Foreign companies doing business in Germany may be subject to withholding tax (Quellensteuer) on certain types of income, even if they do not maintain a permanent establishment in the country. However, based on double taxation treaties (DTT) or the EU Parent-Subsidiary Directive, a reduction or exemption from withholding tax is often possible – if the correct procedures are followed.
This article outlines the German legal framework for withholding tax, explains when a Freistellungsbescheinigung (certificate of exemption) is needed, and describes how to claim refunds for tax that was already withheld.
Legal Basis for Withholding Tax in Germany
Germany imposes withholding tax on certain domestic-source payments to foreign recipients, based on:
- § 43 et seq. of the German Income Tax Act (Einkommensteuergesetz – EStG)
→ Governs domestic withholding on interest, royalties, dividends, etc. - § 50d EStG
→ Governs relief under double taxation agreements (DTAs) or EU directives, including the procedural rules for exemption or refund.
Common payments subject to withholding tax in Germany include:
- Dividends paid to foreign shareholders (typically 25% + solidarity surcharge)
- Royalties paid to non-resident licensors
- Fees for services provided by foreign artists, athletes, or supervisory board members
- Construction services or similar contracts to non-resident subcontractors
- Licensing, consulting or technical fees under specific conditions
Option 1: Relief at Source (Freistellungsbescheinigung)
If the conditions of a double taxation treaty (DTT) or the EU Parent-Subsidiary Directive are met, the withholding tax can be reduced or fully eliminated from the outset. For this, the foreign recipient must apply for a Freistellungsbescheinigung (certificate of exemption) before the payment is made.
Key requirements:
- Application is made by the foreign recipient (or their representative)
- The payer (German company) must have the valid certificate at the time of payment
- The application is submitted to the Federal Central Tax Office (BZSt)
- Documentation includes proof of residence, beneficial ownership, and corporate structure
This method avoids overpayment and simplifies accounting on both sides. In the case of dividend distributions, exemption is typically only granted to corporate shareholders who hold a minimum participation (usually 10%) and fulfill holding period requirements.
Option 2: Refund of Withholding Tax
If withholding tax has already been deducted and transferred to the German tax authorities, a refund application can be submitted. This may apply to:
- Dividend payments to foreign corporate shareholders
- Royalty or license payments
- Contractual payments for services under § 49 EStG (limited tax liability)
Key steps:
- Application must be submitted to the Federal Central Tax Office (BZSt)
- A specific refund form is required, which differs by country of residence
- Submission must include:
- Certificate of residence from the home-country tax authority
- Proof of payment and withholding
- Explanation of treaty entitlement or EU directive
- Refund must generally be claimed within four years from the end of the calendar year in which the income was received
Refunds may take several months to process and depend on complete documentation and review by the BZSt.
Common Challenges and Considerations
- Missing or incorrect certificates can block relief
- Substance requirements (economic presence, beneficial ownership) must be met
- Group structures must be transparent and well-documented
- Timing matters: Applying for exemption before payment is always preferable
- The German Anti-Treaty Shopping Rules (§ 50d EStG, para. 3) may restrict treaty benefits if the recipient is a passive holding without sufficient substance
Conclusion: Strategic Handling of Withholding Tax
Foreign companies receiving income from German sources should carefully assess their withholding tax obligations and entitlements. A structured approach – including timely applications for exemption or refund – ensures efficient tax treatment and avoids unnecessary costs.
For many international groups, this area touches on both tax planning and operational compliance.
Professional support and accurate documentation are key.
If you have questions about withholding tax in Germany or need help with a Freistellungsbescheinigung or refund procedure, feel free to contact us at office@wwkn.de or visit www.wwkn.de/en
