If a German GmbH pays its foreign parent company for a trademark, a patent, software rights or know-how, the question of withholding tax on royalties paid to the foreign parent company arises. German law in principle requires a tax deduction under Section 50a of the Income Tax Act (Einkommensteuergesetz, EStG), which the paying GmbH must withhold, declare to the Federal Central Tax Office (Bundeszentralamt für Steuern, BZSt) and pay over. Whether the result is 15.825 per cent, a lower treaty rate or no tax at all depends on the double taxation agreement (DTA), on the EU Interest and Royalties Directive and on the substance of the parent company. The topic frequently comes up when an entrepreneur moves abroad, keeps their German GmbH and transfers rights to a foreign company. Whether they themselves remain taxable in Germany afterwards depends on residence and habitual abode under tax law; separate rules apply to the GmbH’s royalty payments. This overview reflects the legal position as at September 2026.
When Royalties Paid to the Parent Company Are Subject to Withholding
What Section 50a (1) No. 3 EStG Covers
Under Section 50a (1) no. 3 EStG, tax on persons with limited tax liability (beschränkt Steuerpflichtige) is levied by way of withholding where the income derives from remuneration for granting the use of, or the right to use, rights. The law expressly mentions copyrights and industrial property rights as well as commercial, technical, scientific and similar experience, knowledge and skills, for example plans, designs and processes. This also applies to a foreign corporation; its corporate income tax on this income is, as a rule, settled by the deduction (Section 32 (1) no. 2 of the Corporate Income Tax Act, Körperschaftsteuergesetz, KStG).
Typical scenarios:
- Trademark licence: The parent holds the trademark, and the GmbH sells products under it.
- Patents and processes: The GmbH manufactures using a technology whose property rights are held by the parent.
- Software with exploitation rights: The GmbH may reproduce, adapt or sublicense software.
- Know-how and franchise: Formulas, business concepts or technical expertise are made available.
- Group cost allocations: Flat-rate allocations may contain a licence component that must be considered separately.
The tax is a tax owed by the parent; the GmbH withholds it on the parent’s behalf (Section 50a (5) sentence 2 EStG). The liability risk, however, lies with the GmbH.
The Domestic Connection: Exploitation in Germany or Registration
The parent’s income must be domestic income within the meaning of Section 49 EStG. Under Section 49 (1) no. 2 (f) and no. 6 EStG, this is the case, among other things, if the right is exploited in a German permanent establishment. If the GmbH uses the trademark or patent in its business, this requirement is, as a rule, met. Since the Annual Tax Act 2022 (Jahressteuergesetz 2022), rights that are merely registered in a German register without being exploited here only give rise to domestic income if they are made available between related parties within the meaning of Section 1 (2) of the Foreign Tax Act (Außensteuergesetz, AStG) and no treaty precludes this. Parent and subsidiary are typically related parties.
Distinction: What Is Not a Royalty Payment
According to the Federal Ministry of Finance (BMF) circular of 27 October 2017, the provision of standard software and databases solely for their intended use does not fall under Section 50a (1) no. 3 EStG. The decisive factor is whether rights to further commercial exploitation are granted, such as reproduction, adaptation or distribution rights. According to the BMF circular of 3 April 2019, payments for online advertising to foreign platforms are likewise not subject to withholding. Also not covered are pure services provided by the parent without the granting of rights and the definitive transfer of a right. The boundaries are fluid; the contract should be classified before the first payment.
Amount of the Deduction: 15 Per Cent Plus Solidarity Surcharge
Under Section 50a (2) sentence 1 EStG, the deduction amounts to 15 per cent of the total receipts, plus a 5.5 per cent solidarity surcharge (Solidaritätszuschlag) on the amount deducted (Section 3 (1) no. 6, Section 4 of the Solidarity Surcharge Act, SolZG), a total of 15.825 per cent. The basis of assessment is the gross amount; Section 50a (3) EStG only allows the deduction of business expenses for performances and supervisory board remuneration. The rate of 30 per cent applies only to supervisory board remuneration.
