1. Tax rate on IP ownership
Royalties and capital gains are subject to the standard corporate tax rate of 40% (including German trade tax). From 2009 onwards the standard corporate and trade tax rate will be reduced to 30%.
German tax law does not offer a special relief for research and development.
2. Withholding taxes
Royalties are subject to withholding tax at 21.1% under domestic law except if paid to EU resident affiliated entities (the EU Interest & Royalty Directive exemption) or recipients benefitting from a tax treaty exemption.
Planning should involve consideration of inserting a corporation resident in a treaty country as the recipient of the royalties prior to payment to a non treaty country. However, German anti treaty shopping rules have to be considered.
3. CFC rules
Germany has a CFC regime which applies if, among other things, the income is subject to a low rate of taxation and is passive income. In respect of IP holding entities, the CFC rules can be avoided by adding substance to the corporation holding the IP, in particular with regard to for example engaging in genuine business activities in its country of residence; permanently employing skilled personnel with relevant decision making powers.