date | theme

08. November 2019 | At withholding tax on licenses, operating expenses are deductible

17. January 2019 | Withholding tax according to § 50a EStG: Licenses – Artists – Supervisory Boards

31. January 2019 | Withholding tax for royalty payments to EU/third country companies (this contribution)

06. March 2019 | Tax deduction according to § 50a EStG: withholding tax for limited tax liability

German companies pay license fees to companies in other EU countries and third countries. In principle, 15 percent withholding tax according to § 50a EStG must be withheld on licence payments. While the parent-subsidiary directive (§ 50g EStG) usually helps with licence payments to EU parent companies, the double taxation agreement usually applies to third-country companies. Using the example of Great Britain, we show how the withholding tax deduction procedure behaves in EU matters (UK before Brexit) and in third-country matters (UK after Brexit) for royalty payments to the English parent company.

In the video, we explain to you how corporations shift their profits to low-tax countries by granting licenses and thereby save considerable taxes.

1.License payments: The taxation according to § 50a EStG

For limited taxpayers within the meaning of § 49 EStG, according to § 50a para. 1 S. 1 EStG the tax in the deduction procedure for those referred to in § 50a para. 1 no., 1 to 4 EStG. According to § 50a para 1 no. 3 EStG, this includes income generated for the transfer of use or the right to use rights. In particular, § 50a para. 1 no. 3 EStG is based on industrial property rights. The transfer of industrial property rights falls under § 49 Abs. 1 no. 2 or 3 EStG under the limited tax liability. [6] As industrial property rights provided § 73a Abs. 3 EStDV rights protected in accordance with the Design Act, the Patent Act, the Utility Model Act or the Trademark Act.

The right of use is granted in a license agreement,[7] which determines, among other things, the license fee to be paid. This creates a permanent obligation for the right of use. [8] The tax deduction for the remuneration of industrial property rights, i.e. license fees, is 15 percent according to § 50a para 2 p. 1 EStG.

2nd EU case: exemption according to § 50g EStG

The tax is paid in accordance with § 50g Abs. 1 EStG for licence fees is not charged on request if these are paid by a company of the Federal Republic of Germany or a permanent establishment located there as a debtor to a company of a Member State of the European Union as a creditor. A prerequisite for this is according to § 50g Abs. 3 EStG that the creditor and the debtor are an affiliated company. § 50g para 3 no. 5 EStG defines what counts as a company within the meaning of paragraph 1 and refers to Annex 3 no. 1 of the Income Tax Act. Therefore, only corporations can be considered as undertakings. [9]

3. non-EU matters: No more exemption by § 50g EStG

After the withdrawal of Great Britain from the European Union, § 50g EStG is no longer applicable for the exemption of the deduction tax according to § 50a EStG. [] 10]

However, any exemptions from the deduction tax may also result from concluded double taxation agreements (DTA).

The double taxation agreement between the Federal Republic of Germany and Great Britain provides for Article 12 para. 1 that royalties originating from a Contracting State and whose beneficial owner is a resident of the other State may be taxed only in the other State. The licence fees can therefore only be taxed in the State of the recipient. [11] By way of derogation from paragraph 1, this shall not apply in accordance with Article 12(1). 4 p. 1 of the Double Taxation Convention for the amount exceeding in a third-party settlement. This can be taxed according to the law of each Contracting State acc. Article 12 para 4 p. 2 of the DTA with England.

4.1 Required: refund or Exemption certificate at the Federal Central Office for Taxation

In order to avoid double taxation, a company resident in England which receives royalties from a German corporation has an exemption mandate pursuant to § 50d para. 2 EStG at the Federal Central Tax Office. If the exemption is not requested, the German corporation has to withhold the deduction tax of 15 percentz and pay it to the tax administration. [12] The British corporation can apply the deduction tax according to § 50d Abs. 1 EStG if no exemption has been requested. The application for the refund of the withheld deduction tax is in accordance with § 50d Abs. 9 EStG within a period of four years after the end of the calendar year in which the license fees were received.

4.2. Result: Exemption

The collection of royalties is thus still possible for a British parent company without a retention of the deduction tax within the meaning of § 50a EStG. After Brexit, however, the exemption from the deduction tax is no longer due to the regulations of § 50g EStG, but according to § 50d EStG. Interest on the refund amount will no longer be paid. [] 13]

5. What are the consequences of the new license barrier?

For the German subsidiary, the deduction of the license fees as operating expenses is generally possible without restriction. The operating expense deduction of license fees is limited according to § 4j EStG if the income from the license transfer is taxed lower and the payee is a related party according to § 1 para. 2 External tax law acts.[14] This is the case for a UK parent company.

According to § 4j para. 2 EStG is a low taxation if the income leads to an income tax of less than 25 percent. If this is the case, only a partial deduction of the licence fees paid can be accepted as operating expenditure. [15] The calculation basis for the non-deductible part is the provision of § 4j Abs. 3, p. 2 EStG. The non-deductible part is calculated by dividing 25 percent minus the income tax burden in percent by 25 percent.

The tax burden in the UK is currently 19 percent for corporations as corporation tax and 17 percent from 2020[16] and is therefore lower than in § 4j para. 2 EStG demanded 25 percent. For royalty payments to related parties in the UK, there is a partial deduction ban on operating expenses. However, this regulation is independent of Brexit and already has lasting force.

6. License payments to EU sister companies

For licence payments in a two-stage group based in Great Britain, other provisions may also apply with regard to deduction taxation according to § 50a EStG. This is the case when a German subsidiary of a UK-based corporation pays royalties to another subsidiary of the English parent company.

If the German subsidiary holds at least 25 percent in the other subsidiary which has its registered office in a Member State of the European Union, § 50g EStG can be applied.

Is the German subsidiary not involved in the other subsidiary or not as an affiliate within the meaning of § 50g para. 3 no. 5 letter b double letters aa and bb EStG is recognized on the basis of a participation of less than 25 percent, is the application of § 50g para. 1 EStG not possible. [] 17)

§ 50g EStG can only apply in this constellation if a third company, in this case the British parent company, has a direct stake of at least 25 percent in the other two companies[18] according to § 50g para 3 no. 5 letter b double letter cc EStG. Prerequisite for this is according to § 50g Abs. 2 EStG that the participation exists between undertakings which are established in a Member State of the European Union. This would no longer be the case after Brexit. [19]

After the UK has withdrawn from the European Union, § 50g EStG can no longer be applied in this form. The rules for deductible taxation are governed by the double taxation agreement concluded with the country of the subsidiary receiving the licence fees.

If § 50g EStG is not applicable due to a low or non-existent shareholding, a royalty paid to a Polish subsidiary of the English parent company by the German subsidiary would be subject to the deduction tax under § 50a EStG. Derogating rules can only result from the double taxation agreement with Poland. [] 21]

Article 12 para. 1 of the double taxation agreement with Poland provides that Poland retains the right of taxation as a recipient state. In accordance with Article 12(1), first subparagraph, 2 of the DTA with Poland, Germany can levy a deduction tax of 5 percent. [] 22]

7th Conclusion: DTA helps in third-country matters

The withdrawal of Great Britain from the European Union has therefore only an impact on a possible tax deduction with regard to the royalty payments of a German subsidiary to another foreign subsidiary, provided that the corresponding double taxation agreement grants the Federal Republic of Germany a taxation right.