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In a ruling dated 13 August 1997 (DStR 1997, 1684 - 13 August 1997), the Federal Tax Court has clarified an important procedural aspect of appeals against the imposition of withholding tax. The current withholding tax rate on royalties is 25 % (sec. 50a (4) EStG).

The obligor (payor) of royalties withheld tax at the statutory rate and filed a corresponding withholding tax report. The obligee (payee) of the royalties believed that the amount withheld was excessive and filed an administrative appeal against the withholding tax report. A withholding tax report is, procedurally speaking, the equivalent of a tax assessment subject to change on subsequent audit (sec. 168 AO). As such, the taxpayer may at any time request modification or vacation of the assessment. In a withholding situation, the taxpayer is the obligee (payee) of the income in question.

The obligee likewise filed a motion to stay collection of the withholding tax. This is permissible even when the tax has already been remitted and, if successful, leads to refund of the tax.

The Federal Tax Court held, however, that the grant of a stay of execution pursuant to motion filed by the obligee leads to refund of the withholding tax to the obligor (payor), not to the obligee, as long as the obligor (payor) has not assented to refund to the obligee. In the event of an adverse judgement on the merits, the obligor will be forced to pay the tax plus interest. In the case at hand, the obligor refused to assent.

Since the obligee (payee) was invoking a tax treaty, the proper course to take was to file a refund request under sec. 50d EStG.

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