There have been concerns lately that the German tax authorities might seek to tax certain extraterritorial royalty payments associated with German intellectual property (IP). Although the potential for extraterritorial tax has existed under Germany’s tax rules for a number of years, the possibility that these rules might be applied to certain structures has only recently become known. Whether the tax rules will be applied to specific transactions will depend on the facts and circumstances in each case.

Our colleagues from Deloitte Germany summarise the positive developments that could help mitigate the adverse impacts related to the application of German extraterritorial taxation in the attached blog:

Draft legislation proposed by Germany’s Ministry of Finance (MOF) on 19 November 2020 would mitigate issues related to the application of German extraterritorial taxation in “ETT and ORIP situations,” as further defined below. The proposed legislation is part of a broader package addressing the German withholding tax regime in general.

A limited German tax liability may apply in cases where German nexus intellectual property (German nexus IP) is being transferred or where royalty payments between two non-German entities are being made with regard to German nexus IP. German nexus IP is defined as either (i) rights that are registered in a German public register, or (ii) IP that is being exploited in a German permanent establishment or other German facility. The draft law proposal would remove the first part of this definition: i.e., IP that is being exploited in a German permanent establishment or other German facility would still give rise to German extraterritorial taxation but rights registered in a German public register no longer would. According to the legislative material, the current provision, which was enacted in 1925, was not intended to apply to cases where the registration in a German public register is the only German nexus.

The provision in the draft law proposal would apply to all past, current, and future situations and would apply both to German nexus IP transfer situations (ETT) as well as to royalty payments with regard to German nexus IP (ORIP). Based on the wording of the current draft proposal, the rule change would apply to all open cases, regardless of where the parties to the transaction or licence agreement reside.

At this time it is uncertain whether the legislation will be enacted and, given that it is part of a broader package, it is likely that nothing will be enacted until 2021 at the earliest.

If you would like to discuss this topic, please reach out to our key contacts below.

Key contacts

Martin Krivinskas -  Partner, Transfer Pricing 

Martin is an international tax partner with 20 years experience working on international tax matters. He has worked extensively with global multinationals, with a particular focus on helping international group’s mitigate tax risk and manage their effective tax rates. Martin has significant experience of supporting clients with a wide range of transfer pricing and international tax matters and is part of Deloitte` s Global Value Chain Alignment leadership team. Martin`s clients are predominantly in the life sciences, industrial products and consumer products industries.

Martin is a Chartered Accountant and a member of the Chartered Institute of Taxation

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Jacques Kistler - Partner, International Tax

Jacques is the Lead Partner of our Corporate Tax service line in the French Speaking part of Switzerland, covering international tax and M&A. He has been a full time International Corporate Tax specialist for over 23 years.

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Daniel Stutzmann - Partner, International Tax

Daniel is a Tax Partner with more than 15 years of experience as an international corporate tax specialist. This includes a one year assignment in the US to lead the Swiss ICE Desk. Daniel has extensive experience in the area of cross-border structuring (like establishing tax efficient IP- and financing structures) as well as business reorganizations including large supply chain transformation projects. This also includes advising several multinationals in moving their worldwide/regional headquarters or central functions to Switzerland, while often establishing tax privileged Swiss principal companies. In his capacity as Swiss tax expert he has worked on a significant number of value chain alignment (“VCA”) projects, cross border restructuring and headquarter relocations.

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