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German Bundestag approves Annual Tax Act 2022 and addresses extraterritorial taxation of IP — Orbitax Tax News & Alerts

  • The bill includes changes on the taxation of transactions between non-German entities relating to intellectual property (IP) registered in Germany and is highly relevant in this regard.

  • The German Bundestag, one of two chambers of the German Parliament, approved a revised version of the Annual Tax Act 2022. Among other changes, the bill addresses taxation of IP registered in Germany and amends the initial draft.

  • Taxpayers should carefully review the impact of the proposed changes on their transactions and consider potential documentation requirements for transactions between non-German entities relating to IP registered in Germany for 2022 and future years.

Executive summary

On 2 December 2022, the German Bundestag, one of the two chambers of the German Parliament, approved a revised version of the Annual Tax Act 2022. The initial draft proposed several changes on different areas of taxation (see EY Global Tax Alert, German Ministry of Finance issues first draft of Annual Tax Act 2022 including provisions regarding extraterritorial taxation of IP, dated 28 July 2022). The revised bill still includes changes to the valuation rules for German real estate, increased amortization rates for residential buildings and several other changes for the benefit of individuals (e.g., increased deductibility for pension contributions and increased lump-sum deduction for investment income).

The proposal to eliminate the nonresident taxation of royalty income and capital gains relating to rights solely because these rights are registered in a public German book or register has been modified substantially.

Further changes to the Annual Tax Act 2022 are still possible during the discussion within the Federal Council, the second chamber of the German Parliament. However, approval is expected within the next weeks.

Detailed discussion

Extraterritorial taxation of IP

The initial draft proposed to modify Sec. 49 (1) No. 2 f and No. 6 of the Income Tax Act (ITA) to address the so-called “extraterritorial” taxation of IP-rights transactions. “Extraterritorial” IP transactions include the licensing or sale of IP rights between, or in the case of a sale by taxpayers without German tax nexus other than the registration of said rights in a German public register (German-nexus IP):

  • Based on the wording of the German statute provisions, where a non-German resident person licenses or sells IP that is registered in a German public register, Germany can claim a taxing right under domestic law.

  • Under the plain language of the statute, a German taxation right may cover German-nexus IP right licensing or sale transactions which take place solely between, or in the case of a sale by, German nonresident parties. The statute also does not differ between transactions which occur between related or unrelated parties.

For transactions between unrelated parties (generally, a 25% or more shareholding creates related party-status), the revised bill continues to propose to abolish the rule in all open cases, i.e., retroactively. However, for intercompany transactions, the initial proposal provided that the rule is to be abolished as of 1 January 2023 except for taxpayers resident in a jurisdiction listed on the European Union (EU) List of non-cooperative tax jurisdictions. In contrast to this, the revised bill now maintains the rule in intercompany transactions where the German taxation right would not be barred by an applicable Double Tax Treaty (DTT). In considering whether a DTT applies and denies Germany a taxing right, the German domestic anti-treaty shopping rules would have to be observed.

Effectively, this would mean that taxpayers would have to continue to review actual treaty eligibility of entities licensing or selling rights registered in Germany and in particular meet compliance with the requirements of the German anti-treaty shopping rules, which have recently been tightened further (see EY Global Tax Alert, German Government issues draft law on modernization of withholding tax relief and various additional topics, dated 20 January 2021). If taxpayers determine that these requirements are met for a specific transaction, no actual filings with the German tax authorities would be required because there would be no income subject to German nonresident taxation. However, a potentially substantial controversy risk would remain since a review and certification by the German tax authorities is not foreseen and appropriate documentation would be required to mitigate risks in this regard. Therefore, even though filing of an actual application with the German tax authorities would not be necessary, the required analysis and documentation could be equal to what is currently required for the preparation and filing of regular applications for exemption from German withholding tax, which can involve substantial effort. Even if such documentation is prepared, a controversy risk will likely remain due to the ambiguity of the German anti-treaty shopping rules.

