Global Korean Practice Newsletter

Global Korean Practice Newsletter

Latest regulatory and tax update in Germany

Vol. 1 | January 2023

Tax

1. Update of the simplification rule with regard to the Limited tax liability in Germany if IP is listed in German registers

Intro

In a previous newsletter, we introduced latest developments and a simplification rule with regard to the limited tax liability in Germany arising when Intellectual Property (“IP”) is registered in Germany (socalled “Register-Cases”).

Generally, non-resident companies are limited tax liable in Germany if the income source relates to Germany. This means, income derived from e.g. renting German real estate, from the activities performed by a German permanent establishment but also derived from exploiting Intellectual Property (“IP”) in Germany are subject to limited tax liability in Germany due to the domestic nexus to Germany.

However, the German Federal Ministry of Finance confirmed in 2020 that apart from establishing a domestic nexus through exploitation IP in Germany, for example by using them in a German permanent establishment, the German nexus should be fulfilled already to rights that are listed in a German public register; this may even include the European patent office located in Munich (“Register-Cases”).

This wide interpretation meant that if for example

• a Japanese multinational group licensing IP

• which is registered in a German register

• to a group company in Latin America

the derived license income was taxable in Germany.

Tax

1. Update of the simplification rule with regard to the Limited tax liability in Germany if IP is listed in German registrs

Page 7

2. Real Property tax reform: lots of data, little time

Page 9

3. Paperless Office & Digital Tax Compliance, from status quo to a sustainable digital future

Page 11

With its guidance issued in 2021, the German Federal Ministry of Finance has issued a simplification rule for such Register Cases, but only for a limited period. This limited applicability of the simplification rule to past cases has been extended with a new guidance issued in June 2022.

For future cases, the Federal Government has now decided in a current draft law that the regulation on Register-Cases is to be largely withdrawn. In Register-Cases, limited tax liability is to be affirmed in future only in relation to third parties having its registered seat in a non-cooperative tax jurisdiction. However, different tax treatments are to be considered in a transition period.

Related party generally

Related party having ist seat in non-cooperative tax jurisdiction

Third party having ist seat in non-cooperative tax jurisdiction (third-party licensing)

At a glance

Draft law of Federal Government

Following the draft law of the Federal Government, the “Register-Cases” must be analysed separately for different time periods and depending on whether a group context is given or not. For the future Register Cases are planned to be withdrawn largely and third-party licences should be retroactively withdrawn.

Please find in the following an overview:

Up and including 31.12.2021 the licencing of in Germany registered IP to related entities leads to limited tax liability in Germany.

In 2022 there is the need to distinguish between payments to related parties (all relevant) and to third parties (only non-cooperative tax jurisdictions).

From 2023 onwards only payments to non-cooperative tax jurisdictions lead to limited tax liability in Germany in Register Cases

Past cases: Extended Deadline of Simplification Rule

With its guidance of 11 February 2021 and of 14 July 2021, the German Federal Ministry of Finance has issued a simplification rule for Register Cases, where in the past required tax declarations in Germany had not been made. The simplification is only applicable for cases for which, considering the double taxation agreement (DTA), no German tax liability ultimately arises due to exemption of German withholding tax according to the DTA.

Originally the rule used to apply for remunerations already received by the licensor (creditor) or still to be received up to 01 July 2022.

According to the BMF letter dated 29 June 2022, the requirements set out in the BMF letter dated11 February 2021 may now, however, also be claimed for remuneration that accrues to the remuneration creditor after 30 June 2022 but before 1 July 2023. The application submission period has also been extended until 30 June 2023

In these cases, the withholding, remittance and reporting of tax to the German Federal Central Tax Office (“BZSt”) may be waived if the following cumulative requirements

are met:

1. Payment debtors: no residency (neither legal seat nor place of management) in Germany at the time the remuneration is received.

2. Payment creditors:

• Residency in a country with which Germany has concluded a DTA at the time the remuneration is received.

• Eligibility and entitlement to relief pursuant to the respective DTA (under consideration of specific regulations according to the German Income Tax Act; substance-conditions, etc.).

• In case of partnerships, the key criteria are the partners' residency as well as eligibility and entitlement to relief under the DTA.

• Allocation of the remuneration according to the respective DTA.

• Submission of application to the BZSt for exemption from withholding tax by 30 June 2023

• Disclosure of relevant contracts to the BZSt along with the application.

Outlook & Recommendation

We recommend reviewing this context against the background of the latest developments.

As many of the Japanese multinationals own advanced technologies and know-how, we assume that this topic is relevant and, thus, recommend performing the below analysis:

1. Which IP of the respective Japanese group is registered in Germany?

2. Which companies own the respective IP?

3. W hat are the open years for which the IP owner(s) is / are obliged to declare IP related revenues in Germany?

4. Which revenues were generated in these open years from IP registered in Germany?

5. W hat is the taxation situation in Germany in consideration of applicable tax treaties? Where exemption certificates applied for? Other relevant aspects?

6. As a result of 4. above: what are the tax filing requirem ents in Germany?