Digital companies such as Google, Ebay and Facebook can offer their products across borders and make profits without having to maintain a traditional business location in the country concerned. Therefore, their income is often not recorded in German tax law and remain untaxed. In future, this right of taxation may – at least according to the proposal of some EU states – be eliminated by means of a digital tax.
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Furthermore, at the beginning of 2019, the German tax authorities had the idea of collecting taxes (also retroactively) via a detour. The main victims were German SMEs. For the tax authorities suddenly argued, without prior notice and legal indication, that the placement of online advertising should be assessed as a transfer of rights for tax purposes. In the case of a cross-border transfer of rights, the so-called withholding tax is generally determined, i.e. in the case of the acquisition of rights from abroad, the payer must withhold and pay 15 % withholding tax and pay only the remaining 85 % to the transferor of the rights. If, for example, a German entrepreneur with Google Ads (the company is located abroad) agrees to a price of EUR 1 million for the placement of advertising, only an amount of EUR 850,000.00 may be paid to Google in the case of the transfer of rights and an amount of EUR 150,000.00 would have to be paid by the German company to the Federal Central Tax Office.
For the future, this procedure would have affected Google, Facebook and Co. (at least if the contractual agreements do not stipulate anything to the contrary), because the question of whether the withholding tax is ultimately to be paid to the company providing the service has to be clarified exclusively between the foreign company and the Federal Central Tax Office. In the opinion of the tax authorities, however, the withholding tax deduction should take effect retroactively from 2012. As a result of this recently developed and only partially comprehensible legal opinion, corresponding tax assessments were issued immediately. Companies that invested EUR 5 million in online advertising in 2012 and 2013, for example, should now pay taxes of EUR 750,000.00 in arrears. This led to a not inconsiderable number of completely unexpected insolvency risks, especially for medium-sized companies, because the chance of getting the withholding tax refunded by Google and Co. after 7 years is negligibly low or probably associated with such a high expenditure of time and money that insolvency would occur beforehand. In addition, the contracts of Google and Co. often contain provisions according to which Google always receives the full price and the German company itself has to bear an additional tax burden or costs.
Fortunately, the government has also become aware of this problem. In a press release dated 14 March 2019, the Bavarian State Ministry of Finance announced that a consensus had been reached at the federal-state level that a withholding tax burden on domestic companies when using online advertising was out of the question. Nevertheless, we recommend that the contracts with Google, Ebay, and Facebook and Co. be reviewed and adjusted in the future in order to be able to counter a possible renewed approach by the tax authorities at contract level.