Tips and Taxes on Investing in Germany

This is a third part of the Complete guide to Investing in Germany:

In this part, we will cover some of the tips, tricks and tax implication of Investing in Germany.

Table Of Contents

Taxes on Investment

Nothing in life is certain, except for death and taxes. And to make things worse, German tax law is so complicated that it is said to be topic with the most number of literature written.

But don’t worry.

If you have an account which meets the German legal requirements (most EU banks which accept German residents: all depot account recommended on this website) then everything is taken care of. The bank will send you a yearly tax report (Jahressteuerbescheid) with all the details you need. You will just have to enter the numbers from the report into your tax returns form and you are good to go.

For those who are really interested, read on.

Tax regulation on investments has changed significantly since 2018. Therefore, this section will only in recent law.

Taxes on Shares and Dividends

If you directly bought stocks/shares, i.e. not through a fund, the taxation is simple.

You will pay a tax of 26.375% (withholding tax + Solidarity tax) on:

  • All capital gains (i.e. profit you make when selling the stocks/shares)
  • All dividends payment you received.

If you have foreign shares, then there is a 15% foreign source tax, which will be deducted from your overall taxes. So, at the end it will be the same.

In addition to this, you will have to pay the Church taxes if you are registered for it.

Taxes on Funds

Now, this gets complicated, so the explanation is significantly simplified.

Earlier (before 2018), the taxes were applicable only on realized profit (i.e., after you sold your investment). But, now you pay an advance tax based on an unrealised profit. That is, even though you haven’t sold your investment, the price increase is determined and from that profit.

Fictive profit

The tax amount now depends on a fictive profit or actual unrealised profit (whichever is lower).

In overly simple terms, the fictive profit calculation accounts for the risk factor of the type of fund (specific rate) and the basis rate interest set by the central bank. So, the fictive profit would be something which you would have earned if a percentage of your invested money (percentage because it factors the risk) was invested in a bond.

The tax is 26.375% of the fictive profit or actual profit (whichever is lower). In addition to this, you will have to pay the Church taxes if you are registered for it.

When you actually sell your investment, your real profit is determined and taxed, and all the advance tax you paid are deducted from your final tax.

Again, don’t worry, all these calculations are made by your bank (German Depot). They will deduct the taxes automatically if needed, and you will just have to enter the numbers into your tax form.

This amount will also vary based if the type of fund accumulates your dividends or pays them out, as shown below.

  • Accumulating equity fund (thesaurierender Aktienfonds), or accumulating ETF: Also called growth funds, these are funds which do not pay out the dividends but keep accumulating them into the fund itself.
  • Distributing equity fund (Ausschüttender Aktienfonds), or distributing ETF: Funds which pay out dividends regularly

Taxes on Accumulating equity fund (Thesaurierender Aktienfonds)

Since there are no dividends paid out, the taxes on accumulating funds is as explained above.

That is, determine the actual unrealised gain, determine the fictive profit, and the tax is 26.375% of the fictive profit or actual profit (whichever is lower).

So, let’s say if you had €10,000 to start on your investment account (under a specific rate of 70%) and the basis interest rate was 1.1%. The fictive profit would be €7000 (i.e., 70% of €10,000) X 1.1% = €77.

If your actual investment gave more than this fictive amount, you pay a tax on fictive profit. But if your investment made less than the fictive profit, you will pay taxes on the unrealised profit. So, pay a tax on €77.

Let me quote a specific example taken from a very well written post by user “PandaMunich” on Toytowngermany, which explains this clearly.

 value of your fund on 1.1.2018 was 10,000€.
  value of your fund on 31.12.2018 was 10,500€.
 “real” increase in value: 500€
 “fictive profit” = Basisertrag = 1.1% * 10,000€ * 70% = 77€ 
 since “real” increase in value (500€) is greater than “fictive profit”(77€), you have to pay 26.375% tax on the “fictive profit” of 77€.

Source: https://www.toytowngermany.com/forum/topic/375653-fund-taxation-in-2018-and-fiktive-veräußerung/?do=findComment&comment=3635807

Taxes on Distributing equity fund (Ausschüttender Aktienfonds)

If the fund pays out dividends, then the dividend value is reduced from the unrealized profit.

That is, determine the actual unrealised gain, determine the fictive profit and the tax is 26.375% of the fictive profit or actual profit (whichever is lower) minus the dividend paid.

Using the same example as above, and considering the distributed dividends, the calculations are as follows:

distributed dividends: 50€
value of your fund on 1.1.2018 was 10,000€.
value of your fund on 31.12.2018 was 10,500€.
“real” increase in value: 500€
“fictive profit” = Basisertrag = 1.1% * 10,000€ * 70% = 77€ 
since “real” increase in value (500€) is greater than the “fictive profit”(77€), you have to pay 26.375% tax on (“fictive profit” – distributed_dividends) = (77€ – 50€) = 27€.

 Note: I think they made a mistake in there, I think it should be: pay 26.375% tax on (“fictive profit” – taxable_distributed_dividends) = (77€ – 0.7*50€) = 42€.

Source: https://www.toytowngermany.com/forum/topic/375653-fund-taxation-in-2018-and-fiktive-veräußerung/?do=findComment&comment=3635807