Freistellungsbescheinigung: How Foreign Contractors Avoid the 15% German Construction Withholding Tax

What is the German construction withholding tax (Bauabzugsteuer)?

Germany secures the taxes of construction contractors through a withholding mechanism. Under § 48 of the German Income Tax Act (EStG), the customer must withhold 15% of the payment for construction work carried out in Germany and pay it to the tax office on the contractor's behalf. The contractor only receives the remaining 85%.

The rule applies no matter where the contractor is based. A Polish façade installer, a Dutch steel builder or a Turkish interior fit-out company working on a German site is treated exactly like a German contractor. It also applies to companies that only occasionally carry out construction work.

German customers take the rule seriously: the customer is liable for any amount that was not withheld or withheld too low – regardless of fault (§ 48a (3) EStG). The customer is only protected if a valid exemption certificate was presented at the time of payment.

A double tax treaty does not switch the withholding off. Even if the contractor's profit is not taxable in Germany under the treaty, the customer must still withhold (§ 48d EStG); the contractor then has to claim the money back.

Who has to withhold the 15%?

The obligation lies with the recipient of the construction work if the recipient is:

• a business within the meaning of German VAT law (§ 2 UStG) that receives the work for its business – this includes general contractors who pass work on to subcontractors, small businesses (Kleinunternehmer) and landlords who only make VAT-exempt rental supplies – or
• a legal entity under public law (for example a municipality).

Private individuals who have work done on their own home do not withhold. Landlords who rent out no more than two apartments are also exempt for work on those apartments.

Which services count as construction work?

Construction work (Bauleistungen) covers all services that serve the construction, repair, maintenance, alteration or removal of buildings and other structures. Typical examples are shell construction, roofing, façade and window installation, electrical and plumbing installation, flooring, painting, steel and timber construction, scaffolding and demolition. The term "structure" (Bauwerk) is interpreted broadly: it covers not only buildings but any installation connected to the ground and made from building materials or components. It makes no difference whether the contract is a contract for work or a supply-and-install contract (Werklieferung).

Pure planning and supervision services (architects, structural engineers), pure deliveries of material without installation, and pure transport services are generally not construction work in this sense. If such a service is merely ancillary to construction work under the same contract, however, it shares the treatment of the main service and is subject to the withholding.

How the 15% is calculated

The withholding is calculated on the gross consideration, including VAT (§ 48 (3) EStG). It applies to every payment – advance payments, instalments and the final invoice. No solidarity surcharge is added.

When no tax is withheld

The customer does not have to withhold in two cases:

1. The contractor presents a valid Freistellungsbescheinigung (§ 48b EStG) at the time of payment.
2. The de minimis limit is not exceeded: payments to the same contractor are not expected to exceed €5,000 in the current calendar year. The limit is €15,000 if the customer exclusively makes VAT-exempt rental supplies. All construction work already provided and still expected from that contractor in the calendar year is added together.

For any commercially relevant project the de minimis limit is exceeded quickly. The exemption certificate is therefore the standard solution – most German general contractors will not sign a subcontract or release a payment without it.

How a foreign company gets the Freistellungsbescheinigung

1. Identify the responsible tax office. Foreign contractors do not choose a tax office freely. Germany assigns one central tax office to each country of residence (see the table below). The same office handles the withholding, the certificate, the crediting and any refund.
2. Appoint an authorised recipient in Germany, if required. The law requires a domestic authorised recipient (Empfangsbevollmächtigter) for the certificate. This does not apply to contractors based in an EU member state or an EEA state. Contractors from third countries – for example the United Kingdom, Switzerland, Turkey or the United States – need one.
3. Apply and answer the tax office's questionnaire. No particular form is prescribed for the application itself. For companies that are not yet registered in Germany, however, the tax office collects the necessary information with a questionnaire – about the company, its activities in Germany and the contracts concerned. A certificate of tax residence issued by the home country's tax authority is mandatory for foreign contractors.
4. Receive the certificate. The tax office issues the certificate if the tax claim does not appear to be at risk. It is valid for at most three years from the date of issue; the tax office may set a shorter period or limit the certificate to a specific project. Project-related certificates are time-limited as well. Certificates are issued subject to revocation.
5. Present it before the first payment. The customer must have the certificate before paying. For a general certificate a copy or an electronic copy is enough; a certificate limited to one specific project must be handed to the named customer as an original. The customer can verify it online with the Federal Central Tax Office (BZSt) at eibe.bff-online.de and may then pay 100% of the invoice.

