Significance of register cases– deadline for exemptions extended again

The German Federal Ministry of Finance has extended the deadline for applying for retrospective exemption certificates for income from registered foreign rights (“register cases” (Registerfälle)) by one year (now until 30 June 2023). It has done this for the second time in a row, just before the time limit was about to end.

But let’s start at the beginning: What exactly are “register cases” and why has the Federal Ministry of Finance published four circulars on them in the last two and a half years? The whole topic is in fact based on the almost 100-year-old rule contained in section 49(1)(2)(f) of the Income Tax Act (Einkommensteuergesetz – EStG). It took until late 2020 for the  Ministry’s circular dated 6 November 2020 to clarify the administrative interpretation regarding the application of this provision to extraterritorial royalties (“register cases”). These are royalties from licences for which neither the party owing the payment nor the recipient is domiciled in Germany. The only link to Germany is the entry of the rights in a German public record or register. Under section 49(1)(2)(f) of the German Income Tax Act, the royalty payments relating to these rights are subject to limited tax liability. They are taxed using the tax deduction process as stated in section 50a Income Tax Act. In this process, the party making the payment is essentially required to withhold, declare and pay 15% withholding tax on the royalties on the recipient’s behalf.

The Ministry’s circular dated 11 February 2021 discussed the possibility of giving the recipient the option not only to apply for relief from German withholding tax pursuant to section 50a(1)(3) Income Tax Act where a double taxation treaty provides for full or partial exemption from withholding tax on the income earned in Germany, but also to apply for exemption for periods in the past, in analogy to no. 1 of the first sentence of section 50c(2) of the Income Tax Act. It was possible to file this retrospective application by 30 September 2021 using a simplified procedure. The application simply had to be received by the Federal Central Tax Office by the deadline of 30 September 2021 to ensure that all payments remitted until this date were exempted from withholding tax.

The Ministry even went on to improve on this in its circular dated 14 July 2021, extending the deadline for retrospective applications by nine months until 30 June 2022.

The significance of the register cases has now become clear once again: the deadline for retrospective applications has once again been extended by a year now until 30 June 2023 – one day before the deadline was to expire – in the Ministry’s circular dated 29 June 2022. This means that applications can also be made to the Federal Central Tax Office up to and including 30 June 2023 using the simplified procedure for payments received after 30 June 2022. The application must be filed by 30 June 2023 in order to be eligible.

It remains to be seen whether the Federal Ministry of Finance will decide to extend the time limit again before the end of June 2023 or whether it will take a different view of the treatment of the registered foreignrights referred to in section 49(1)(2)(f) Income Tax Act. Legal scholars not only express major constitutional concerns, but also raise doubts as to how such cases are implemented and reviewed. Some also argue that the rules are contrary to principles recognised under customary international law.

If you have cases similar to this in your company, we would be happy to assist you in handling and applying for retrospective exemptions.