Germany: Withholding taxes on cross-border payments for software development

Guidance reflects amendments to the German copyright law

Guidance reflects amendments to the German copyright law

The German Federal Ministry of Finance (BMF) recently provided guidance on withholding taxes on cross-border payments for software development to reflect amendments to the German copyright law that became effective 7 June 2021.


Income of a non-resident taxpayer from a time-limited license to use rights is subject to limited tax liability and withholding tax in Germany.

Prior to the amendments to the German copyright law that became effective 7 June 2021, a licensing of copyright-protected software generally was always regarded as a temporary licensing of rights because a full transfer was excluded in the case of copyright-protected rights. Under the amended law, although a purchase of the copyright from the creator of the work remains prohibited, a final economic transfer of the copyright in the form of an economic purchase of rights is now in principle possible. In that case, there is no obligation to withhold tax.  

BMF guidance

The BMF guidance provides a non-exhaustive list of criteria for distinguishing between an economic purchase and a temporary purchasing of software rights. In general, an economic purchase of software rights requires the contractual grant of extensive, exclusive and irrevocable rights of use and exploitation to the software for an unlimited period of time.

In the case of multi-level contractual relationships (i.e., if one or more cross-border licensing occurs prior to the licensing of the rights of use and exploitation), whether there is an economic purchase of rights or a temporary licensing for use must be determined at each level. If at any level there is merely a temporary licensing of copyright use, then any subsequent grant of rights will not be treated as an economic purchase of rights.

The BMF guidance applies to all open cases under which the relevant contractual arrangement was concluded after 6 June 2021. For reasons of simplification, the tax administration also will apply the principles of the guidance to all payments for software development that accrue after 6 June 2021.

Read an August 2022 report [PDF 1.2 MB] prepared by the KPMG member firm in Germany 


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