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5.5. Source Rules with Respect to Income Derived by Non-Residents

Dividends

Dividends received from companies that are incorporated and registered in Germany and from foreign companies authorized to operate in Germany are deemed German sourced.

Interest

Interest paid by German residents to non-residents is deemed German sourced.

Royalties

Royalty fees paid for the use of intellectual property rights registered in Germany are deemed German sourced, regardless of the tax residence of the payer or recipient of the royalties.

A guidance letter published in relation to intellectual property rights registered in Germany provides guidelines on the taxation and compliance obligations. The guidance provides that intellectual property rights registered in Germany can create a German tax nexus, resulting in the creation of limited tax liability in Germany even for overseas transactions involving the transfer of the intellectual property rights. The temporary or indefinite transfer of the intellectual property rights is taxable as royalties or capital gains, respectively, subject to withholding tax or corporate tax.

In addition to the above, a February 2021 guidance letter provides for simplified procedures in relation to the temporary transfer of rights in cases where a non-resident would be subject to limited tax liability in Germany in connection with intellectual property rights that are registered in Germany. In such cases, the licensees can abstain from withholding, declaring and transferring taxes or filing a tax return for royalty payments made to non-residents up to 1 July 2023 (extended from 1 July 2022), subject to the fulfilment of certain requirements including that a request for a certificate of exemption is filed by 30 June 2023 (extended from 30 June 2022), with retroactive effect if necessary. This simplified procedure ceases to apply effective for payments made after 1 July 2023 (extended from 1 July 2022), from which date the standard rules apply.

It is further clarified that the tax basis is the gross amount of the remuneration for the intellectual property rights registered in Germany. If the remuneration relates to multiple intellectual property rights registered in multiple jurisdictions, a "top-down approach" must be followed whereby only the portion of the gross remuneration for the granting of rights to use the intellectual property rights registered in Germany is included in the tax basis.

Rental Income

Rental income from property situated in Germany is deemed German sourced.

Service Fees

Service fees paid to a non-resident are deemed German sourced if performed or utilized in Germany or paid for from German public funds.