Important note: There are four variants of the withholding tax currently in effect in the German taxation regime. These include withholding tax on construction, withholding tax on income of non-residents, final withholding tax, and withholding tax on income from capital. This article solely concerns itself with the withholding tax on income of non-residents. Every effort has been made to communicate the information as accurately as possible, all pertinent subclauses of tax laws are referenced where applicable. However, please make sure to read the date of publication of this blog post in order to ascertain when it is outdated.
What is the tax payable on?
As is the case for people resident in Germany, non-residents (people with limited tax liability in Germany) are subject to withholding tax on income earned from employment by an employer in Germany (wages tax) and on certain types of income from capital assets (final withholding tax, and withholding tax on income from capital). Under section 50a subsection (1) of the Income Tax Act, the following types of income earned by non-residents are subject to a special withholding tax:
- remuneration for artistic, athletic, entertainment and similar performances in Germany as well as the domestic exploitation of such performances
- remuneration for the use of, or the right to use, e.g., copyright, industrial property rights, expertise as well as remuneration generated from mediating the opportunity to contract a professional sportsmen for a limited period
- supervisory board fees
In exceptional cases, tax offices may require the withholding of tax from other types of income accruing to non-resident individuals (cf. section 49 of the Income Tax Act) if this is regarded as expedient to ensure the collection of tax (cf. section 50a subsection (7) of the Income Tax Act).
Who is liable to be taxed?
The party liable to pay the abovementioned remuneration (e.g., the concert organizer at whose concert a non-resident artist with limited tax liability performs) withholds at source the tax on the agreed fee for the abovementioned activities. That liable party then pays it over to the respective tax office on behalf of the beneficiary of the remuneration (e.g., the artist). It is simpler and more reliable to withhold tax rather than assessing such beneficiaries for income and corporation tax purposes. This is because the beneficiary will not have a place of residence/habitual abode in Germany (if the beneficiary is an individual) or a registered office or place of management in Germany (if the beneficiary is a company).
How much is the tax?
Tax must generally be computed on the full amount of income without any deductions. In the case of supervisory board fees, tax amounts to 30% of income; a 15% rate applies to the other forms of remuneration under section 50a subsection (1) of the Income Tax Act. The rate is 25% for withholding tax that is required by a tax office under section 50a subsection (7) of the Income Tax Act for the purposes of ensuring the collection of tax. The solidarity surcharge has to be added in each case.
An EU/EEA national who is resident in an EU/EEA state and, accordingly, certain corporations with limited tax liability, may, as part of the withholding tax process, claim their business expenses or income-related expenses which have a direct commercial connection to their income. In these instances, the tax rate increases to 30% for individuals and is 15% for corporations – plus the solidarity surcharge in each case.
Any income tax liability is generally deemed to have been discharged with the deduction of final withholding taxes. Assessment for income tax/corporation tax may be conducted subsequently in certain cases (cf. section 50 subsection (2) number 4 letter b and number 5 of the Income Tax Act, and section 32 subsection (2) number 2 of the Corporation Tax Act).
What is the legal basis?
Taxation by withholding (with the exception of wages tax and withholding tax on income from capital) is standardized in section 50a of the Income Tax Act. Procedures to provide relief from withholding taxes under double taxation agreements, the Parent-Subsidiary Directive and the Interest and Royalties Directive (such as the refunding of tax withheld, the exemption method and a simplified procedure for reduction of/exemption from taxation) are regulated in section 50d of the Income Tax Act.
Who collects the tax?
The withholding tax for non-residents is collected by the Federal Central Tax Office for remuneration paid after 31 December 2013 and by the Länder (state level administration of the German government) for remuneration paid prior to this date. The Federation and the Länder share the revenue in a predetermined ratio.
How did the tax develop?
Various regulations have applied to the withholding of tax from the income of non-residents since 1935, and in 1958 these were incorporated into the Income Tax Act. The 2009 Annual Tax Act revised section 50a of the Income Tax Act. Particular aspects of note include a change in the list of income subject to final withholding tax and the ability of EU/EEA nationals to elect to claim business expenses/income-related expenses as part of the withholding tax procedure.
The aim of this change was to adapt the provision to fit with double taxation law and European Court of Justice case law.