If you are an US based company licensing your product to German B2B customers, then this might be of interest for you:
Royalty income is only to be taxed in the USA. This is backed-up by the Double Tax Treaty between Germany and the USA.
So, the big question is, did you receive the total royalty payment by your German customer? It might be possible that you did not!
German companies are – by German law – obliged to withhold German withholding tax on royalties if paid to a foreign company. The withholding tax amounts to 15% plus 5,5% solidarity surcharge thereof, thus 15.825% in total. If this is the payment amount you are missing, then you should act!
Indeed, it is quite unreasonable that there is a German withholding tax obligation by law while the Double Tax Treaty between both countries says that Germany is not allowed to tax. However, Germany is known for its bureaucracy and this is the case for the withholding tax as well: US-based companies need an exemption certificate to avoid the German withholding by their customers. You can get it by filing an application at the German Federal Tax Office.
No worries, if your customer withheld tax in the past, you can apply for a refund retroactively for the past 4 years. Note: formalities should be checked before filing the application.
Although most companies, meanwhile, are familiar with the withholding tax schemes in other countries. I have made the experience that there is still potential to get a withholding tax refund which by the way is a double taxation in this case.
In principle and in most cases, the application procedure is simple. Note that I say “in most cases” as there are many cases where things are differentl
9 Steps to avoid withholding tax payments
- Check your German customer list and the payments received. If German customers pay you less royalties, than agreed, then ask them if they withheld taxes.
- If yes, then ask for a withholding tax certificate (so called “Steuerbescheinigung”). The German customer issues a so called tax certificate. It states when and for which royalty payment the withholding tax has been paid to the German tax office. The tax certificate also includes the German customer’s tax identification that is mandatory. With this number, the German Federal Tax Office can check whether the customer paid any withholding tax. Of course, only if payment has been made, the withholding tax can be refunded. If it is easier for the discussion with the customer, I can provide you with a blank withholding tax certificate. Feel free to ask me!
- Provide a copy of the license agreement for the application.
- Apply for a form 6166 at the U.S. Department of Treasury soonest possible. This can take a few weeks or even months based on my experience. A certification of US Tax Residency (form 6166) is needed for each fiscal year the refund is applied and in original (no copy).
- Get the German application prepared, signed, and send out to the German Federal Tax Office.
- It is recommendable to have assistance in German language when filing the German application as the German Federal Tax Office only speaks German.
- By the way, when applying for a refund, you can apply for an exemption in the same application as well. The exemption for future payments of your customer is granted for 3 years that is nice to have.
- Be aware that the German Federal Tax Office might have some additional questions to the application. Often, they even send out a questionnaire to be answered with the aim to check whether the US company is entitled for a refund since certain anti-abuse rules apply.
- When entering into a new license agreement with German B2B customers, consider applying the exemption certificate immediately. Just include this in your distribution process and you are good to go to avoid future double taxation.
Last updated August 2021
Disclaimer:
This article does not constitute legal or tax advice but is for general information only. Every personal/company situation is unique, so that your tax situation might be different as described in this article. Therefore, I always recommend professional advice to avoid any tax disadvantages.
