Include withholding tax as an everyday topic

Business entities should examine withholding tax use cases in a structured manner, ensure payment, and avoid subsequent corrections.

Examine use cases, ensure payment, avoid subsequent corrections.

Business entities are increasingly called on to pay withholding tax. The main reasons for this are digital business processes and company processes, as well as cross-border activities and structures. However, a societal change in thinking also contributes to this. While practices for transferring profits abroad have been at least tolerated until recently, there is now an increasingly critical public discussion about this. In addition, the complexity of the withholding tax matters and their tax assessment through new regulations such as the draft Withholding Tax Relief Modernisation Act (Abzugsteuerentlastungsmodernisierungsgesetz, AbzStEntModG) is increasing again. In addition, current needs for action are increasing pressure on companies: As it is planned to tighten withholding tax reduction requirements, companies should review their international structures, particularly for dividend payments. Business entities are also forced to take action in charging withholding tax for royalty payments between foreign companies for intellectual property (IP) registered under German patent law. This option of the simplified “smoothing out” of the past ends here in December 2021. Anyone who does not have a handle on withholding taxes, either by means of a certificate of exemption or the withholding and remittance to the tax authority, can be held liable.

There is a threat of multiple taxation, which is a serious cost risk at withholding tax rates of 25 percent, for example.

Therefore, the goal of each business entity should be to examine the withholding tax use cases in a structured manner and to establish a process that ensures the payment given the business-related circumstances.

At a glance: Possible withholding tax issues

Two-tier investment structure abroad

In the future, for example, the withholding tax relief will not apply if the entitlement to relief for dividends is based on two different entitlement standards.

Domestic registered rights or patents

Royalty payments relating to domestic registered rights and patents and paid between foreign companies trigger withholding tax in Germany.

Engaging a foreign-based influencer

If influencers advertise products on their social media channels, the business entity may receive rights to use images and videos. The permission to use products or services for free or at a discount counts as consideration that triggers withholding tax.

Use of media files of foreign stock media vendors

If the marketing department uses media files of foreign stock media vendors (e.g. photos) as part of its own advertising measures (online, print), withholding tax will apply.

Engagement of foreign artists or athletes

When engaging foreign artists, agencies or athletes for internal and/or external promotional purposes, withholding tax should often be withheld.

Use of rights with foreign cooperation partners

The agreement to use or exploit rights together with a foreign cooperation partner can trigger withholding tax.

Supervisory board member residing abroad

Supervisory body members that reside abroad trigger withholding tax obligations.

How we support you

Based on our long-standing expertise, we offer support tailored to your needs. This can include case-by-case advice, a withholding tax compliance check, or a process software solution, among other things.

Case-by-case advice:

Handling of issues related to procedural law as well as communication with the German tax authorities on withholding tax issues.

Disclosure of historically unexplained withholding taxes and capital gains related to intellectual property (IP) recorded in a German register or exploited in Germany.
Handling of exemption and/or refund procedures (on the basis of a treaty or EU law) on behalf of the foreign recipient of the remuneration.
Preparation of tax certificates for the foreign issuer of the payment.
Support in the necessary change of the corporate structure in order to generally avoid withholding taxes on dividends.
Drafting of tax clauses (gross/net agreements as well as cooperation agreements) with the foreign contractual partners.
Creation of a Section 50a EStG (Personal Income Tax Act) guideline, a work instruction or training documents taking into account the specifics of your business entity.

Withholding tax compliance check

The goal of the three-phase check is to identify, evaluate and, if necessary, (subsequently) explain withholding tax-relevant circumstances in your business entity.

Phase 1: Workshops with the affected departments and central functions such as marketing, purchasing, IT, legal and HR to identify possible use cases and to raise awareness of employees regarding withholding tax-relevant matters.
Phase 2: Analysis and evaluation of the identified contractual relationships within the framework of standardised assessment and recording forms, while assessing relevant accounting systems if necessary.
Phase 3: Data preparation and reporting of the identified use cases to the Federal Central Tax Office (BZSt).

Digitised withholding tax solution

If you want to establish withholding tax as part of your tax compliance management system, with our Section 50a EStG software solution, we offer a technology-based, end-to-end solution for process-based management and the handling of withholding tax matters. We would also be happy to assist you with the implementation.

No matter how much support you need, we are there for you with our withholding tax expertise. Get in touch.