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Does Bavaria introduce withholding tax for digital advertising services?

Withholding tax for digital advertising services

The debate surrounding the taxation of online advertising has been raging for some time. The OECD raised the issue as part of its BEPS initiative looking at the tax challenges of the digital economy, but has not come to a conclusive assessment thus far.


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The European Commission meanwhile developed a proposal back in March 2018 for a directive on the common system of a digital services tax on revenues resulting from the provision of certain digital services. A number of European countries (e.g. Spain, Italy, the UK and France) are also planning to introduce a digital tax at the national level. 

Revenue officers in Bavaria now believe that they have found a way to tax certain digital services on the basis of existing tax law; namely, through the collection of withholding tax on these services. Withholding tax is targeted at income particularly from banner or search engine advertising which a domestic taxpayer buys from a portal operator not resident in Germany. In the case of banner advertising, the German taxpayer places banner advertisements for a fee on a portal belonging to the foreign portal operator (e.g. Google, Facebook, Instagram, etc.). In the case of search engine advertising, the taxpayer pays to appear on the list of search results when users enter certain key words into the search engine. The transaction is typically based on standardised contracts and is processed by a computer program run by the portal operator without human intervention. 

According to the Bavarian revenue officers, this kind of automated advertising does not qualify as a service but rather as granting of advertising rights (cf. section 49 (1) no 2(f)(aa) of the German Income Tax Act [EStG]) or as granting the use of processes/algorithms (cf. section 49 (1) no 9 EStG). This would make the domestic taxpayer liable to pay withholding tax pursuant to section 50a (1) no 3 EStG at 15% of the proceeds. Since these cases are raised during tax audits, there is often no certificate of exemption available and withholding taxes can be collected retroactively for many years. The granting of rights is also subject to trade tax addition under section 8 no 1(f) of the German Trade Tax Act [GewStG], meaning that companies that purchase the above-mentioned advertising via a domestic advertising agency could also be affected by the classification of advertising as a granting of rights. Even if this is still “just” a Bavarian initiative, we expect this issue to become the subject of discussion at federal/state level and potentially be welcomed elsewhere. In the worst case scenario we can expect a coordinated uniform approach from tax authorities across Germany. 

Companies should check sooner than later whether they are affected by the new “Bavarian” digital tax. An initial step is to ask whether they have previously placed a banner or search engine advertisement. If the answer is yes, an initial assessment of the tax risk should be conducted based on the concluded contracts. As part of this assessment it should be verified whether the focus of the transaction is not in fact a straightforward service, so that the domestic company would not simply become an unintentional tax collector for the likes of Google.

Do you have any questions relating to this issue? Please do not hesitate to contact us. We are happy to help you and keep you up to speed on any further developments.

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