The background to this was the reform of the German Copyright Law (UrhG) as of 7 June 2021. In particular, the exclusion of the provisions on the author's right to additional remuneration and the right of revocation for non-use in respect of computer programs had a direct impact on the withholding tax treatment of the granting of rights.
Pursuant to Section 50a para. 1 no. 3 ITA, income derived from the temporary cross-border licensing of rights (such as software) is subject to withholding tax. This also applies where, at the time the agreement is concluded, it is uncertain whether and when the granting of the right to use will end. In contrast, an acquisition of rights generally does not trigger a withholding tax obligation. An acquisition of rights is assumed where, under the agreement, the right of use remains with the party entitled to use it on a permanent basis. Consequently, the distinction between a temporary licensing arrangement and an acquisition of rights must be assessed based on the contractual provisions and the circumstances prevailing at the time the contract is concluded, provided that the actual implementation corresponds to the contractual agreement.
In light of the amendments to the copyright law, the BMF considered that, for the first time, a permanent economic transfer of copyright, and thus a classification as an economic acquisition of rights that is not subject to withholding tax, had become possible, notwithstanding that a transfer of legal title remains excluded under civil law. This continues to apply. A prerequisite is that the author is entirely excluded from exploiting the rights throughout their customary useful life. This requires, cumulatively, that the agreement grants comprehensive, exclusive, irrevocable and perpetual rights of use and exploitation in respect of the software. As long as rights deriving from copyright law and having an economic value remain contractually with the author or other foreign persons, a classification as an economic acquisition of rights is precluded.
It is worth noting that the BMF letter expressly states that withholding tax should be applied to mitigate liability risks if there is any doubt as to whether an arrangement qualifies as an economic acquisition of rights or as a temporary licensing arrangement subject to withholding tax.
In multi-tier contractual arrangements, each tier must still be assessed separately. Where the first tier in the contractual chain merely provides for a temporary licensing arrangement, a subsequent economic acquisition of rights at lower tiers is generally excluded.
In addition, mixed contracts are becoming increasingly important. Where agreements include not only software development services but also further service components, such as maintenance, support, hosting or other ancillary services, an appropriate allocation of the remuneration may be required.
At first glance, however, the draft Annual Tax Act 20262 appears to provide relief for those who are — or may potentially
be — subject to withholding tax under Section 50a para. 1 no. 3 ITA:
The draft provides for an increase in the threshold for the exemption procedure under Section 50c para. 2 sentence 1 no. 2 ITA, which does not require a prior application, from EUR 10,000 to EUR 100,000. This is intended to enable a larger number of remuneration debtors to refrain from withholding tax without a prior exemption procedure before the Federal Central Tax Office.
However, it should be noted that the assessment of entitlement to relief will continue to remain the responsibility of the German remuneration debtor. The exemption option can generally only be utilized where relief from German withholding tax is available under the applicable double taxation treaty, and the relevant requirements are met. If the software development services are provided by a foreign company, the anti-treaty-shopping provision of Section 50d para. 3 ITA must furthermore be considered as part of the assessment.
In addition, the obligation to file a withholding tax return is also expected to remain in force even if the increased threshold applies.
It therefore remains to be seen whether the stated objective of reducing administrative burdens will actually be achieved or whether, following the guidance in the BMF letter, tax will continue to be withheld “in cases of doubt” where no certificate of exemption is available.
In light of the BMF letter, companies should assess the potential tax implications. This includes taking stock of and reviewing existing agreements as well as conducting a tax analysis of newly concluded software development agreements and other digital service arrangements.
Your contact partners at BDO will be pleased to support you in identifying any required actions. We would be pleased to assist with tax-efficient contract structuring and, where necessary, applications for certificates of exemption, withholding tax returns and refund applications.
1 BStBl. 2022 I p. 138; Applicability most recently confirmed by the BMF letter dated March 20, 2026 (BStBl. 2026 I p. 394).
2 See the Federal Government’s draft bill dated August 14, 2026; BR-Drucksache 447/26.
