International Tax Law

Federal Ministry of Finance (BMF) circular concerning tax deduction on remuneration from software development

On 2 August 2022, the tax authorities published a circular on the application of tax deductions under 50a of the German Income Tax Act (Einkommensteuergesetz – EStG) for remuneration from software development services. The BMF circular concerns cases in which German businesses develop software using businesses that are resident abroad.


Income from the temporary transfer of rights is subject to a tax deduction of 15.825 percent if the recipient of the remuneration is not resident in Germany. The tax is deducted by the domestic party who is due to pay the remuneration.

The complete acquisition of a right by a business that is resident in Germany by a person not resident in Germany is not subject to any tax deduction.

In relation to software development services, copyright law must be observed. According to this, a complete transfer of developed software under civil law is legally ruled out. Thus, total buy outs are not legally possible on principle. Due to the legal complexity of software developments, this topic is often the subject of legal due diligences in mergers and acquisitions.As a rule, with developed software only the granting of a comprehensive right of use and exploitation is an option. Transferring the rights under civil law is thus not possible.

These legal principles apply regardless of whether the software is developed based on a service contract, a contract to produce a work or any other kind of contract. With regard to software development, they apply between third-party businesses and between associated companies. They also apply in principle both to purely domestic cases (which do not result in a duty to deduct tax) and in cases where software is developed across borders.

“A GmbH”, resident in Germany, has a Bulgarian software developer develop software as part of a service contract. Both businesses involved desire that the Bulgarian software developer should not obtain “any rights in the software”.

Excluding all rights and thereby completely transferring the software to A GmbH under civil law is ruled out since the Germany Copyright Act (UrhG) applies. A grant of use is the only thing that comes into consideration.

However, in the case of a grant of the use of rights, the party subject to pay remuneration (A GmbH) has to deduct tax from the foreign software developer’s remuneration amounting to 15.825 percent. It may be possible to reduce this under the DTA between Germany and Bulgaria or the EU royalties directive.

The question is whether a “commercial sale of rights” is an option when there is no “legal sale of purchase”. If it is, this would not lead to a deduction for tax.


Current developments

The BMF circular addresses the implications for tax deductions against the background of the complete transfer of developed software not being possible.

This makes the BMF circular relevant to all German businesses developing software abroad through associated or non-associated companies.

The reason for the circular is the amendments to the German Copyright Act (Urhebergesetz – UrhG) made in 2021, according to which s.32 (author’s mandatory financial participation) and s.41 of the UrhG (revocation of right of use by the author if the entitled party does not exercise its right of use) no longer apply to software from 7 June 2021.

According to the circular, despite the general application of the law of copyright to software, a “commercial” sale of rights may still exist for tax purposes. The result of this is that no tax has to be deducted.

The condition for this is that the software development contract should provide for the granting of comprehensive, exclusive, indefinite and irrevocable rights of use and exploitation in the software.
However, if the author retains commercially relevant rights, a commercial sale of rights is typically ruled out. The consequence of this is that withholding tax would have to be deducted in these cases.
If software is developed via several contracts in several stages (e.g., a contract developer employs the services of a sub-contractor), it should be ensured that the requirement of granting comprehensive, exclusive, indefinite and irrevocable rights of use and exploitation in the software is met in all the stages. The background here is that a first-level contract (e.g., the contract between the commissioning party and the developer) can only grant rights in the software to the extent that this was also provided for in second-level contracts (e.g., in the contract between the developer and a sub-contractor).

In the above example, the Bulgarian software developers commission a Slovenian company with producing part of the software for A GmbH.

In order for no German tax to be deducted from the Bulgarian company’s (primary) remuneration from A GmbH, it must first be established that all the criteria for a “commercial sale of rights” between these two companies have been met. Furthermore, it must be ensured that this has also been fulfilled between the Bulgarian and the Slovenian software developers. This is the only way that the Bulgarian software developers can grant rights to A GmbH.
The circular of the BMF is to be applied to development projects carried out on contract and to payments that were made since 7 June 2021 (when the amendments to the UrhG came into force).


Next Steps

If your business plans to develop software abroad, the contract should be checked to see whether the criteria for a “commercial” sale of rights have been met.

If this is not the case, it should be amended. Also, tax should be deducted for the past – if an exemption certificate has not been issued – and declared to the tax office.

Our team is ready to give you further information and to check your contractual arrangements.


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