Extraterritorial transactions on licensing or sale of German-registered IP rights
IIAs and extraterritorial taxation



Disputes between taxpayers and Germany's tax authorities are subject to the jurisdiction of the financial courts. However, the exception to this rule may be the forseeable disputes between foreign investors – most notably from the tech sector – and Germany following the state's recent decision to tax the licensing or sale between foreign entities of German-registered IP rights. For these disputes, foreign investors may find additional protection in Germany's international investment agreements (IIAs), which typically provide for investor-state dispute settlement by way of international arbitration.

This article explores the benefits and limits of IIAs and their dispute resolution clauses to serve as an additional layer of protection for foreign investors against this new taxation.

Extraterritorial transactions on licensing or sale of German-registered IP rights

Germany's new extraterritorial taxation applies to foreign transactions concerning the licensing or sale of IP rights registered in Germany where:

  • the parties are domiciled outside Germany;
  • the business activities take place outside Germany; and
  • no further nexus between the transaction and Germany exists.(1)

The registered rights affected by the taxation may include trademarks, patents, design rights and utility models that are registered with the German Patent and Trademark Office.

The new taxation is based on the registered rights rule in article 49(1)(2)(f) of the Income Tax Law,(2) which stipulates that the "granting or disposal" of domestically registered IP rights is taxable. This provision has previously been applied only to transactions with a nexus to Germany (ie, where the income taxed was derived from within Germany). However, on 11 February 2021, the Ministry of Finance announced that this would be extended to cover extraterritorial transactions without a nexus to Germany that are not covered by double taxation agreements.(3)

IIAs and extraterritorial taxation

IIAs aim to protect foreign investments against political risks and, by way of their investor-state dispute settlement provisions, offer affected investors access to international arbitration outside the national court system. Over the past 20 years, IIAs have proven to be an effective tool for the protection of foreign investments, not only in developing countries but also in industrialised jurisdictions with functioning domestic court systems, such as Germany. Whether or not IIAs are also a suitable defence for foreign investors in terms of the new extraterritorial taxation depends on a number of factors, four of which appear to be relevant.

Scope of German IIAs
In order to have access to the investor-state dispute settlement system outside Germany's state courts, a foreign investor and the affected IP rights must fall within the scope of one of German IIAs. For instance:

  • there must be an IIA between Germany and the investor's home state;
  • the investor must qualify as a protected person; and
  • the IP rights that are the subject of the transaction must qualify as a protected investment.

The biggest hurdle is most likely the mandated IIA between Germany and the investor's home state. While Germany has more than 100 IIAs, the vast majority of these treaties have been concluded with developing nations that are not normally the home state of the entities involved in the affected IP rights transactions. Notable exceptions may be Germany's IIAs with international business centres, such as Hong Kong, Barbados, Panama or its few treaties with other Western economies, such as the Energy Charter Treaty. Alternatively, it has been recognised in arbitral tribunal case law that investors whose home state does not have an IIA with the host state in question (ie, Germany), may restructure their investments in a way to ensure that they come under the protection of an IIA with a different country. This option exists as long as a dispute is not considered to have been foreseeable.

Once this hurdle has been overcome, Germany's IIAs generally protect all judicial persons validly existing in their relevant jurisdiction, and they expressly list registered IP rights as one form of protected investments. While there is currently little case law as to the exact coverage of IP rights by IIAs, the case law that exists supports the understanding that IP rights holders may rely on IIAs, as long as they can show that the IP rights are actively used in that jurisdiction.(4)

Material protection against extraterritorial taxation
If an investor enjoys the protection of an IIA, the question arises of whether an arbitral tribunal would consider that Germany's extraterritorial taxation amounts to a breach of the material standards of protection granted by that treaty. While it seems rather difficult to argue that the taxation amounts to an indirect expropriation, the extraterritorial taxation may breach the fair and equitable treatment standard. This standard, which over the past 20 years has become the backbone of investment protection, is generally held by arbitral tribunals to require states to respect the legitimate expectations investors had when making their investment, and to protect investors against any kind of arbitrary, unreasonable or discriminatory treatment. In recent years, the fair and equitable treatment standard has been at the heart of a number of high-profile investor-state arbitrations that have concerned the retroactive application of a tax on a number of extraterritorial offshore transactions. At least two tribunals have found that the taxation of these transactions violated the obligations under the fair and equitable treatment standard.(5)

