Withholding tax

Pursuant to Section 50a of the German Income Tax Act (EStG), withholding taxes must be reported and remitted in Germany if a German company pays remuneration to a foreign contractual partner for the following circumstances:

• Remuneration for artistic, athletic and similar performances that are exploited in Germany, such as in the case of collaboration with influencers or advertising partners based abroad,
• Remuneration for the transfer or use (including the right of exploitation) of copyrights, patents, trademarks, know-how, and similar rights, such as in the provision of licenses,
• Remuneration to foreign members of supervisory and administrative boards.

In addition, the withholding of capital gains tax on various types of capital income in Germany (e.g., profit distributions or dividends) also constitutes a form of withholding tax for foreign investors or shareholders.

The foreign contracting party is liable for German withholding tax. Nevertheless, as the payer of the remuneration, the German company is required by law under Section 50a of the German Income Tax Act (EStG) to remit the withholding tax to the Federal Central Tax Office. Otherwise, the German company may be held liable for the contracting party’s tax.

It is important to note that, as a rule, the German company is not burdened by the payment of the tax, since, depending on the contractual agreement, only the invoice amount remaining after taxes is transferred to the foreign contractual partner (so-called gross agreement). However, deviating agreements are possible. We are happy to assist you in reviewing or drafting standard contract clauses that best address the tax requirements.

In the reverse scenario, where the German company owes taxes abroad, the tax is withheld by the foreign contractual partner and remitted to the tax authorities.

The withholding tax is generally 15% plus the solidarity surcharge (5.5% of the withholding tax).

The withholding tax on remuneration paid to foreign members of the supervisory and management boards is 30% plus the solidarity surcharge (5.5% of the withholding tax).

The capital gains tax is 25% plus the solidarity surcharge (5.5% of the capital gains tax).

Double taxation occurs when a taxpayer is taxed on the same income in multiple countries. Germany essentially avoids such double taxation through bilateral double taxation treaties, EU directives (the Licensing Directive and the Parent-Subsidiary Directive) and national regulations (crediting or deducting foreign taxes).

To obtain tax relief in Germany - provided the relevant requirements are met – an application for exemption or refund must be submitted to the Federal Central Tax Office in accordance with Section 50c(2), (3) of the German Income Tax Act (EStG). We are happy to assist you in reviewing your eligibility for relief and in preparing the refund and/or exemption applications.

The application for exemption and/or refund must be submitted electronically to the Federal Central Tax Office via the BOP (BZSt-Online Portal). A considerable processing time should be expected.

The processing time can be significantly reduced if the applications are submitted complete with all relevant documents. This includes, in particular, providing comprehensive answers in advance to questions regarding the complex anti-abuse clause under Section 50d(3) of the German Income Tax Act (EStG). 

The provision serves to prevent the abusive use of tax benefits under double taxation treaties (DTA) and EU law through the interposition of companies with no real economic substance. Accordingly, the tax authorities may deny the exemption from the withholding tax payable in Germany, to which the applicant would generally be entitled under DTAs and EU directives, pursuant to Section 50d(3) of the German Income Tax Act (EStG).

A foreign company is only entitled to relief to the extent that the persons holding an interest in it would themselves be entitled to relief (“personal entitlement to relief”) and the source of income in Germany has a substantial connection to its own economic activity (“factual entitlement to relief”).

If neither the requirements for personal nor for factual entitlement to relief are met, a claim for relief may nevertheless exist provided that the applicant demonstrates that:

• none of the main purposes of its involvement is to obtain a tax advantage or
• the main class of the applicant’s shares is traded substantially and regularly on a recognized stock exchange (the so-called “stock exchange clause”).

The vast majority of countries worldwide levy various forms of withholding tax. The services provided must therefore always be assessed individually at the local level in accordance with national tax law.

It should be noted, however, that the most significant difference from German withholding tax in many countries is the additional taxation of services. This may include, for example, consulting and expert services, management services, installation work, or electronic services. This is the case, for example, in China, India, or Poland.

In collaboration with our global network, we are happy to assist with our expertise in this context as well, whether for case-by-case reviews or unclear circumstances.

If a foreign tax is to be paid on behalf of the German company by the payer abroad, the German company subsequently receives a "tax certificate" from the contracting party as proof of the tax paid.

A distinction must generally be made with regard to the following scenarios:

A bilateral double taxation treaty (DTA) is in place: In the case of lawful taxation, the DTA provides avenues for avoiding double taxation. This typically takes the form of an exemption of the income in Germany or the crediting of the foreign tax against the German tax liability. If the tax withheld abroad exceeds the maximum rate agreed upon in the DTA, a formal application for relief must be filed with the foreign tax authorities for the excess amount.

An EU directive applies: EU law allows for a refund of withholding taxes under certain formal requirements, which may, however, vary depending on how the directive is implemented into national law in individual countries. Often, an application must be submitted to the foreign authority along with a German certificate of residence in order to avoid the tax deduction abroad.

There is no double taxation treaty in place or no applicable EU directive: A refund abroad is generally not possible. In these cases, relief from double taxation is provided under national legislation through the credit against the German tax liability pursuant to Section 34c of the German Income Tax Act (EStG). However, any maximum credit limits and classification conflicts must be taken into account, as the foreign tax must correspond to the German tax.