by Ninja-Antonia Reggelin
The German Finance Ministry on 17 May issued a draft circular concerning the limited tax liability and source taxation of cross-border transfers of software and databases.
In practice, Germany’s taxation of cross-border software transfers and cloud services has led to confusion because of the lack of detailed guidance in the area. This particularly applies to the question of whether payments for software, cloud services, and database use are subject to German withholding tax. These issues are addressed in the draft.
According to the German finance administration, if a foreign-based provider offers software for domestic use, the provider may be subject to limited tax liability in Germany with respect to domestic income pursuant to Article 49 (1) (2) (f) or Article 49 (6) of the Income Tax Act (EStG), if the transfer of rights is not already subject to tax in Germany through attribution to the provider’s German permanent establishment.
The domestic paying business is deemed to have realized taxable income according to this section only if the user of the software is given full commercial rights (reproduction, processing, dissemination, or publication rights) for economic re-use.
Thus, the guidance provides that there is no income if the functionality and intended use of software, as specified in a license contract, is limited to activities necessary to enable the software application, namely, software installation, download into working memory, the application of the software and, if necessary, duplication.
This assessment is to be carried out independently of whether it is so-called standard software or specially manufactured individual software, as well as whether the software is transferred to data carriers or to the internet (download, use on third-party servers).
If the foreign-based provider of a cross-border software transfer is subject the preconditions of limited tax liability, the tax will be levied by means of a withholding tax deduction pursuant to § 50a Paragraph 1 No. 3 EStG. In principle, the full amount of the revenue is subject to the tax, unless, as in the case of mixed contracts, a breakdown must be made.
The withholding tax is only applicable to the temporary grant of a right to use. In principle, the granting of rights to copyrighted software is to be regarded as a temporary transfer of rights, since a complete transfer of copyrighted rights is excluded.
The draft also includes specifics regarding the taxation of cross-border use of databases. No income is deemed to have been generated if the only rights granted are those necessary for access to the elements of the database and for its usual use (functions for access, reading, and printing).
Further details and examples can be found in the 13-page draft. Interested stakeholders are invited to submit comments by 7 July.
Ninja-Antonia Reggelin
Ninja-Antonia Reggelin is based in Berlin, where she is head of tax policy at a business association.
She previously worked at the OECD, contributing to the project that led to the publication of the BEPS Action Plan. Prior to that, she was with PwC Germany, where she focused on international tax structuring.
Ninja holds a Master’s degree (LL.M.) in International Trade Law from Bond University Australia and a Master’s degree (M.A.) in International Relations from the University of Kent Brussels School of International Studies.
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