Tax withholding under Section 50a of the German Income Tax Act: License fees to foreign rights holders
Payments to persons with limited tax liability for the granting of use or the right to use rights are classified as income subject to tax withholding under Section 50a (1) No. 3 of the Income Tax Act.
The debtor of the payment is obliged to withhold 15% withholding tax on the gross payment plus the solidarity surcharge and to pay it to the Federal Central Tax Office (BZSt).
Many double taxation agreements (DTAs) limit the German right to levy withholding tax on license fees or exclude it altogether. Nevertheless, Section 50c (1) of the Income Tax Act stipulates that the provisions on withholding, payment, and declaration of withholding tax are to be applied initially, even if the relevant DTA provides otherwise.
The creditor with limited tax liability can subsequently apply to the BZSt for a refund of the withheld and paid withholding tax (refund application under Section 50c (3) of the Income Tax Act).
Alternatively, the person with limited tax liability can apply to the BZSt for a certificate before receiving the payment, which reduces or completely exempts the tax deduction. The debtor of the payment must then only withhold tax to the extent permitted by the DTA (exemption procedure under Section 50c (2) sentence 1 no. 1 of the Income Tax Act).
Both procedures are formally burdensome and require numerous supporting documents (e.g. certificates of residence from abroad). In practice, the BZSt often needs several months to process exemption or refund applications; it can take up to twelve months to issue a refund of the withheld withholding tax or the exemption certificate.
The exemption procedure is particularly used in practice for transactions between affiliated companies, as sufficient lead time can usually be planned here. It is also particularly suitable for long-term legal relationships (e.g., ongoing royalty payments), especially as exemption certificates can be issued for up to five years.
For short-term or one-off royalty payments, the exemption procedure is often not practicable in good time, so the refund procedure is generally used.
Exemption option for license payments in DTA cases
In addition to the exemption procedure, Section 50c (2) of the Income Tax Act provides another option for avoiding tax withholding at source: Under Section 50c (2) sentence 1 no. 2 of the Income Tax Act, the debtor of the payment can refrain from withholding tax on payments for the granting of rights within the meaning of Section 50a (1) no. 3 of the Income Tax Act without a prior application and without an exemption certificate, insofar as domestic taxation is precluded by a DTA. Currently, however, this provision only applies if the sum of the relevant payments made by a debtor to the same creditor in a calendar year does not exceed €10,000 (exemption threshold).
If the requirements are met, the debtor of the payment may immediately apply the DTA rules for withholding tax—in many cases, no tax deduction is actually required. The responsibility for checking whether the conditions for exemption under Section 50c (2) sentence 1 no. 2 of the Income Tax Act are met shifts to the debtor of the payment. In particular, he must determine to what extent the applicable DTA allows withholding tax. If the DTA or the exemption threshold is applied incorrectly, the debtor is liable for the unpaid withholding tax. The situation is further complicated by the fact that German DTAs provide for very different withholding tax rates on royalties: depending on the DTA, these range from 0% (full exemption) to 25%; in total, 13 different residual tax rates are possible.
Despite the relief, there is a notification requirement: the debtor must report the payments to the BZSt, even if no tax is withheld. This enables the tax authorities to maintain their audit capability.
The exemption option is particularly suitable for debtors with a larger number of changing creditors.
According to the draft of the 2026 Annual Tax Act, the exemption threshold under Section 50c (2) sentence 1 no. 2 of the Income Tax Act is to be increased from the current €10,000 to €100,000 per creditor and debtor. According to the draft, the removal of the threshold will first apply to payments received after December 31, 2026. However, this change is still in the legislative process.
Conclusion
The planned increase in the exemption threshold and the significant expansion of the scope of Section 50c (2) sentence 1 no. 2 of the Income Tax Act would noticeably enhance the practical importance of the exemption option. For many royalty payments to persons with limited tax liability, the time-consuming and costly exemption or refund procedures could in the future be dispensed with, significantly reducing the administrative burden for both debtor and creditor. At the same time, foreign creditors would benefit from a clear liquidity advantage compared to the refund procedure. The reduction in the number of applications should also lead to shorter processing times for the remaining cases at the BZSt.
However, the increase in the exemption threshold also raises the liability risk for debtors: incorrect application of the exemption option could in future result not only in a maximum liability of €1,500 (€10,000 × 15%), but in a liability of up to €15,000 per creditor (plus solidarity surcharge). It is therefore even more important to precisely monitor the applicable threshold each time, to carefully check the relevant DTA, and to adjust contractual agreements accordingly.
To limit liability risks, debtors should withhold tax on royalties if it is unclear whether the requirements of Section 50c (2) sentence 1 no. 2 of the Income Tax Act are fulfilled. Given the complex DTA provisions and liability risks, expert tax advice is recommended.
