German Ministry of Finance issues official guidance on withholding tax for software development services

Local contact

EY Global

22 Aug 2022
Subject Tax Alert
Categories Corporate Tax
Jurisdictions Germany
  • Persons selling software development services from outside Germany to German customers, or acquiring such services in Germany from abroad will need to consider this new guidance on potential withholding tax obligations.

  • The guidance addresses changes in German copyright law and for the first time sets forth the official view on when withholding tax obligations will arise in cross-border software development projects involving German principals.

  • Taxpayers should assess past and future software development transactions involving German principals for compliance with the guidance, and consider proactively obtaining treaty clearances to ensure no withholding obligations arise.

Executive summary

On 2 August 2022, the German Federal Ministry of Finance (MoF) issued guidance on the withholding tax treatment of remuneration paid to nonresidents for software development services.

The withholding tax treatment of remuneration in connection with software purchases or software development - even after a basic classification of the payments was made by the MoF guidance dated 27 October 2017 - repeatedly gives rise to discussions between remuneration creditors and remuneration debtors regarding the obligation to withhold tax pursuant to Section 50a (1) No. 3 German Income Tax Act (ITA). The discussions center around whether transactions should be viewed as a final transfer of a right or as a (temporary) license to use a right for a limited period of time, as only the latter gives rise to withholding tax under domestic law.

Detailed discussion

Whether a right can be viewed as being finally transferred critically depends on the underlying copyright provisions. Until a change in copyright law with effect from June 2021, certain specifics of the German copyright law caused significant uncertainty with respect to whether software development agreements could be viewed as finally transferring the rights in the developed software to the entity ordering the services as only in this case, remuneration would be outside the scope of German withholding tax.

The copyright provisions for computer programs have been amended as of 7 June 2021 in such a way that: (i) the author's right to subsequent remuneration; and (ii) the right of recall in the event of non-exercise no longer apply to computer programs. The MoF guidance now comments on the tax implications of these changes in the copyright law to software development services.

In the opinion of the MoF, an economic purchase of rights (which is not subject to withholding tax) should from the date of the law change in principle be possible - even if the copyright still cannot be legally transferred. The MoF explains this with the fact that since the amendment of the Copyright Law, it is possible in principle to transfer the legal position in computer programs in such a way that no further economic position remains with the author. However, it depends decisively on the details of the contractual provisions as to whether they provide for the granting of comprehensive, exclusive and irrevocable rights of use and exploitation to the computer program for an unlimited period of time.

According to the MoF, the following factors would indicate that there was not a final transfer of rights:

  • The author/developer (or another person or company) has been granted a right to a further (financial) participation.
  • The author/developer (or another person or company) is granted the right to another exploitation of the work.
  • The transfer is limited in time. Such a limitation may also exist if it arises only as a result of the occurrence of further conditions.
  • The author/developer (or other person or company) has the right to revoke the transfer. It is irrelevant whether these exist only in specific (previously defined) individual cases, since in that case the economic rights of use are generally not transferred comprehensively.
  • Certain areas of the rights of use and exploitation are retained by the author (or other persons or companies). This criterion is met if the exercise of certain rights of use/exploitation is made dependent on the consent of the author (or other persons or companies).

For the assessment of the criteria, it is irrelevant whether those rights of the author/developer arise from the contract itself or from the law of another country applicable in the specific individual case.

The MoF also comments on multi-level contractual relationships (e.g., back-to-back transactions) and clarifies that it must be examined at each level whether an economic purchase of rights or a licensing is given. If a licensing is given at one level, an economic purchase of rights is ruled out for all subsequent levels in the view of the MoF, even if the party assigns all rights that it has received itself.

The principles of the guidance apply to all payments made after 6 June 2021. The MoF does not explicitly comment on the tax treatment of payments prior to that date. However, the comments in the Tax Authority’s guidance suggest that the tax authorities would view these payments as subject to withholding tax.


It is a positive development that the MoF has addressed this highly relevant question, which is often a source of conflict in practice, and thus provides taxpayers with criteria for classifying existing contracts and aligning future contracts accordingly. However, the (still) strict interpretation of the requirements for the economic purchase of rights by the MoF means that – where strict criteria for such purchase are not met – compliance means increased administrative work and potentially lengthy discussions with the remuneration creditors for taxpayers in double tax treaty situations (which often provide for a reduction of the withholding tax to zero anyway), as such a strict standard is not known in many other countries and the procedure for obtaining an exemption certificate with the Federal Central Tax Office often leads to long delays.

Nonresident service providers offering software development services to German customers should be aware of the criteria set forth by the MoF and should consider aligning their contractual terms with these requirements to ensure that their services do not trigger withholding tax in Germany. If it is not possible to adapt the contractual terms for business reasons, a withholding tax exemption certificate should be applied for with the German Federal Tax Office very early on in project as the average processing time for applications is currently around 6 to 12 months and customers would need to withhold 15.8% withholding tax on payments made in absence of such certificate.

For additional information with respect to this Alert, please contact the following:

Ernst & Young GmbH, Munich
  • Christian Ehlermann
  • Katja Nakhai
Ernst & Young LLP (United States), German Tax Desk, New York
  • Tobias Appl
  • Thomas Schmitz
  • Jasan Bsharat
  • Matthias Ritter
  • Alexander Schega
  • Janina Kolb

For a full listing of contacts and email addresses, please click on the Tax News Update: Global Edition (GTNU) version of this Alert.