Withholding method

Domestic income earned by foreign artists, athletes, license grantors and directors within the meaning of Section 49 ITA is subject to limited tax liability. This income is taxed using a special procedure, the tax withholding procedure defined in Section 50a ITA.

In this procedure, the (generally domestic) remuneration debtors are required to withhold taxes from the payments to the foreign remuneration creditors and then pay these taxes to the Federal Central Tax Office (BZSt). Typical remuneration debtors include event organizers and licensees. They have to e-file tax returns with the BZSt and pay the calculated taxes to the BZSt every quarter. This is very similar to the wages tax procedure in which employers are required to withhold and pay tax from employees’ paychecks.

Applications for relief

Foreign remuneration creditors can claim a refund of the withholding tax that a remuneration debtor has withheld and paid for them under Section 50a ITA as long as the applicable double taxation agreement (DTA) fully or partially exempts the remuneration from German taxation. Alternatively, remuneration creditors can apply for a certificate of exemption before the remuneration is paid. If remuneration debtors have one of these certificates in their possession when they pay the remuneration, they can either withhold tax at a lower rate or refrain from withholding tax altogether.

Please note that the foreign remuneration creditors have to file these applications for "relief" (i.e. refunds and exemptions). remuneration debtors have very few rights to participate in or obtain information about the applications. This is largely due to tax secrecy and the fact that the BZSt occasionally requests and evaluates highly sensitive information about the foreign remuneration creditors, particularly during its tax evasion evaluation (Section 50d para 3 ITA). Foreign remuneration creditors can authorize remuneration debotrs or other persons to file requests and perform other actions in the procedure.

Exemption option

Remuneration debtors, for their part, can in cases with minor tax significance make use of the exemption option under Section 50c para. 2 sentence 1 no. 2 ITA to reduce withholding tax under Section 50a ITA or to exempt a payment entirely. The exemption option applies in cases of payment for licensed rights under Section 50a para. 1 no. 3 ITA that was paid after December 31, 2021. This includes all transactions of money or with a monetary value (such as benefits in kind and barter transactions). A separate application is not required. The main convenience lies in the fact that the foreign remuneration creditor does not have to apply for an exemption. The remuneration debtor does not have to deduct the tax separately, or make one at a lower tax rate. The latter is true if the relevant double taxation agreement (DTA) includes a "residual tax” in its licensed item. This new exemption option is subject to a tax-free threshold.

Diagram: The "participation triangle" in the tax withholding and relief procedure