Online advertising: tax risk from obligation to withhold tax?

The Internet is becoming increasingly important as a sales market and advertising venue. One of the most important or most frequently used online marketing channels are search engines such as Google, Bing or Yahoo. Paid advertising campaigns in social networks - such as Facebook or YouTube - also enable target group-oriented advertising.

There are essentially two options for search engine marketing: Either a company tries to increase the presence of its websites in search engine results or visibility in web search engines through targeted measures (so-called SEO strategy) or it decides to have a paid advertisement (consisting of ad title, description and link to its website) appear as a search result when defined search terms are entered (so-called SEM strategy). Google Ads, the search engine advertising service operated by Google, is the undisputed market leader, with annual global sales of almost USD 100 billion.

Now, the Bavarian tax authorities in particular take the view in tax audits - and also in specialist literature - that payments of domestic tax obligations to foreign operators of search engines and social networks would be subject to German taxation. However, it is not the foreign corporations such as Google, Facebook, etc. that are left behind, i.e. the tax burden, but the domestic advertiser.

The tax claim is based - at least in the opinion of the tax audit - on a provision according to which remuneration earned by a foreign company from the transfer of rights or the transfer of use of know-how and similar experience is subject to withholding tax deduction in Germany. Withholding tax is deducted in such a way that the domestic party liable for the remuneration (i.e. the advertiser) pays part of the remuneration for the foreign contractual partner to the German tax office; the tax rate is 15% plus the solidarity surcharge. If the domestic advertiser does not comply with this obligation (i.e. does not withhold tax), it is regularly held liable for the tax liability of the foreign portal operator.

It may be possible for the foreign online marketing providers or portal operators to obtain a refund of the taxes paid to the German tax authorities. However, the advertising agreements with the foreign portal operators generally require the (domestic) advertisers to pay all taxes and other levies, with the result that the costs of the advertising service are increased in each case by the German tax to be paid.

There is currently no official announcement from the German Federal Ministry of Finance (BMF) regarding the withholding tax liability of payments made in connection with the provision of advertising services by foreign portal operators. Nonetheless, there is a risk that domestic advertisers - in the course of a tax audit - will be held liable for withholding taxes that have not been paid. In the cases concerned, the notices of demand should be kept open by means of an appeal until an official statement has been issued by the Federal Ministry of Finance on the question of withholding tax or the Federal Fiscal Court has clarified this open legal question in the final instance.