If the GmbH promises the parent a fixed net amount, the tax must be grossed up to a higher gross amount.
Example (fictitious figures): Royalty of EUR 80,000 per year, no treaty relief.
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| Item | Gross agreement | Net agreement |
|---|---|---|
| Basis of assessment | EUR 80,000.00 | EUR 95,040.10 |
| Tax deduction 15% | EUR 12,000.00 | EUR 14,256.01 |
| Solidarity surcharge 5.5% | EUR 660.00 | EUR 784.08 |
| Payment to the parent | EUR 67,340.00 | EUR 80,000.00 |
| Total cost to the GmbH | EUR 80,000.00 | EUR 95,040.10 |
In this case, the net agreement makes the licence around 18.8 per cent more expensive. Between related companies, it must also be examined whether bearing the tax is at arm’s length.
Declaration, Payment and Tax Certificate
The tax arises when the remuneration accrues to the parent (Section 50a (5) sentence 1 EStG). The GmbH must declare and pay over the tax to be withheld in a calendar quarter to the BZSt by the tenth of the following month (Section 50a (5) sentence 3 EStG, Section 73e of the Income Tax Implementing Regulation, EStDV). The declaration (Steueranmeldung) must be submitted electronically; the BZSt only permits a paper declaration on application to avoid undue hardship. In the accounts, tax that has been withheld but not yet paid over must be recorded as a liability.
Two details are often overlooked:
- Declaration even without a deduction: The duty to file a declaration also applies if, owing to an exemption or the de minimis rule, no tax or only a reduced amount of tax is to be withheld (Section 50a (5) sentence 4, Section 50c (2) sentence 2 EStG).
- Certificate for the parent: On request, the GmbH must certify, using the official form, the creditor, the type and amount of the remuneration, the date of payment and the tax withheld (Section 50a (5) sentence 7 EStG). Without this certificate, there is no refund.
Liability of the GmbH and the Managing Director
The GmbH is liable for withholding and paying over the tax (Section 50a (5) sentence 5 EStG). If the deduction is not made, the tax office (Finanzamt) can issue a liability notice (Haftungsbescheid), often for several years following a tax audit. The parent can also be called upon as the tax debtor (Section 50a (5) sentence 6 EStG), but in practice the authorities usually turn to the GmbH.
In addition, the managing director (Geschäftsführer) is personally liable under Sections 34 and 69 of the Fiscal Code (Abgabenordnung, AO) in the event of an intentional or grossly negligent breach of duty. A shareholder-managing director who moves abroad and continues to run the GmbH from there remains subject to this duty; more on this in the article on managing director liability when relocating abroad.
Relief: Double Taxation Agreements, the EU Directive and the BZSt Procedure
The Basic Rule: Deduct First, Then Obtain Relief
Under Section 50c (1) EStG, the duties to withhold, pay over and declare also apply if a treaty or Section 50g EStG precludes taxation. The GmbH cannot itself invoke the parent’s rights. It may only refrain from or reduce the deduction if an exemption certificate (Freistellungsbescheinigung) has been issued or the de minimis rule applies.
Limitation by Double Taxation Agreements
Most German treaties limit withholding tax on royalties or allocate the taxing right exclusively to the licensor’s state of residence. How residence and allocation rules work is explained in the article on double taxation agreements for emigrants. Some examples:
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| Parent’s state of residence | Treaty rate for royalties | Note |
|---|---|---|
| USA | 0% (Art. 12 (1) DTA USA: taxation only in the state of residence) | Examine the limitation-on-benefits clause (Art. 28) |
| Switzerland | 0% (Art. 12 (1) DTA Switzerland: taxation only in the state of residence) | Relief via Art. 28 DTA Switzerland; also Section 50g (6) EStG |
| Luxembourg | 5% (Art. 12 DTA Luxembourg) | 0% possible via Section 50g EStG for associated companies |
| China | 10%, for the leasing of equipment 10% on 60% of the amount | Art. 12 DTA China |
| United Arab Emirates | No treaty: the 2010 DTA expired at the end of 31 December 2021; since 1 January 2022 only German law applies | Full deduction of 15.825% |
| State without a treaty | No limitation | Full deduction of 15.825% |
The specific treaty text in the current overview published by the Federal Ministry of Finance remains decisive.