In the explanatory notes to this change, it is acknowledged that this creates substantial additional efforts for taxpayers compared to the initial proposal. The same applies to the tax authorities since they generally must monitor and review compliance with these requirements. Based on the report issued by the finance committee, it seems that the background of this change was the reliance on the initial draft on the EU List of non-cooperative tax jurisdictions., which was apparently perceived to be too narrow. The Ministry of Finance is tasked to review whether this list can be expanded by a domestic list of additional jurisdictions and, if so, to provide suggestions for such a list. If such an expanded list should be implemented, the rule concerning extraterritorial taxation of IP could be amended again to only maintain it for taxpayers resident in such jurisdictions (i.e., as per the initial proposal but based on a larger list of jurisdictions). The potential timing in this regard is currently unclear but it would generally seem possible that this process could be completed within the coming year. If so, it should be expected that such an expanded list would also generally apply within the Act to Combat Tax Avoidance and Unfair Tax Competition (see EY Global Tax Alert, German Ministry of Finance publishes working draft of Act to Combat Tax Avoidance and Unfair Tax Competition name, dated 17 February 2021).

In summary, the revised rules on extraterritorial taxation of IP can still be viewed as a positive development. However, compared to the initial proposal, the revised version causes substantial additional effort and controversy risks for taxpayers all over the world and does not eliminate the corresponding efforts for the tax authorities to monitor and review compliance.

Introduction of a solidarity contribution on fossil fuel sector

The temporary “solidarity contribution” (effectively a windfall tax) that is part of the EU emergence regulation on emergency measures to mitigate high energy prices and the risk of supply shortages in Europe from early October (see EY Global Tax Alerts, EU Member States politically agree on electricity revenue cap and solidarity contribution of fossil fuel sector, dated 3 October 2022 and EU Member States formally adopt electricity revenue cap and solidarity contribution of fossil fuel sector, dated 11 October 2022) has become a part of the Annual ax Act 2022. Germany will levy the solidarity contribution at a rate of 33% in the tax periods 2022 and 2023. It will be levied on the surplus profits of companies that generate at least 75% of their proceeds through extraction, mining or refining of petroleum or manufacturing of coke oven products. Surplus profits are profits in excess of a 20% increase on the average taxable profits of the previous four fiscal years starting on or after 1 January 2018. The solidarity contribution is levied in addition to the corporate income tax and is not tax deductible. It will be collected by the Federal Central Tax Office.

Further proposed changes

The bill provides for several beneficial changes for individuals and contains rules to increase the exchange of information, and the digitalization of the taxation process in Germany, e.g.:

  • The straight-line rate depreciation for residential buildings will be increased to 3% for new residential buildings completed after 1 January 2023. For buildings that serve residential purposes and were completed before the cut-off date, the previously applicable discount rates continue to apply.

  • The return of capital transactions by non-EU corporations is only non-taxable under the strict requirements set forth in the law. The less strict requirements according to the judgments of the Federal Fiscal Court and the corresponding guidance issued by the Ministry of Finance do not apply anymore as of 1 January 2023.

  • A tax exemption for income from the operation of small photovoltaic systems is introduced. The tax exemption applies for systems with a maximum output between 15 kilowatts (peak) and 100 kilowatts (peak) depending on the type of building. Furthermore, a zero percent Value-Added Tax rate is introduced on supplies of solar modules to the operator of a photovoltaic system with a maximum output of 30 kilowatts (peak).

  • Moreover, the draft law provides for a revised valuation of real property to align the current applicable law with the newly issued real estate valuation regulation. These revised rules may also have an effect within the German Real Estate Transfer Tax assessment process.

  • Further, the draft law provides for certain clarifications to the Tax Haven Defense Act and, e.g., explicitly excludes certain bonds from the withholding tax in accordance with this law in case they are publicly traded.

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For additional information with respect to this Alert, please contact the following:

Ernst & Young GmbH

  • Christian Ehlermann, Munich | christian.ehlermann@de.ey.com
  • Daniel Kaeshammer, Freiburg | daniel.kaeshammer@de.ey.com
  • Stefan Koehler, Frankfurt | stefan.koehler@de.ey.com
  • Michael Schaden, Stuttgart | michael.schaden@de.ey.com
  • Oliver Wehnert, Düsseldorf | oliver.wehnert@de.ey.com

Ernst & Young LLP (United States), German Tax Desk, New York

  • Tobias Appl | tobias.appl2@ey.com
  • Thomas Schmitz | thomas.schmitz@ey.com
  • Kai Dittmer | kai.dittmer1@ey.com
  • Matthias Ritter | matthias.ritter1@ey.com
  • Alexander Schega | alexander.schega1@ey.com
  • Janina Kolb | janina.kolb1@ey.com