According to the current view of the tax authorities, advertising expenditures for the placement of online advertising with foreign providers may be subject to a withholding tax of 15.825 % (incl. solidarity surcharge) on domestic clients. In the case of a contractual "gross-up", the additional burden on the domestic client amounts to approx. 18.8% of the "net" payments to be made to the foreign provider. Moreover, payments are potentially subject to "the royalty limitation rule" and an add-back for trade tax purposes.
- In the view of the tax authorities, foreign providers are subject to limited tax liability in Germany due to the provision of online advertising services to domestic clients.
- For the domestic clients the withholding tax amounts to 15.825% and 18.8% in case of contractually agreed gross-up clauses.
- A withholding tax refund made to the provider or a withholding tax exemption certificate requires a formal application procedure. Domestic clients cannot claim a refund of withholding tax.
- The legal position of the tax authorities is disputed.
1. What is this about?
The tax authorities take the view that foreign operators of web portals (e.g. search engines and social media) are subject to limited tax liability in Germany if they provide advertising services to domestic clients. This particularly concerns industries that depend on online advertising.
The tax authorities base their legal position on the fact that the foreign provider transfers its know-how to the domestic client by providing its advertising service and thus becomes subject to limited taxation without any further domestic link.
As a result, the domestic client is obliged to retain a 15.825% withholding tax on the account of the foreign provider and remit it to the tax authorities.
Plenty of foreign providers stipulate in their contracts that the agreed advertising fee is to be paid "net" by the domestic client, i.e. without deduction of withholding tax ("gross up"). In this case, the withholding tax to be paid to the tax authorities by the domestic client economically amounts to approx. 18.8% of the amount to be paid to the foreign provider.
Such situations are increasingly being addressed in the context of tax audits. If it is determined that the withholding tax has not been remitted, corresponding payment orders can be issued against the domestic client.
Further consequences could be the application of the German royalty limitation rule and the trade tax add-back in the amount of 6.25% of the expenses.
2. Reimbursement of withholding tax and withholding tax exemption certificate?
The double taxation agreements concluded by Germany generally assign the right to tax the income of a foreign provider of advertising services to its country of residence. In this case, the foreign provider can submit a formal application for reimbursement of the withholding tax or for a preliminary withholding tax exemption to the Federal Central Tax Office. Since the tax authorities currently take the view that the provider must meet the strict (substance) requirements of § 50d (3) of the German Income Tax Act, such procedures are often rejected. The domestic client himself is not entitled to a refund of the withholding tax from the tax authorities.
3. What can you do?
In our view the legal position of the tax authorities is incorrect. In order to avoid a risk for a tax liability, it should be examined in each individual case whether the withholding tax should nevertheless be retained by the domestic client and remitted to the Federal Central Tax Office.
Proceedings with the tax authorities relating to withholding tax should be kept open, as the opinion of the tax authorities is disputed and no supreme court case law has yet been passed.
Since in our opinion the advertising services of foreign providers are (active) operations, there is no provision of know-how, but rather a performance of a service. Please do not hesitate to contact us if you have any questions.
The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.