Interest and Royalties Directive (Section 50g EStG)
Within the EU, under Section 50g EStG the tax is not levied on application if the GmbH pays royalties to an associated company in another member state. Companies are associated if one holds a direct interest of at least 25 per cent in the capital of the other or if they have a common parent holding at least 25 per cent in each (Section 50g (3) no. 5 (b) EStG). Further requirements: a legal form listed in Annex 3 to the EStG, residence and liability to corporate income tax without exemption in the other member state, beneficial ownership by the parent and an arm’s length amount, since an excessive portion is excluded under Section 50g (2) no. 2 EStG. Section 50d (3) EStG applies accordingly (Section 50g (4) EStG). Under Section 50g (6) EStG, Switzerland is treated equally if the Swiss company is an AG, a GmbH or a partnership limited by shares (Kommanditaktiengesellschaft) and is subject to unlimited Swiss corporate income tax. More extensive treaty rules remain applicable (Section 50g (5) EStG); refunds under Section 50g EStG bear interest (Section 50c (4) EStG).
For dividends paid to the parent, by contrast, the Parent-Subsidiary Directive applies (Section 43b EStG); withholding tax on distributions (Kapitalertragsteuer) is covered in the article on German withholding tax after emigration.
Exemption Certificate Before Payment
Under Section 50c (2) sentence 1 no. 1 EStG, the parent applies to the BZSt for an exemption certificate. Under the current wording, it is limited to a maximum of five years and applies at the earliest from receipt of the application (Section 50c (2) sentence 4 EStG). The BZSt is to decide within three months of submission of all supporting documents (sentence 6). The application must be submitted electronically; the parent proves its residence by means of a confirmation from its tax authority (Section 50c (5) EStG), comparable to the certificate of tax residence for private individuals.
If the certificate is only issued after the declaration, the declaration can still be amended for payments made from receipt of the application (Section 50c (2) sentence 3 EStG). For earlier payments, only a refund remains. The application should therefore be made before the first royalty payment.
De Minimis Rule up to EUR 10,000 and Planned Increase
Under Section 50c (2) sentence 1 no. 2 EStG, the GmbH may also refrain from the deduction without a certificate if a treaty precludes taxation and the payments to the same creditor do not exceed a total of EUR 10,000 in the calendar year. The declaration remains mandatory. On 12 August 2026, the Federal Cabinet adopted the government draft of the Annual Tax Act 2026; under this draft, the threshold is to rise to EUR 100,000 per creditor and year for payments accruing after 31 December 2026. Until the legislative process has been completed, this is only planned.
Refund After Payment
If the tax has been withheld, the BZSt refunds it to the parent on application (Section 50c (3) EStG). The deadline is four years from the end of the calendar year in which the remuneration was received; it does not end before the expiry of one year after the tax was paid, nor before a longer treaty deadline. The certificate under Section 50a (5) sentence 7 EStG must be enclosed; this application must also be submitted electronically.
Anti-Abuse Rule: Substance of the Parent Company (Section 50d (3) EStG)
A foreign company loses treaty relief under Section 50d (3) sentence 1 EStG to the extent that two requirements are met at the same time:
- Its shareholders are persons who would not be entitled to the relief if they earned the income directly.
- The source of income has no substantial connection with an economic activity of the company. Merely earning and passing on income is not deemed an economic activity, nor is an activity carried on with a business operation that is not adequately equipped.
