Germany > Legal entities > Exemption from withholding tax
Exemption from withholding tax - Freistellung
German legislation imposes a withholding tax on construction activities (so-called Bauabzugsteuer). However, this obligation can be avoided. We will be happy to help you with this.
We can help you with administration and solutions in Germany
German legislation stipulates that if you carry out construction activities in its territory, i.e. activities on real estate, your customer is obliged to deduct withholding tax (so-called Bauabzugsteuer) from the invoices issued by you unless you are registered with the German tax authorities and have a withholding tax exemption (Freistellungsbescheinigung or Freistellung). This exemption must be valid at the latest time of payment of the invoice so you can start the work and claim the exemption simultaneously.
Once a valid exemption has been submitted, the customer will pay you the full amount, i.e. they will not deduct withholding tax from the invoice. If your customer has already withheld the withholding tax, you can claim a refund, but this is only possible after the end of the calendar year.
Not only the company, but also its other subcontractors should be exempt from withholding tax, as this rule applies throughout the entire subcontracting chain. This means that both your company and any subcontractors you may have should register. Therefore, if your subcontractors are not exempt from withholding tax, you are obliged under German law to deduct the same withholding tax from their invoices and then remit this to the German tax authorities.
Frequently asked questions
Why is it worth having an exemption from withholding tax?
If you are exempt from withholding tax, the customer will pay you the full amount, i.e. will not deduct withholding tax from the invoice.
When do I need to apply for exemption from withholding tax?
You need to apply for the exemption when you start carrying out construction work in Germany. This exemption must be valid at the time the invoice is paid, so you can start the work and claim the exemption at the same time.