Whether or not an arbitral tribunal would consider that Germany's extension of the registered rights rule to extraterritorial transactions amounts to a violation of the fair and equitable treatment standard depends on the facts of the specific case and cannot be answered in the abstract. However, if certain hallmarks of a potential breach appear to be present, it is at least arguable that a breach may have occurred. Such hallmarks include where the Ministry of Finance deviates from its longstanding understanding of the scope of the registered rights rule, without offering an explanation, and that the extension may go beyond Germany's taxing rights under customary international law.(6) Further, in November 2020 (ie, less than three months before the circular published on 11 February 2021) the Ministry of Finance labelled the extension of the registered rights rule to foreign transactions as "not appropriate", ("nicht sachgerecht") (7) thereby indicating that the extension may be unreasonable. While this would not in and of itself amount to a breach, an arbitral tribunal may find further support for a breach in the fact that the taxation appears to be at odds with Germany's own position on international taxing rights, as outlined in the Organisation for Economic Co-Operation and Development.(8)

Investor-state dispute settlement provisions in German IIAs
Investors can rely independently on an IIA only if the IIA contains an investor-state dispute settlement provision that provides the investor with the right to pursue its claim without diplomatic protection from its home state. Most German IIAs have such a provision, but the requirements of these clauses can differ. While some IIAs allow the investor to approach the state directly and to commence arbitral proceedings without any further steps if the parties fail to settle their dispute amicably within a couple of months, other IIAs require that the dispute first be brought before the local courts, and that arbitral proceedings can be commenced only once a certain period of time has elapsed. Other treaties provide that the investor has to choose whether it wants to pursue its claims before local courts or in arbitral proceedings, thereby making both avenues mutually exclusive. Any investors that want to invoke an IIA against Germany's extraterritorial taxation should first carefully study the provisions of the relevant IIA and consider in detail how they interact with its statutory rights under German procedural law.

Remedies under German IIAs
Investors need to consider the remedies available under IIAs. While, in contrast to domestic courts, arbitral tribunals have no power to overrule and annul domestic laws, they may find that governmental measures are in breach of the respective state's treaty obligation under the IIA and, if the tax has already been paid, award damages to the investor. A further practical effect that it is worth an investor considering is that notification of a dispute under an IIA must be given the host state's highest level of government before a claim is brought. This may provide an opportunity for an early out-of-court settlement before arbitral proceedings must be commenced.


Germany's extraterritorial taxation of foreign transactions is a substantive deviation from its previous application of the registered rights rule, and it seems likely that affected investors will defend their rights before German state courts. However, before doing so, investors should at least check whether they may find an additional avenue for relief in German IIAs and their investor-state dispute settlement provisions. While the issue of whether the new taxation amounts to a breach of the fair and equitable treatment standard will rely on the facts of the individual case, the additional procedural options granted by German IIAs, including access to higher levels of government, make it worth analysing whether such protection is available and, if so, how it could be integrated into the overall defence strategy.

For further information on this topic please contact Anke C Sessler or Markus Perkams at Skadden Arps Slate Meagher & Flom LLP by telephone ( +49 69 742 200) or email ([email protected] or [email protected]). The Skadden Arps Slate Meagher & Flom LLP website can be accessed at


(1) For a more detailed analysis of the transactions covered and for details of the new taxation, see Johannes Frey and Florian Schmid, Nexus Limitations on German-Source IP Taxation, Tax Notes International, 2020, 1051 et seq; Johannes Frey, Florian Schmidt and Frank-Michael Schwarz, Germany's U-Turn on Extraterritorial IP Taxation, Tax Notes International 2021, 891 et seq.

(2) The English translation of the provision reads as follows:

[Subject to German income tax is] business income . . . generated by . . . leasing out or . . . the disposal of . . . rights which are registered with a domestic public book or register (…).

Translation as in Frey and Schmid, Tax Notes International 2020, 1051.

(3) See the Ministry of Finance's Circular – IV B 8, S2300/19/10016 :007, DOK 2021/0003450, dated 11 February 2021, published in DStR 2021, 420.

(4) See Bridgestone v Panama, International Centre for Settlement of Investment Disputes Case ARB/16/34, here.

(5) See Vodafone vs India (I), Permanent Court of Arbitration, Case 2016-35, award, 25 September 2020, here. See Cairn v India, Permanent Court of Arbitration, Case 2016-7, award, 21 December 2020, here.

(6) For a further analysis of this aspect, see the articles quoted at (1).

(7) See the draft law on the modernisation and discharge of withholding tax and the tax of capital investment, dated 19 November 2020, p 35.

(8) For a detailed analysis and further references, see the articles quoted at (1).