The company can prove that none of the main purposes of its involvement is a tax advantage (sentence 2); Section 42 AO remains unaffected. A parent that merely holds the right and passes on the fees is at risk. It is in a stronger position if it develops, maintains, protects and markets the right itself and has staff and premises for this purpose. If the shareholder lives in the parent’s state of residence and would be entitled to the same treaty relief if they received the income directly, there is much to suggest that the first requirement is not met in the first place. This may be assessed differently for relief under the Directive pursuant to Section 50g EStG, because a natural person cannot claim the benefit of the Directive.
Unclear legal position: obtain a binding ruling. Where the tax assessment in Germany is not certain or is foreseeably subject to change, an application for a binding ruling (verbindliche Auskunft) from the tax office should precede implementation (Section 89 (2) AO). It binds the tax office to the assessment given for a precisely defined set of facts that has not yet been realised, and a fee is charged for it. In our view, a tax adviser who does not recommend this in such a situation is acting irresponsibly: the client risks having to litigate over the result years later, which costs time and money.
Transfer Pricing: The Royalty Must Be at Arm’s Length
Between parent and subsidiary, the royalty must comply with the arm’s length principle of Section 1 AStG. The GmbH must keep records of its business relationships with the parent, including the reasons why the prices are at arm’s length (Section 90 (3) AO). If the fee is excessive, there is a risk of a constructive dividend (verdeckte Gewinnausschüttung) under Section 8 (3) sentence 2 KStG; for this portion, withholding tax on investment income (Kapitalertragsteuer) rather than the royalty deduction then comes into question.
The reverse route is also delicate: if the GmbH transfers a trademark or technology it has developed itself to the foreign company and licenses it back, it must receive an arm’s length price. If an entire function including opportunities and risks is transferred, the rules on the transfer of functions (Funktionsverlagerung) apply (Section 1 (3b) AStG). Related questions are covered in the article on exit taxation of business assets.
Licence Barrier (Section 4j EStG): Abolished Since 2025
Many accounts still mention the licence barrier (Lizenzschranke) of Section 4j EStG, which restricted licence expenses paid to related parties in low-tax preferential regimes. It was repealed by the Act to Amend the Minimum Tax Act and to Implement Further Measures of 22 December 2025 (BGBl. 2025 I No. 353) and, under Section 52 EStG, applies for the last time to the 2024 assessment period. It may still play a role for earlier years in a tax audit. For current payments, the transfer pricing rules and the restriction on deductions in the case of tax mismatches (Section 4k EStG) must still be observed.
Irrespective of this, one quarter of licence expenses is added back for the GmbH’s trade tax (Gewerbesteuer) to the extent that the total of the amounts to be added back exceeds EUR 200,000 (Section 8 no. 1 (f) of the Trade Tax Act, GewStG). For VAT purposes, the GmbH, as a rule, owes the tax on the foreign parent’s licence under the reverse charge procedure (Section 13b of the VAT Act, UStG) and, if it is entitled to full input tax deduction, can deduct it at the same time.
The Emigrant Scenario: The Shareholder Moves Away, the GmbH Stays
The topic gains in importance when the shareholder of a German GmbH moves abroad and holds or establishes another company there:
- Contributing shares to a foreign holding company: If the foreign company becomes the parent of the GmbH, the contribution or the move may trigger exit tax on GmbH shares. Whether a holding structure before emigration makes sense requires a separate review.
- Rights held personally by the shareholder: If, after moving, the shareholder licenses a privately held trademark to their GmbH, this payment is also subject to Section 50a (1) no. 3 EStG. Relief depends on the treaty with their new state of residence; Section 50d (3) EStG only concerns corporations.
- Place of management: If the foreign company is in fact managed from Germany, it may be subject to unlimited tax liability here; in that case, it is not Section 50a EStG but full German taxation that applies. Conversely, managing the GmbH from abroad may affect its residence; the consequences of moving the company’s registered office abroad must also be examined.
