The enhanced guidance aims to clarify areas of uncertainty.
Germany’s Ministry of Finance (MOF) issued a final decree on 27 October 2017 regarding the withholding tax treatment of payments made to nonresidents under software, cloud and/or database licensing arrangements. The final decree is based on a draft decree published on 17 May 2017 (see GTLN dated 6 June 2017).
The final decree confirms that outbound payments for the use of software are royalties subject to German withholding tax only where the user obtains a comprehensive right to economically exploit the software under the arrangement. No withholding tax should be triggered if the arrangement for which the payment is made focuses only on the designated or intended use of the software. The final decree contains 16 examples that describe circumstances where payments for the use of software would and would not be subject to German withholding tax.
The final decree includes three additional examples–one in a new section on payments for the use of databases by universities and public libraries–and some clarifications. No further significant changes have been made compared to the draft version. The three new examples are as follows:
The final decree provides welcome clarifications regarding the withholding tax treatment of outbound payments for the use of software and databases, and should help increase certainty in this area. The guidance should allow taxpayers to avoid the lengthy and burdensome process necessary to obtain a withholding tax exemption certificate where one is not required, by making clear those situations in which German withholding tax will apply to software and database usage payments.
However, the guidance does not apply to other forms of digital transactions, such as the streaming of content. Uncertainties relating to these types of transaction remain and, where there is any doubt, a royalty withholding tax exemption certificate should be obtained.
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