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Limited tax liability and tax deduction where rights have been transferred

Limited tax liability can already arise if the income in Germany is generated solely from rights that have been recorded in a register in Germany. A recent Federal Ministry of Finance (Bundesministerium der Finanzen, BMF) circular includes detailed explanations that are used to differentiate between permanent and temporary transfers of rights.

Limited tax liability

Natural persons who are neither domiciled nor ordinarily resident in Germany have limited tax liability there in respect of income flows in Germany that are listed exhaustively in Section 49 of the Income Tax Act (Einkommenssteuergesetz, EStG). The same applies to corporate bodies, associations of persons and pools of assets if, among other things, neither their management nor registered offices are based in Germany.

Domestic income flows also include those derived from the renting out and leasing of rights (Section 49(1) no. 2f and no. 6 EStG). The respective income flows, such as royalties, will trigger a limited tax liability in Germany if they have a connection to Germany. The BMF, in its circular from 6.11.2020 (case reference: IV C 5 -S 2300/19/10016 :006) clarified that in the case of temporary or permanent transfers of rights the connection to Germany already exists as a result of the record in a German register (e.g., in the German trademark register).

Temporary transfer of rights

Temporarily transferring those rights that have been recorded in a German register is one of the elements for the existence of income flows listed in Section 49 EStG that are subject to limited taxation; such a temporary transfer of rights will thus result in a tax liability for a foreign patent owner. It is incumbent on the payment (royalty) obligor

  • to withhold tax (Section 50a(1) no. 3 EStG),
  • to pay the tax to the Federal Central Tax Office (Bundeszentralamt für Steuern, BZSt) and
  • to send a tax return to the BZSt.

Please note: In some cases, it may be possible to apply for a certificate of exemption.

Permanent transfer of rights as the sale of rights

A permanent transfer of rights constitutes a sale of the rights. This would likewise trigger a limited tax liability since this is included in the catalogue of income flows in Section 49 EStG. In such a case, however, it is the recipient of the payment that has to take action and submit a tax declaration to the competent tax office since the sale of rights is not subject to withholding tax under Section 50a(1) no. 3 EStG.

Please note: Admittedly, under the law, for a limited tax liability to arise it is not necessary to exploit the rights, which have been recorded in a German register, in a permanent establishment based in Germany or to have cash flow in Germany. It is only upon such exploitation however that income flows are actually generated in Germany that can then be taxed.

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