The tax office itself does not charge a fee for the certificate.

A contractor who is only active in Germany for a short time and can plausibly show that no German tax claims will arise should, according to the tax authorities' guidance, still be granted a certificate.

Which German tax office is responsible for which country?

For contractors whose registered office or place of management is outside Germany, responsibility is centralised by country:

For Poland the first letter of the surname or company name is decisive.

Why applications are refused

The law (§ 48b (1) EStG) names three typical situations in which the tax claim is considered at risk:

• The contractor has not notified its business activity to the authorities as required (§ 138 AO).
• The contractor does not comply with its duties to provide information and cooperate (§ 90 AO) – in practice: the tax office's questionnaire is not answered, or answered incompletely.
• A foreign contractor does not provide a certificate of tax residence from its home tax authority.

Beyond that, the tax office can refuse the certificate if there are persistent tax arrears, if incorrect figures were found in tax returns, or if returns are repeatedly filed late or not at all. A refusal is issued as a formal decision stating the reasons.

Plan for the certificate before the first invoice is due. Once a customer has withheld 15%, the money is with the tax office, and getting it back takes considerably longer than getting the certificate would have.

What if 15% has already been withheld?

The money is not lost. Amounts that the customer has withheld and declared are credited against the contractor's German taxes in a fixed order: first wage tax withheld by the contractor, then advance payments of income or corporate income tax, then the income or corporate income tax for the year in which the work was carried out, and finally withholding amounts the contractor itself owes as a customer of subcontractors.

A contractor based outside Germany can apply for a refund (§ 48c (2) EStG) if it is not required to file German wage tax returns and an assessment to German income or corporate income tax does not come into consideration – or if it can credibly show that no German tax claims will arise for the year. If the refund is claimed because a double tax treaty assigns the taxing right to the home country, the contractor must prove its residence with a confirmation from its home tax authority. The refund application must be made on the official form by the end of the second calendar year following the year in which the withheld amount was declared; a longer period under a tax treaty prevails.

The customer must give the contractor a written statement of the withholding (contractor, invoice date and amount, payment date, amount withheld, tax office). This statement is not a tax certificate and does not by itself create a right to the credit or refund, but it makes the crediting at the tax office considerably easier – keep it.

Withholding tax and VAT are two separate topics

The Freistellungsbescheinigung only deals with the 15% withholding. Whether a foreign construction company also has to register for German VAT is a separate question. It depends on who the customers are (businesses or private individuals) and how the project is structured – for many business-to-business projects the German customer accounts for the VAT under the reverse charge mechanism, while work for private customers usually requires a German VAT registration. The free assessment covers both questions.

How German-VAT.com helps

German-VAT.com is the digital platform of MajTax Steuerberatungsgesellschaft mbH. We handle the complete Freistellungsbescheinigung application for foreign construction and installation companies – identifying the responsible tax office, the tax office's questionnaire, the application and the follow-up with the tax office, and we can act as your authorised recipient (Empfangsbevollmächtigter) in Germany – for a one-time fee of €200 (net). No German address or office is required.

Sources

§§ 48–48d German Income Tax Act (EStG); Federal Ministry of Finance circular of 19 July 2022 (BStBl I 2022, p. 1229); official leaflet on the withholding tax for construction services (Merkblatt zum Steuerabzug bei Bauleistungen), April 2025 edition.