background image
8.2.1. Withholding Taxes

The withholding tax on specified items of income paid to non-residents must be operated by the paying agent normally at the rates provided for under German law and remitted to the Central Federal Tax Office. The recipient may subsequently claim the refund of excess withholding tax over the treaty or EU Directive reduced rate or exemption. There are both a regular and a simplified procedure to claim the application of a reduced or nil treaty rate (or zero withholding tax under EU Interest and Royalty Directive) at the moment of payment of the relevant income, in which case instead of a refund claim post-fact, the payer may apply the reduced or nil rate at the moment of payment. Note that withholding tax relief under a tax treaty may be denied under certain conditions. Effective 1 July 2021, reduced withholding tax rates or exemptions do not apply to payments made to non-cooperative jurisdictions / tax havens (see Sec. 13.5.).

Dividend

Tax is withheld at the rate of 26.38% (25% plus the 5.5% solidarity surcharge) from gross dividends distributed to non-residents.

Regardless of whether or not relief from withholding tax is available under a tax treaty, German domestic law permits the refund to non-resident dividend recipients of 40% of the withholding tax levied at the domestic rate. This effectively results in a withholding tax on dividends not exceeding the corporate tax rate of 15.825%. Effective 1 January 2016, tax credits/ refunds of such excess dividend withholding tax are no longer allowed unless the shares have been acquired at least 45 days before the dividend distribution and are held for at least 45 days after the distribution. In addition, the beneficial owner of the shares must bear at least 70% of the economic risk from the shares during the period.

Germany’s domestic tax law provides certain rules for the grant of refund of taxes withheld on dividend income distributed to non-resident companies having a shareholding of less than 10% or 15%, as the case may be, in a German resident company. These rules do not apply when the recipient of dividend income is a German resident company having an equivalent shareholding in another German resident company. As per these rules, in order to claim the refund, non-resident recipients are required to submit a certificate issued by the foreign tax authority to the effect that the German withholding tax cannot be set off, or cannot be carried forward in favour of such non-resident or of its direct or indirect shareholders, nor can it be deducted by such non-resident as a business expense or as an operating cost. On 16 June 2022, the Court of Justice of the European Union (CJEU) rendered a decision in which it held that the German refund conditions are incompatible with the freedom of movement of capital as provided for by Article 63 of the Treaty on the Functioning of the European Union (TFEU). The decision of the CJEU was primarily based on its observation that the German rules set out different conditions for claiming relief of withholding taxes depending on the residential status of the recipient in Germany.

Under the EU Parent-Subsidiary Directive, dividends paid by a German company to a qualifying parent company resident in another EU Member State are exempt from withholding tax.  In order to qualify for the exemption under the Directive, the parent company must have held continuously at least 10% in the capital of the German distributing entity for at least  one year.

On 4 April 2018, the German Ministry of Finance (MOF) issued a guidance decree regarding the German anti-treaty shopping rule and its implications for EU investors claiming withholding tax relief on dividends under the German implementation of the EU Parent-Subsidiary Directive (PSD). The guidance is in response to the CJEU decision in which the Court ruled that the German anti-treaty shopping law of 2007 was in violation of the EU PSD and also the freedom of establishment. The 2012 law eliminated the 2007 requirement of 10% or more of the gross receipts from “genuine self-business activities” for claiming withholding tax relief and introduced two tests – the shareholder test and the business purpose test. The decree states that the anti-treaty shopping law of 2007 is no longer applicable. Further, holding companies engaged in mere asset managing activities may be able to claim dividend withholding tax relief under the PSD. The decree limits the guidance to dividend withholding tax relief under the PSD. Thus, the application of the anti-treaty shopping rule for withholding tax relief on royalties as well as on dividends (not covered by the PSD) remains unchanged. The decree also limits the application of the 2012 law, although the interpretation of the rule is currently pending before the CJEU.

Interest

No withholding tax under domestic law. However, withholding tax is imposed on interest from convertible bonds, profit-sharing bonds, participation loans, as well as income from the participation of silent partners in a trade or business. The rate is 26.38% (25% plus the 5.5% solidarity surcharge). In addition, interest on coupons of bearer bonds that are not credited to a bank account with a foreign bank (anonymous over-the-counter transactions) is subject to withholding tax at a rate of 36.93% (35% plus the 5.5% solidarity surcharge). The withholding tax on regular bank interest does not apply to payments to non-residents.

Under the EU Interest and Royalties Directive, interest payments are exempt from withholding tax if made to an associated company in another EU Member State. To qualify for this exemption, the association must be through a common shareholding of at least 25%.

Royalty Copyright

Tax is withheld at the rate of 15.83% (15% plus the 5.5% solidarity surcharge) from gross royalties paid to non-residents.

Under the EU Interest and Royalties Directive, royalty payments are exempt from withholding tax if made to an associated company in another EU Member State. To qualify for this exemption, the association must be through a common shareholding of at least 25%.

Royalty Software

In terms of a clarificatory circular issued in November 2017, royalty payments made to non-residents for the use of software and databases are subject to withholding tax in Germany only where the software or databases are exploited commercially by the user. The mere use of software or database will not be subject to withholding tax.

Further, in relation to fees for online advertising, the tax authorities clarified in a press release issued on 14 March 2019 that payments made by domestic advertisers to foreign platform operators and internet service providers for the placement of electronic advertisements on internet web pages are not in the nature of royalty. Since such remunerations are not paid for the temporary granting of rights or for the use of commercial, technical, scientific, or similar experience, knowledge and skills (know-how), they are not subject to withholding tax in Germany. As per a guidance issued on 3 April 2019, this clarification also applies to fees for inquiries in online search engines, via placement platforms, for social media advertising, banner advertising, and other similar online advertising, regardless of the conditions under which the remuneration is due (e.g., cost-per-click, cost-per-order, etc.).

Royalty Patent

Tax is withheld at the rate of 15.83% (15% plus the 5.5% solidarity surcharge) from gross royalties paid to non-residents.

Under the EU Interest and Royalties Directive, royalty payments are exempt from withholding tax if made to an associated company in another EU Member State. To qualify for this exemption, the association must be through a common shareholding of at least 25%.

Royalty Trademark

Tax is withheld at the rate of 15.83% (15% plus the 5.5% solidarity surcharge) from gross royalties paid to non-residents.

Under the EU Interest and Royalties Directive, royalty payments are exempt from withholding tax if made to an associated company in another EU Member State. To qualify for this exemption, the association must be through a common shareholding of at least 25%.

Service Management

No withholding tax under domestic law on payments made by a German resident for management services performed outside of Germany by a non-resident without a German permanent establishment.

Service Technical

No withholding tax under domestic law on payments made by a German resident for technical services performed outside of Germany by a non-resident without a German permanent establishment.

Below is a discussion of domestic withholding tax rules for most of the common cross-border payments.

Capital Gains 1.49 %
Dividends 26.38 %
Interest 0.0 %
Royalty Copyright 15.83 %
Royalty Patent 15.83 %
Royalty Trademark 15.83 %
Sales 0.0 %
Service Management 0.0 %
Service Technical 0.0 %

* Rates are current as of 02 October 2022