HOT/Important: Google Ads tax liability trap

Nowadays, extremely many use Google Ads to promote their own services, web stores and the like. Be it in the advertising network and/or directly on Google Search.

Currently, however, a major liability trap is developing that primarily affects large advertisers at Google, i.e. marketing agencies, startups and the like, and that can potentially become very, very expensive for these companies.

But as an introduction:

If advertising services are provided by companies domiciled in Germany, this income is subject to German tax. If tax non-residents within the meaning of Section 1 IV of the Income Tax Act or within the meaning of Section 2 of the Corporate Income Tax Act are active, this requires a domestic connection in accordance with Section 49 of the Income Tax Act. These are then subject to limited tax liability. If the tax is to be collected from the domestic advertiser, there is a requirement to withhold and pay the tax in accordance with Section 50a of the Income Tax Act.

First of all, it is questionable whether Google is subject to limited tax liability in Germany at all? Section 49 EStG is long and complicated and since tax law basically follows civil law, details and the exact facts are very important here. According to Sec. 49 I 2a EStG, there could be a domestic permanent establishment or a permanent representative. It is difficult to judge whether this is the case. Google Ads is in any case, purely legally operated by the branch in Ireland. Google Germany in Hamburg is supposedly only a sales office and just not a permanent representative. Whether this is really the case may be questionable. However, Section 49 I No. 9 EStG could come into question.

Affected are:

other income within the meaning of § 22 No. 3, even if it would be attributable to another type of income if this provision were applied, insofar as it is income from domestic entertainment performances, from the use of movable property in Germany or from the transfer of the use or the right to use industrial, technical, scientific and similar experience, knowledge and skills, for example plans, patterns and processes, which are or have been used in Germany; this shall not apply insofar as it is taxable income within the meaning of Nos. 1 to 8;

According to the case law of the Federal Fiscal Court, this concerns, among other things, empirical knowledge, the transfer of which saves the debtor costs and time. According to initial legal opinions, this should apply in the case of automated advertising platforms such as Google Ads.

According to § 50a EStG, this would result in the remuneration being subject to the tax deduction procedure pursuant to § 50a V, II EStG, §§ 73a-73g EStDV. One would therefore be obliged to pay 15% of the amount paid to Google for advertising as a so-called withholding tax in Germany. This is Google’s tax in Germany, which the German tax debtor withholds for Google. must. In detail, there are still many complicated questions of demarcation here as to whether a transfer of software or only algorithms is involved and whether the performance of Google Ads is a service contract or a contract for work and services. To date, there have been only a few rulings on similar issues by the Federal Fiscal Court and hardly any by the Federal Supreme Court. In the context of this warning , I do not want to go too deeply into the delimitation problems under tax law, also perhaps in order not to anticipate possible court proceedings in the future.

Just so much: The tax authorities in Bavaria are now of the opinion that Google Ads is a transfer of use, since the benefit agreed under civil law is the execution of advertising by a process controlled by a computer program and Google Ads’ master right to the advertising spaces continues after the transfer of the advertising spaces.

But now we come to the real problem: According to the current construction, it should of course be illusory to tell Google: “I spent 1000 euros with you, but I’ll only transfer 850 euros to you. I have withheld the withholding tax for you”. Apart from the fact that Google debits the money itself via credit card or SEPA direct debit, not paying in full would simply lead to the account being closed. So the only option at the moment is to consider the amounts paid to Google as net amounts and at least expect that withholding tax would have to be paid additionally. In Munich there are already first liability notices of the tax authorities in addition and it is to be assumed that other tax offices and or even higher tax offices follow this opinion. The intention here is probably clear, because the German tax authorities are interested in collecting tax revenues from international Internet companies, as they have – so far – persistently avoided taxation in Europe. This can also be seen from the fact that the tax authorities are probably at the same time of the opinion that Google would not be entitled to a refund for withheld withholding tax under Section 50d I EStG, since the real management and control would not take place in Ireland, but in the USA (a third country), and Google would therefore not meet the requirements of Section 50d III EStG.

So why am I talking about a liability trap? Well, this is again a problem with company audits. See my other article here. There are actually two options for those affected. One agrees with the opinion of the tax authorities and some people in the literature (there is no case law on this yet), sets aside 15%, declares this sum in the tax return and pays it later. This makes Google advertising significantly more expensive and puts you at a competitive disadvantage. If one is litigious, one could of course claim this sum against Google. However, this will probably require court assistance and is therefore only worthwhile for relevant sums. What is really relevant is if you ignore the situation, do not pay withholding tax, wait until the income tax audit and then have the amount assessed by the tax auditor in two years. The latter is unlikely to have any qualms about simply issuing liability notices that could quickly amount to 6-figure sums for Internet companies and social media agencies in particular. In Bavaria, the first liability notices have been issued in the millions. You can then file a lawsuit against these liability notices or use other known legal remedies. How promising this is will probably be shown by the course of the current proceedings. In case of doubt, these sums must be paid first. Quite a problem 😉

Oh, by the way, Google Ads is just one example here in case of doubt. The problem affects many other Internet services and providers such as Facebook, Twitter, US advertising network and so on. So the question is particularly relevant and liable for large advertising agencies, social media companies, online stores and anyone who invests a lot of money in online services, advertising and the like. In a few years, they risk very high back tax payments, which in case of doubt can quickly threaten their existence.

The topic is red hot and everyone from the above mentioned target group should deal with it. Working with an accomplished tax advisor on this issue, I can provide both legal and business advice to my social media clients and clients such as advertising agencies and other advertisers. Contact me via my contact form or via email at haertel@rahaertel.com for an initial consultation. This can clarify whether the problem affects you at all and how relevant it may be from a business perspective. You should NOT wait.

Author: Marian Härtel

Marian Härtel ist Rechtsanwalt und Fachanwalt für IT-Recht mit einer über 25-jährigen Erfahrung als Unternehmer und Berater in den Bereichen Games, E-Sport, Blockchain, SaaS und Künstliche Intelligenz. Seine Beratungsschwerpunkte umfassen neben dem IT-Recht insbesondere das Urheberrecht, Medienrecht sowie Wettbewerbsrecht. Er betreut schwerpunktmäßig Start-ups, Agenturen und Influencer, die er in strategischen Fragen, komplexen Vertragsangelegenheiten sowie bei Investitionsprojekten begleitet. Dabei zeichnet sich seine Beratung durch einen interdisziplinären Ansatz aus, der juristische Expertise und langjährige unternehmerische Erfahrung miteinander verbindet. Ziel seiner Tätigkeit ist stets, Mandanten praxisorientierte Lösungen anzubieten und rechtlich fundierte Unterstützung bei der Umsetzung innovativer Geschäftsmodelle zu gewährleisten.