All payment debtors that make payments for licensed rights under Section 50a para. 1 no. 3 EStG can make use of the exemption under Section 50c para. 2 sentence1 no. 2 EStG.

The exemption applies to payments made after December 31, 2021.

The application of the exemption option is a simplified procedure. Foreign payment creditors do not have to file a separate exemption application as long as the tax-free limit of EUR 5,000 is not exceeded. Nor is a (residency) confirmation of the foreign tax authority on the entitlement to use the tax relief under the DTA required. No cooperation of the foreign payment creditor is required.

• The payment has to be income of the person with limited tax liability for licensed rights under Section 49 para. 1 no. 2 f) aa), no. 6 or no. 9 EStG, which is generally subject to tax deduction under Section 50a para. 1 no. 3 EStG.
• The payment has to be made after December 31, 2021.
• The double taxation agreement between Germany and the foreign payment creditors country of residence provides the later with a (full or partial) right of taxation. .
• The payment plus the payment already made to the person with limited tax liability by the payment debtor in the same calendar year does not exceed the amount of EUR 5,000.

Once the payment that exceeds the limit is made, exemption under Section 50c para. 2 sentence 1 no. 2 EStG can no longer be applied. The payment debtor must deduct the tax from the entire payment affected, and report and pay the deducted amounts. This also applies to payments already made and to later payments in the same calendar year.

Example 1:

Payment debtor S and payment creditor G have concluded an agreement about the use of copyrights. S pays EUR 10,000 for this. According to the agreement, the payments must be made as follows:

On March 1, 2022: EUR 2,500
On June 1, 2022: EUR 2,500
On September 1, 2022 EUR 2,500
On December 1, 2022 EUR 2,500

Solution:

The limit of EUR 5,000 is not exceeded until the second payment. No tax has to be withheld, but tax returns must be submitted. The limit is exceeded with the third payment. Thus, S must withhold tax for the entire payment. The tax returns for the first two payments must be corrected and the tax must be paid retroactively. The tax on the fourth payment must be reported and paid as usual.

Example 2 (1st variation)

Same Situation as in Example 1, but different payment agreements are made.

On September 20, 2022 EUR 4,000
On February 20, 2023 EUR 3,000
On 20 July 2023 EUR 3,000

Solution:

The first payment is below the limit of EUR 5,000. No tax must be withheld in Q3 2022. The second payment does not exceed the limit either, because it is made in the following year. It is not until the third payment that the limit for the 2023 calendar year is exceeded. Thus, S must withhold tax for the second and third payments in 2023. For Q1 2023, a corrected tax return must be submitted and the tax must be paid retroactively. The tax return for the first payment in 2022 does not have to be corrected.

Example 3 (2nd variation)

Same situation as in Example 1, but the total amount must be paid on November 30, 2022.

Solution:

This payment exceeds the limit of EUR 5,000. Therefore, S must withhold tax for the entire amount.

Example 4:

Payment debtor S and payment creditor G have concluded two agreements for the use of copyrights. For this purpose, on May 1, 2022 S pays EUR 4,000 to meet the first agreement and on October 1, 2022 EUR 4,000 to meet the second agreement.

Solution:

The first payment is below the limit of EUR 5,000. No tax has to be withheld, but a tax return must be submitted. Once the second payment is made, the limit is exceeded. Thus, S must withhold tax for both payments. The different agreements make no difference, because all payments made to the taxpayer with limited tax liability by one payment debtor in the same calendar year must be taken into account when checking the tax-free amount. The tax returns for the first payment need to be corrected and the tax must be paid retroactively.

If the DTA provides for taxation of income from licensed rights under Section 50a para. 1 no. 3 EStG with a residual tax, the payment debtor must withhold and pay the withholding tax for the payment in the amount of the residual tax if the payment has not exceeded the tax-free amount. A solidarity surcharge of 5.5% is not applicable in these cases.

Once the amount of EUR 5,000 is exceeded, the full tax rate must be applied when calculating the withholding tax for all payments.

Example 5:

Facts as in Example 4 with the addition that the relevant DTA shows a residual tax of 5%.

Solution:

The payment for the first agreement is below the limit of EUR 5,000. The payment debtor can apply the withholding tax for this payment with a tax rate of 5%, i.e., EUR 200. Once the payment is made for the second agreement, the limit is exceeded. Thus, S must withhold 15% tax for the first and second payments. He has to correct the return for Q2.

The exemption under Section 50c para. 2 sentence 1 no. 2 EStG applies only to the obligation to withhold and pay the tax. The payment debtor is required to file a tax return even if they do not have to withhold and pay tax (Section 50c para. 2 sentence 2 EStG).

The responsibility for the withholding tax under Section 50a EStG lies with the BZSt. Due to this the BZSt decides whether there is an obligation to withhold tax for payments.

A claim can be filed against the payment debtor using a liability assessment (Section 50a para. 5 sentence 5 EStG, Section 73g EstDV) if they did not meet their legal obligation to withhold tax. Furthermore, an additional assessment notice can be issued to the payment creditor (Section 50a para. 5 sentence 6 EstG).

For more information, see the DTA. For countries that do not have a DTA with Germany, exemption is not allowed pursuant to Section 50c para. 2 sentence 2 no. 2 EStG. For each payment, the DTA must be consulted regarding German taxation rights. This will show whether and how much tax you must withhold.

For an overview of German taxation laws regarding royalties, see the residual tax list.

For a list of all DTAs, see the BMF website.

German taxation rights and thus the obligation to withhold taxes apply to all payments to foreign payment creditors whose country of residence does not have a DTA with Germany. This means that the legally required tax deduction of 15% plus 5.5% solidarity surcharge must be applied to all payments.

Particularly to avoid a liability risk, the payment debtor should withhold, report and pay the tax if there is doubt as to the regulations of the DTA. Prior thereto, the payment debtor can also submit an application for exemption under Section 50c para. 2 sentence 1 no. 1 EStG. The BZSt will then check whether the payment creditor is subject to a DTA and an exemption certificate can be issued. If the payment was already made and taxes were withheld, reported and paid, the payment creditor can submit an application for reimbursement of the withholding tax under Section 50c para. 3 EStG.

Subsequent application is excluded according to Section 50c para. 2 sentence 3 EStG.