Software contract development – New regulation for tax deduction according to Sec. 50a German Income Tax Act for software development

In the case of contracts for software development, there may be an obligation to deduct taxes under Section 50a of the German Income Tax Act. The Federal Ministry of Finance has now pointed this out in its letter of August 2, 2022. After changes in copyright law for software last year, this specification is relevant for all companies that have software programmed by contractors abroad. This applies to all open cases where the contract was concluded after June 6, 2021.

Income from a temporary transfer of usage rights is subject to tax deduction. This happens regularly with software development abroad. In principle, income in connection with remuneration for the transfer of use or the right to use rights is taxable. This also applies if this is limited in time or if it is uncertain when the contract is concluded whether and when the transfer will end.

A transfer of copyright, which is regarded as a highly personal right, is excluded under German law. After the new regulation of copyright, however, a so-called economic purchase of rights is possible in principle. The legislator has created criteria for the distinction between an economic sale of rights and a temporary transfer of use and thus the obligation to deduct taxes. If in doubt, the tax deduction should be made to avoid liability risk.

For further questions on tax deduction for software development, please contact the experts at the Altehoefer law firm for international tax advice.