The taxation of so-called register cases, which has been vehemently criticized by consultants and companies, is once again under scrutiny. Also against the backdrop of the high administrative and compliance burden, the tax authorities have once again extended the simplified procedure for retroactively waiving the filing and withholding of withholding taxes on remuneration for transfers of rights under certain conditions.
According to German law, the mere registration of rights in a domestic register or book gives rise to a right of taxation with respect to income from the transfer and sale of certain rights or to a limited tax liability of the transferor. In the case of the transfer (but not the sale) of such rights, tax is generally withheld at the rate of 15% (plus solidarity surcharge) at the time the remuneration is paid to the creditor.
Since 2020, there has been an intensive discussion on this regulation, to which little attention has been paid to date. In a letter from the Federal Ministry of Finance (Bundesministerium der Finanzen - BMF) dated November 6, 2020, the tax authorities confirmed that the entry of a transferred right in a domestic book or register constitutes a sufficient domestic reference with the consequence of establishing a limited tax liability in Germany. Taxpayers to whom a double taxation agreement (DTA) is applicable "without doubt" were subsequently granted some procedural simplifications in a BMF letter dated February 11, 2021. It was made possible to submit an application for the retroactive issuance of an exemption certificate for remuneration already received. This procedural simplification was initially extended until June 30, 2022 in a BMF letter dated July 14, 2021. A further extension has now been granted until June 30, 2023.
BMF letter dated 29.6.2022
Accordingly, the (subsequent) filing and withholding of withholding taxes on remuneration in the cases described above, which accrue until June 30, 2023, may be waived under the following conditions:
- No unlimited tax liability (residency) of the remuneration debtor in Germany;
- Undoubted DBA eligibility of the remuneration creditor due to residency in a DBA state, receipt of the remuneration and fulfilment of the requirements for the granting of treaty benefits;
- Application for exemption from German tax withholding to the Federal Central Tax Office (Bundeszentralamt für Steuern - BZSt) by June 30, 2023;
- Disclosure of the relevant contractual relationships (German translation of the main agreements) as part of the application.
In case of doubt about the DTA eligibility, the application of the simplification does not come into consideration. Likewise, this simplification does not apply to the disposal of such rights that is not subject to tax deduction.
BMF report from 28.6.2022
In this report, the Federal Ministry of Finance itself evaluates the current legal situation regarding the taxation of registry cases. According to this, the register case taxation is to be critically scrutinized in particular due to the developments on global effective minimum taxation (Pillar 2 of the BEPS process) as well as the planned partial reallocation of taxation rights (Pillar 1). The regulation is sharply criticized abroad and understood as a unilateral measure with extraterritorial effect. Since the introduction of the global effective minimum taxation will ensure such taxation internationally and make the relocation of intangible assets to tax havens unattractive, the basis of argumentation for register case taxation will also collapse further from the perspective of the Federal Ministry of Finance.
In addition, the report refers to the complex legal situation in register cases, which has not yet been clarified by the courts with regard to most of the legal issues. The registry cases generate a high administrative and compliance burden and present consultants and companies with considerable practical difficulties in the course of clarifying the facts for the past, obtaining the relevant evidence and determining the tax base, especially in third-party licensing cases. Internationally, the German legal situation has met with considerable criticism.
Based on the developments towards global effective minimum taxation and also the planned partial reallocation of taxation rights, an additional taxation right based solely on the mere registration of rights in a domestic register/book appears more than questionable. Moreover, the so-called DEMPE concept (Development, Enhancement, Maintenance, Protection and Exploitation), which is now also anchored in German foreign tax law, already follows the approach of taxing income from the use of intangible assets at the place of the economic activity. The BMF also seems to have recognized this. It would like to counteract the high administrative and investigative costs by further extending the procedural simplification regulation. However, the problem of obtaining information and clarifying the facts, especially in the case of third-party licenses, remains. The report of the Federal Ministry of Finance does not propose any solutions to this problem. Overall, a restriction of the register case taxation to cases involving so-called non-cooperative tax jurisdictions would be welcome.