The German Federal Ministry of Finance has issued guidance on the tax treatment of the cross-border provision of software and databases on 27 October 2017. The topic has in the past been a subject of considerable legal uncertainty, hence the statement now offers some guidance. Its style of describing the applicable tax consequences on the basis of examples is a very welcome approach. The statement is particularly relevant for business models such as “Software as a Service” (SaaS) and “Application Service Providing” (ASP). In addition, the guidance also applies to other forms of provision of software by non-German tax resident providers to domestic customers.
The following questions typically arise with respect to the tax treatment of the cross-border provision of software and databases:
As a starting point, it should be stressed that according to the German tax authorities’ view, the tax treatment of the cross-border provision of software applies irrespective of whether it is rendered on a data medium or internet based, by way of download or via foreign servers. The German tax administration answers in the affirmative both liability of the foreign service provider to German tax and an obligation of the domestic customer to withhold German withholding tax in all cases in which the domestic customer is granted comprehensive rights of use for commercial exploitation inland – in particular rights to reproduce, to edit, to distribute or to publish. Commercial exploitation requires goal-orientated economic activity with the purpose of the customer to benefit financially from the rights granted. In addition, the commercial exploitation needs to be conducted in a domestic permanent establishment or comparable facility.
In case the rights of use provided by the non-German tax resident provider are no comprehensive rights of use or there is no commercial exploitation by the domestic customer, there are no German tax obligations according to the statement of the authority. Rights of use fail to meet the comprehensive rights of use criterion, if the specific use is admissible without the consent of the provider pursuant to copyright law or the provision of the software is granted for the intended use only. Intended use of the software includes, e.g., installation, download or the software application as well as editing and reproduction operations which shall enable the software application within the company, e.g. adjustments or integration works into the corporate IT environment. The criterion of commercial exploitation is not met in case only the results of software application are used commercially, e.g. slides created with a presentation software program are being presented in the course of a chargeable lecture event.
The tax treatment needs to be examined in each individual case and irrespective of the designation of the respective business model. This applies to, in particular, SaaS and ACP and also to so-called mixed contracts, where the compensation is partly owed for the provision of comprehensive rights of use for commercial exploitation and partly owed for other services of the provider.
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