withhold tax

No withholding tax deduction for software developed abroad in the future? – New circular from the Federal Ministry of Finance expected

German clients have to deduct withholding tax from their payments to foreign software developers

German companies that conclude contracts with software developers abroad may be subject to a tax deduction under Sec. 50a(1) no. 3 German Income Tax Act. The tax must be collected from persons subject to limited tax liability (individual developers or companies abroad) by withholding tax from the remuneration paid by the customer in Germany. However, this must involve income that arises from the transfer of the right of use, which may include industrial property rights or copyrights.

Particular risks are associated with past contracts under which a company failed to withhold tax when paying the remuneration. This omission is punishable under criminal law and a fine may be imposed (Sec. 380 German Tax Code). A recent circular from the Federal Ministry of Finance dated 11 February 2021 offers relief in such cases. According to this circular, no tax need be withheld from remuneration until 30 September 2021 if certain conditions are met. However, the circular expressly applies only to rights that are entered in a domestic public book or register (see also our blog post of 12 February 2021). Copyrights arising from the development of software are not covered, because copyright is not a registrable right in Germany.

The extent to which withholding tax must be deducted when software has been developed abroad has not been clarified in full. On the one hand, the Federal Ministry of Finance’s circulars indicate that withholding tax must be withheld from the remuneration. On the other hand, the amendment to the Copyright Act gives rise to a solid argument to the contrary (see below). That’s why the Federal Ministry of Finance is now dealing with this legal issue again. A new circular is expected shortly.

Previous opinion of the Federal Ministry of Finance

Comprehensive granting of rights as economic reutilisation

For the Federal Ministry of Finance, the decisive factor is economic reutilisation (“wirtschaftliche Weiterverwertung”), which is interpreted broadly. In a circular dated 27 October 2017 on the cross-border transfer of software and databases, the Federal Ministry of Finance focused on whether the developer grants the client comprehensive rights. If the other conditions are also met, the foreign developer’s income is classed as domestic according to Sec. 49(1) no. 2(f) and no. 6 Income Tax Act. Withholding tax would have to be deducted by the customer in Germany in accordance with Sec. 50a(1) no. 3 Income Tax Act.

The transfer of the right to use copyrights is usually time-restricted

According to the previous opinion of the Federal Ministry of Finance, the right to use copyrights is granted for a limited period of time. It was argued that the purchase of a right, i.e. a permanent transfer, cannot exist under copyright law. Taking this line, withholding tax would regularly have to be withheld from the paid remuneration.

This opinion was based on two Federal Fiscal Court rulings from 2018, which pointed in a similar direction. One ruling concerned a film adaptation of a novel (Federal Fiscal Court of 24 October 2018 – I R 69/16). The other concerned a report on foreign affairs (Federal Fiscal Court of 24 October 2018 – I R 83/16); in this case, the court concluded that no permanent transfer of rights (i.e. a rights purchase) had taken place. This was partly justified by the author’s right to recall under Sec. 41 of the German Copyright Act. Additionally, the court highlighted the author’s right to a share in the success of his or her work under Sec. 32a Copyright Act.

Effect of the amendment to Sec. 69a(5) Copyright Act

The German Copyright Act was amended with effect from 7 June 2021 to implement the Directive (EU) 2019/790 on Copyright in the Digital Single Market („DSM Directive“). The amendment regulates important areas such as text and data mining, reproductions of visual works, responsibility of platforms and copyright contract law.

In addition, the provisions on computer programs (Sections 69a et seq. Copyright Act) contain an amendment that – although inconspicuous – could prove decisive in tax law. The amended Sec. 69a(5) Copyright Act regulates which norms do not apply to computer programs. Previously, only individual norms concerning the remuneration of authors were exempted. After the amendment, the remuneration regulations (Secs. 32 to 32g and 36 to 36g Copyright Act) are comprehensively excluded. What’s more, the right of other exploitation after ten years (Sec. 40a Copyright Act) and the right of revocation due to non-exercise (Sec. 41 Copyright Act) no longer apply to software developers.

Importance of the amendment for withholding tax deduction according to Sec. 50a Income Tax Act

With effect from 7 June 2021, the remuneration regulations no longer apply to contracts with software developers. Pursuant to the new copyright law, the right to remuneration under Sec. 32a Copyright Act ceases to apply, as does the right of recall under Sec. 41 Copyright Act. Whether a developer is freelance or employed is expressly not relevant. The Federal Fiscal Court has therefore lost its argumentation basis in relation to total buyouts.

The question of whether the right to use copyrights can be transferred permanently in the sense of a rights purchase must therefore be reassessed. Solid reasons can be put forward as to why withholding tax does not necessarily have to be deducted if the developer grants the client rights of use. From a scientific copyright perspective, the question of whether the client may edit source code could also be significant. We expect the Federal Ministry of Finance to comment on this soon in a new circular. Ideally, this issue, which is detrimental to the German economy, will then be resolved for the future.


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    Verena Roder-Hießerich ist Rechtsanwältin am Standort Bonn. Ihr Beratungsschwerpunkt liegt im Bereich Gesellschafts- und Konzernrecht. Dabei berät sie insbesondere bei Umstrukturierungen und Transaktionen (Mergers & Acquisitions). Ferner berät sie aufgrund ihres urheberrechtlichen Hintergrunds im gewerblichen Rechtsschutz und im Urheberrecht.

    Verena Roder-Hießerich is an Attorney at Law in Bonn (Germany). Her practice focuses on corporate and group law. In particular, she advises on restructuring and transactions (mergers & acquisitions). Furthermore, due to her background in copyright law, she advises on intellectual property and copyright law.

    T +49 228/95 94-0