After German tax authorities in the state of Bavaria and others had begun to order some German companies, as part of ongoing audit procedures, to retroactively pay German withholding tax at a rate of 15% on payments to non-German online advertising providers, see the Eversheds Sutherland article on German Digital Ad Tax May Be A Concerning New Trend (published in Law360 on March 4, 2019), the Federal Ministry of Finance issued a uniform and binding resolution in response in favor of affected businesses. Contrary to this resolution, Bavarian tax officials had previously argued that a non-German company providing digital advertising services to a German advertising company constitutes a transfer of the use of technical know-how, which is being economically utilized by companies in Germany, thus triggering the claimed royalty withholding tax. However, the Federal Ministry of Finance together with the Finance Ministries of the various German states reviewed the issue and decided against following this approach.

Accordingly, in a March 14, 2019 press release, the Bavarian State Ministry of Finance and the Homeland announced that no tax is required to be withheld by German companies purchasing advertising from their payments on behalf of the non-German cross-border digital advertising services providers. In the press release, the Bavarian Minister Albert Füracker emphasized that "[t]he clarification now reached between the federal government and the states means that domestic companies will be spared unnecessary additional taxation in connection with online advertising." To ensure that German companies were not taxed before a binding clarification at the federal and state level was issued, the Bavarian tax authorities were instructed to keep these cases open without enforcing the withholding tax claim.

An official letter issued by the Federal Ministry of Finance, which will be published in the Federal Tax Gazette is to follow (likely in a few weeks).

Observations:

This outcome, a uniform decision binding the German federal and state tax authorities, is the best-case scenario for affected businesses. As a result, all German tax authorities must continue to adhere to the previous tax practice, German advertising companies do not have to shoulder potentially significant economic burdens while waiting for a final decision by the German tax courts, and legal certainty is provided to all businesses throughout Germany.

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