Germany: Withholding tax liability for German resident sponsor of foreign Formula One team

A German resident sponsor of a Formula One team entered for the year?s 1998 tot 2001 into an agreement with a foreign Formula One team, according which the company?s logo was to be disposed on the car and clothes of the drivers of the team during each Formula One race. Two of the races took place in Germany.

The German tax authorities took the position that parts of these payments were closely connected with a sports performance in Germany. Due to this connection the payer, i.e. the German resident sponsor, should have withheld withholding tax on the payments to the Formula One team (pursuant to Sec. 50a, (4)(1) and (3) of the Einkomstensteuergesetz, hereinafter EStG). Although the tax liability was effectively meant to be imposed in the foreign taxpayer, the German legislation allowed for recourse to the German resident payor of the fees.

The taxpayer did not agree, and the Financial Court of Munich had to decide. This Court held in favor of the tax authorities. Indeed the Court found that there was a close enough connection between the sponsor agreement and the sports performance in Germany by the Formula One team. The Court did assimilate the performance of the drivers with those of the teams, and mentioned that for both categories a world championship is in fact organized.

The Court then also held that the taxpayer had used its rights in or through a permanent establishment in Germany, and that partial attribution of the fee therefore needed to take place. From the decision it is clear that the Court has heard witnesses on what a sponsor of a Formula One team could do to promote its own business. Whether or not the taxpayer had indeed used all these possibilities was not so relevant. Also not relevant was according to the Court the statement of the sponsor that their interest was worldwide and on a global scale. They would have even sponsored if there would have been no races in Germany. This the Court found not relevant.

The taxpayer has asked for appeal with the German Federal Financial Court (Bundesfinanzhof). The Court of Munich has allowed for that, and for the final answer the decision of the highest Court is to be awaited.