Excursus: Withholding tax and GbRs

Profits earned by partners in a German-based partnership under the German Civil Code (GbR) who reside abroad may be subject to withholding tax.

If a German partnership under the German Civil Code (GbR) includes partners residing abroad, their income may also be taxable in Germany.

The following scenarios must be distinguished:

• Performance with payment of fees by external organizers
• Own events and project funding
• Issues regarding permanent business establishments

If the GbR receives remuneration from an organizer for a performance that takes place in Germany and some of its partners reside abroad, the question arises as to whether the GbR or the organizer is responsible for paying the withholding tax. While this question cannot be answered definitively from a legal perspective, it can be clarified, for example, by obtaining a binding ruling from the Federal Central Tax Office (BZSt).

In practice, the GbR typically withholds and remits the tax on the profits distributed to the partners residing abroad. If you want the organizer to pay withholding tax on the portion of the fees due to partners based abroad, you will need to clarify with the BZSt whether it can be paid at this first stage. In such cases, the GbR would likely be exempt from having to remit withholding tax again.

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The GbR sells tickets for a performance in Germany and pays the partners a proportionate share of the profits for their performance activities or applies for project funding from which the partners are paid proportionally for a performance in Germany in the form of profit distribution ("personal fees"). Income in the form of profit distributions (joint income) may also be subject to withholding tax. Accordingly, when a German-based GbR (e.g., an artist collective organized as a GbR) generates income from performances and distributes profits to its partners, the portion paid to the partner(s) abroad is subject to withholding tax. Since the GbR is responsible for distributing the profits, it is also obligated to withhold and remit the withholding tax to the BZSt. The GbR should issue a tax certificate in the name of the partner residing abroad so that the withholding tax retained in Germany can be taken into consideration in that partner's country of residence.

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If the GbR maintains a "permanent business establishment" in Germany, it is advisable to check with the local tax office whether profit distributions to partners resident abroad are taxable in Germany as income attributable to this permanent business establishment. A "permanent business establishment" is generally defined as a "fixed place of business" such as an office, theatre, studio, workshop or concert hall operated or rented by the GbR for its activities. Some tax offices interpret this definition very broadly. In some cases, even renting a rehearsal room may qualify as having a permanent business establishment. If the GbR has a permanent business establishment, profit distributions to partners residing abroad may no longer fall within the scope of Section 50a EStG (withholding tax). Instead, the partners must file individual income tax returns in Germany and declare and pay tax on the portion of their income associated with the permanent business establishment (tax assessment). Since they are not German tax residents, they are not entitled to the personal exemption. This means that their profits are taxed from the first cent, often leading to a higher tax burden than the standard 15% withholding tax (plus solidarity surcharge). It is therefore imperative to clarify whether withholding tax is to be levied in accordance with Section 50a EStG, or whether a separate tax assessment is necessary due to the existence of a permanent business establishment in Germany. Otherwise, there is a risk of substantial clawbacks from the tax office.

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