The German Federal Parliament passed the Annual Tax Act 2022 on 2 December. Among other provisions, the Act introduces (transitional) legislative changes to the taxation of payments for IP rights that are registered in a German register between foreign taxpayers. In a change from the government’s draft bill, all non-treaty cases between related parties, for the time being, will remain subject to German nonresident taxation beyond 2022. The German Federal Council will deal with the law in its session on 16 December.
Actions to consider: Taxpayers who may have potential German taxation under Sec. 49 of the German Income Tax Act in prior or future years should analyze the impact of these German law changes. Specifically, taxpayers with royalty payments related to German-registered IP, or who recognized capital gains on sales of such property to unrelated parties, no longer have potential tax liability under Sec. 49 of the German Income Tax Act (even for prior years). For taxpayers with these royalty payments (or capital gains) with a related party, it will be necessary to determine if the payor (or seller in the case of a capital gain) is entitled to claim a treaty exemption with Germany. Such a determination is not automatic in that treaty-shopping rules (both treaty-based and those under German domestic law) must be considered inapplicable. Finally, those taxpayers claiming a treaty exemption on prior-year related-party royalty payments (or capital gains on sales of IP to related parties) under the simplified filing procedure must complete such work before June 30, 2023. Failure to do so by then will require disclosure of much more detailed information in order to seek treaty exemptions.