Withholding Tax on Investment Income in Germany: A Comprehensive Guide
Capital Gains Tax Explained: How Your Profits Are Taxed
Investing in Germany comes with its own set of tax implications, particularly when it comes to capital gains and income from investments. Here's a breakdown of how the withholding tax on investment income works in Germany.
The Basics
The withholding tax on investment income is generally calculated at a base rate of 25%, plus additional surcharges. These surcharges include a 5.5% solidarity surcharge on the tax amount and a church tax if applicable, which is 9% in most states, 8% in Bavaria and Baden-Württemberg. This results in an effective tax rate of about 26.375% without church tax, 27.99% with 9% church tax, or 27.82% with 8% church tax.
Taxation of Various Investment Products
- Fixed-term deposits: Interest earned on these deposits is subject to the capital gains tax at the rates mentioned above. However, due to the saver’s allowance (€1,000 per individual per year, or €2,000 for married couples), small interest incomes from deposits below this threshold are tax-exempt. For example, with a 2.5% return, you would need around €32,500 invested before the profit exceeds the saver’s allowance and withholding tax applies.
- Stocks and equity investments: Capital gains tax applies to profits realized from stock sales at the same rates (25% plus surcharges). Losses from equity transactions can only offset gains from equity, not other asset classes.
- Bonds: Coupons and capital gains from bonds are taxed like other investment income with the same rates. Subject to saver’s allowance and surcharges.
- Investment funds: Distributions and capital gains from investment fund shares follow the same taxation principles. Taxation depends on whether the income is classified as capital gains, interest, or dividends, but the same withholding tax rate scheme applies.
Implications for Specific Groups
- Church members: Church tax is levied on top of the capital gains tax if the taxpayer is a registered church member in Germany. This adds 8-9% on the capital gains tax amount, increasing the effective tax rate accordingly.
- Low-income earners: The saver’s allowance can protect small investors from paying withholding tax by exempting the first euro of investment income up to that amount. Therefore, low-income earners with modest investment returns might not pay any withholding tax at all, assuming they submit the exemption order to their bank or broker.
In summary, the withholding tax in Germany on capital investment income is essentially a flat 25% rate plus solidarity surcharge and church tax if applicable, applied to profits above the saver’s allowance. This framework applies broadly across fixed-term deposits, stocks, bonds, and investment funds, with certain offsets and loss compensation rules differentiating how gains and losses can be balanced across asset types.
This withholding tax is a form of capital gains tax introduced in 2009. Interest income after taxes and Soli for non-church members is €73.63, while for church members it is €72.01. The withholding tax, Soli, and church tax are calculated based on the interest income. Banks automatically remit the withholding tax, Soli, and church tax to the tax office.
Private investors can exempt their capital gains of up to 1,000 € from the withholding tax with a tax exemption order. For married couples with joint accounts, this so-called saver's allowance is doubled, allowing them to exempt 2,000 € of their interest income. If you have made a loss transaction at one bank, you should request a loss certificate to allow the tax office to offset the loss against gains at another bank, if applicable.
If your tax rate is below 25%, you can apply for a favorable review, allowing the tax office to levy income tax on your annual income and capital gains combined instead of separately, resulting in fewer tax deductions overall and more money for you in the end. You can apply for a favorable review in Annex KAP of your income tax return.
Capital gains earned at a bank with a seat abroad must be declared in the Anlage KAP - Income from capital - schedule of the income tax return. The uniform withholding tax applies to capital gains from bank deposits such as fixed-term deposits or savings books, private pension and capital life insurance, Riester contracts, Rürup pension and company pension plans, stocks, bonds, investment funds and master funds, financial innovations such as securities and guaranteed certificates, certificates without capital guarantee, open-ended real estate funds, and capital gains earned at a bank with a seat abroad.
The solidarity surcharge (Soli) is added at 5.5% of the withholding tax, making the effective tax rate 26.375% for non-church members. Losses from securities transactions can be offset against gains, but only losses from securities transactions can be offset against securities gains. Credit institutions offset gains and losses from multiple accounts and portfolios of an investor, but do not exchange data with other institutions.
Other investors might not pay any withholding tax if their income is below the saver’s allowance (€1,000 per individual per year, or €2,000 for married couples), exempting the first euro of investment income up to that amount.
Capital gains earned from investment funds are subject to withholding tax like other investment income, with the same rates (25% plus surcharges), but taxation depends on whether the income is classified as capital gains, interest, or dividends.
