Rights granted abroad – Withholding tax due in Germany?

A German tax issue has been causing great uncertainty among international corporates since spring 2020: Are licence fees received under licence agreements concluded between foreign companies taxable in Germany if the right granted is listed in a public register in Germany, but no other links to Germany exist? In times dictated by the pandemic, German tax authorities appeared to have identified a (new) source of tax income, and despite strong criticism from across the legal press, they were unwilling to surrender it. In a Circular issued by the Federal Ministry of Finance (Bundesfinanzministerium; BMF) on 6 November 2020, the tax authorities still upheld their belief that the income was taxable in Germany. Shortly afterwards, however, the BMF made a surprising U-turn. In a draft bill (Referentenentwurf) published on 19 November 2020¹, the BMF now proposes amending the relevant tax provisions set out in section 49 (1) no. 2 f) and section 49 (1) no. 6 of the German Income Tax Act (Einkommensteuergesetz; EStG) in terms of the contentious points such that the fact that a right is merely registered in Germany does not automatically lead to it being subject to the German tax regime. The amendment is to be applied to all open cases.

¹ Draft Bill for an Act to Modernise Relief from and Issue Certification for Withholding Taxes (Referentenentwurf für ein Gesetz zur Modernisierung der Entlastung von Abzugssteuern und der Bescheinigung von Kapitalertragsteuer) dated 19 November 2020.