- Time before the move: As long as the shareholder is subject to unlimited tax liability, the controlled foreign company rules (Hinzurechnungsbesteuerung) under the Foreign Tax Act may capture the royalty income of a low-taxed foreign company.
The foreign tax law of the state in which the new company is resident must be clarified with a local adviser.
Example (fictitious): Carsten holds 100 per cent of a German sales GmbH. He moves to another EU member state, establishes a corporation there without staff of its own and contributes his privately held trademark to it. From January, the GmbH pays a monthly royalty of EUR 12,000. Without an exemption certificate, it must withhold EUR 5,697.00 (15.825 per cent of EUR 36,000) in the first quarter and declare it by 10 April; the de minimis rule does not apply because the very first payment exceeds EUR 10,000. Exemption under Section 50g EStG requires, among other things, that the new company passes the anti-abuse test; without staff and an activity of its own relating to the trademark, this is questionable. In addition, the fee must be at arm’s length.
Common Mistakes in Practice
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| Mistake | Consequence | Remedy |
|---|---|---|
| Licence booked as a service | Liability, often for several years | Classify contracts before the first payment |
| Exemption only applied for after the first payment | Full deduction until receipt of the application | Apply before the contract begins |
| No declaration despite exemption | Breach of the duty to declare | Quarterly declaration even without an amount deducted |
| Net agreement without grossing up | Additional tax claim | Agree gross amounts or gross up correctly |
| Parent without substance | Relief refused under Section 50d (3) EStG | Review functions, staff and documentation |
| Excessive fee | Constructive dividend | Transfer pricing documentation (Section 90 (3) AO) |
| Expiry of the exemption overlooked | Full deduction from the end of the period | Monitor deadlines for each creditor |
Conclusion
Royalties paid by a German GmbH to its foreign parent company are in principle subject to the tax deduction of 15.825 per cent under Section 50a (1) no. 3 EStG, which the GmbH must declare quarterly to the BZSt and for which it is liable. Treaties and the Interest and Royalties Directive can reduce the burden to zero, but only via the procedure under Section 50c EStG, where the parent has sufficient substance and the fee is at arm’s length. The licence barrier no longer plays a role from 2025; the increase of the de minimis threshold to EUR 100,000 is not yet law. A shareholder who moves away and transfers rights to a foreign company should plan the licence agreement, exemption, transfer pricing and exit tax together.
Frequently Asked Questions
Must the GmbH withhold tax even if the treaty provides for 0 per cent?
Yes, as long as there is no exemption certificate and the de minimis rule does not apply (Section 50c (1) EStG). The parent can subsequently have the tax refunded.
How long is an exemption certificate valid?
For a maximum of five years, at the earliest from receipt of the application by the BZSt (Section 50c (2) sentence 4 EStG), and only as long as the requirements continue to be met.
Does the tax deduction apply to SaaS or cloud subscriptions from the parent?
As a rule, no, if only the intended use of standard software is granted. It may be different if the GmbH receives rights to reproduce, adapt or sublicense.
Who is liable if the deduction was forgotten?
In the first instance the GmbH (Section 50a (5) sentence 5 EStG). In the event of an intentional or grossly negligent breach of duty, the managing director may be personally liable under Sections 34 and 69 AO, even if they now live abroad.
Does the licence barrier still have to be observed?
No longer for expenses from the 2025 assessment period onwards; Section 4j EStG only applies to periods up to and including 2024.
Attorney Dr. Johannes Fiala and the Munich-based firm, which focuses on international succession law, tax law and asset protection, advise entrepreneurs and shareholders on cross-border licensing structures, from the tax deduction under Section 50a EStG to exemption and transfer pricing and coordination with a move abroad. Dr. Fiala has published extensively on questions of emigration and asset protection. Please get in touch with the firm without obligation to discuss your individual situation in an initial consultation.
