Federal Finance Court judgement of October 24, 2018, I R 69/10

According to a Federal Ministry of Finance letter dated October 27, 2017, para. 11, a tax deduction under Section 50a(1)(3) Income Tax Act is only possible for the temporary use of a right. In fact, in the opinion of the tax authorities, which has now also been confirmed by the Federal Fiscal Court ruling of October 24, 2018, I R 69/10, a transfer of exploitation rights that is subject to German copyright law is not possible indefinitely. As a consequence, there is an obligation to withhold tax pursuant to Section 50a(1)(3) Income Tax Act – even where the limited taxable remuneration creditor grants the remuneration debtor a comprehensive right of use to a copyrighted work within the meaning of a “total buy-out” against a one-time lump-sum payment.

The presumption of an acquisition of rights therefore requires the return transfer of the rights of use to be practically excluded at the beginning of the contract. Since copyright is inalienable by its very nature, the transfer of relevant rights of use and performance exploitation is generally subject to the presumption of a temporary transfer of use, which is subject to tax deduction under Section 50a(1)(3) Income Tax Act. A permanent sale of rights is therefore not to be presumed.

An exception is Section 40a(3)(1) Copyright Act, according to which authors may grant unlimited exclusive rights of use against a lump-sum payment upon conclusion of the contract if their work is merely a subordinated contribution” to a work, a product, or a service.

In our view, this legal opinion is not mandatory. The non-transferability of the “moral right” under German law is to be distinguished from the rights of use and ancillary copyrights, which are in fact permanently transferable and permanently exclude the actual author from any use or exploitation after a transfer. If the rights of use and ancillary copyright were not permanently transferable, there would be no need to amend Section 40a Copyright Act. The legislator itself has therefore obviously expected that permanent transfer of the rights of use and ancillary copyrights is possible in principle. The Federal Fiscal Court, in the aforementioned ruling, has regrettably taken a different position. A withholding tax deduction may therefore only be avoided with a forward-looking and potentially complex contractual arrangement in the future.