By Konstantin Sakuth, Linklaters LLP, Munich
In a circular letter earlier this month, the German Federal Ministry of Finance resolved the issue of whether payments from German advertisers to foreign providers of online advertisements are subject to German withholding tax.
After a few months of uncertainty, it has been clarified that there is no such thing as a “Google tax” in Germany, at least for now.
How did the discussion arise?
In mid-January 2019 an article was published in a German tax journal with the title “tax audits targeting online advertisements”.
The publication was written by an official of the Munich tax authorities, presenting his personal views. The conclusion of the author was that foreign providers of online platforms are subject to limited tax liability in Germany with their income derived from online advertisements provided to German advertisers.
According to the author, from a German tax perspective such services are characterised as the granting of use of procedures (i.e., algorithms) and, thus, payments for such services trigger withholding tax obligations for the German advertiser.
The legal framework
Foreign individuals or corporates are only subject to limited tax liability in Germany on their income derived from German sources. According to the German Income Tax Act, such income is inter alia income from a granting of a use or a right to use of commercial, technical, scientific, and similar know-how, knowledge and skills.
For example income from, plans, samples and procedures that are or were used in Germany would be subject to tax. For such income, the income tax is charged by way of withholding.
The debtor of the remuneration (i.e., the German advertiser) is liable for withholding the tax and transferring it to the Federal Central Tax Office (BZSt) for the account of the foreign provider. The withholding tax amounts to 15.825% (15% plus solidarity surcharge of 5.5% thereon).
Public outcry of taxpayers and tax practitioners
The article with its rather surprising result went viral and led to numerous follow-up publications in various tax journals.
One of the main counter-arguments was basically that the advertiser is not granted the use of the underlying algorithm but only receives the final outcome without understanding how the algorithm came up with the result. This should be seen as a mere service which does not enable the advertiser to use e.g., Google’s know-how allowing him to place advertisements himself.
In theory it would be possible for the foreign provider to apply for a tax credit or a future tax exemption. However, certain substance requirements would need to be met (for recent developments in this respect see ECJ in Deister and Juhler Holding, C-504/16 and C-613/16) and, more importantly, the terms and conditions of the foreign platform providers usually entail a net clause. This means that the remuneration to be paid is exclusive of any applicable taxes and such taxes are the responsibility of the advertiser (see, e.g., the country-specific Google Ads Terms & Conditions).
Hence, any German advertising company (including small start-ups with limited financial means) would bear the burden of the withholding tax if, e.g., Google does not afford the time and effort to get the tax back from the Federal Central Tax Office for the benefit of the withholding advertiser.
Everything back to normal
After a couple of months of uncertainty, a press release of the Bavarian Ministry of Finance dated 14 March gave reason for relief.
According to a statement of the minister, Bavaria initiated an agreement between the federal government and the federal states that no withholding tax applies in connection with online adverts. Further, to avoid any immediate harm, the Bavarian tax offices were instructed to keep relevant cases open without making final assessments in this respect.
By circular letter dated 3 April, the German Federal Ministry of Finance has confirmed this view and specifically pointed out that no withholding tax applies in case of search engine adverts, social media adverts, and other online adverts irrespective of the specific contractual remuneration method (e.g., cost per click or other).
In the end, after the topic has attracted a lot of attention and led to quite some turmoil in the German tax world, everything seems to be as it used to be.
It remains to be seen whether this will stay for good considering recent endeavours aiming for a “Google tax” such as in France and Austria.
—Konstantin Sakuth is an Associate with the tax team of Linklaters LLP in Munich.
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