provision of the use of know-how for unlimited period of time (court decision)

A court decision concerning the use of know-how for unlimited period of time

A court decision concerning the use of know-how for unlimited period of time

The German Federal Tax Court (BFH) held that the provision of the use of know-how for an unlimited period of time by a foreign taxpayer can result in income subject to non-resident tax liability, on which withholding tax is imposed.

The case identifying information is: file ref I R 18/18 (13 October 2021).


A German GmbH concluded in 2007 an "agreement on the exclusive transfer of a process for making an active ingredient X coupled with the transfer of know-how and all process documentation as well as supply of X and intermediate stages" with a corporation domiciled in Hungary that had developed a process of making the pharmaceutical active ingredient X. This process was based on the international patent application of another company for the active ingredient Y. Under this contract, the GmbH acquired the unlimited right to use of the know-how developed by the Hungarian company for producing X and Y, and the Hungarian company agreed not to convey information on the process to third parties, even at a later date. In addition, the Hungarian company was to supply the GmbH with, among other things, a specified amount of the active ingredients X and Y. Following disagreements between the GmbH and the Hungarian company over the quality of the active ingredients produced by the Hungarian company, the contractual relationship was terminated during 2009.

The GmbH did not withhold on payments made to the Hungarian company under the contract. However, the tax authority ruled that the GmbH was required to withhold tax on such payments, and the BFH upheld the opinion of the tax authority. The court found that the Hungarian company had non-resident tax status in Germany for the income arising under the contract (Section 49 (1) no. 9 of the German Income Tax Act [EStG]) because the sale of know-how (which is not subject to withholding tax) must be differentiated from the provision of the use of know-how for an unlimited period of time. Further, the court found a sufficient domestic nexus—the legal requirement for “actual use” of the know-how in Germany did not depend on the know-how having the agreed scope and/or agreed quality in order to meet the goal pursued in Germany.

Read a June 2022 report [PDF 1.2 MB] prepared by the KPMG member firm in Germany 


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