This is a third part of the Complete guide to Investing in Germany:
- Part I covered the basics of investing in general
- Part II covered investing in Germany: Where and How.
In this part, we will cover some of the tips, tricks and tax implications of Investing in Germany.
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 a topic with the most literature written.
Capital Gain Taxes
In Germany, the tax on capital gains is 25%, an additional Solidarity tax of 5.5% (on the tax) and a church tax (if you are registered). Thus, you have the total tax on capital gain is 26.375% (withholding tax + Solidarity tax) :
- All capital gains (i.e. profit you make when selling the stocks/shares)
- All dividends payment you received.
Church tax: If you are registered with a church, you will also have to pay Church taxes on your capital gains.
Foreign Source Withholding tax: If you have Stocks or ETFs from other countries (e.g., of US companies), there is a 15% foreign withholding tax. This is not an additional tax. Once you file the annual assessment, any foreign source tax paid will be reduced from the payable tax. So, in the end, it will be the same.
Tax-free limits on capital gains
The Sparerpauschbetrag is a tax-free allowance for investment income in Germany. It allows taxpayers to earn a certain amount of investment income each year without paying taxes. The amount of the Sparerpauschbetrag depends on the taxpayer’s marital status and the type of investment income.
From January 1, 2023, for single taxpayers, the Sparerpauschbetrag is €1,000 per year. for single taxpayers, and €2,000 per year for married taxpayers filing jointly.
These amounts apply to investment income from dividends, interest, and capital gains. The Sparerpauschbetrag is not available for other types of income, such as salary or business income.
Exemption orders
You can make use o the allowance to prevent your bank from paying withholding tax in Germany with an exemption order up to this amount. You should split the amount if you have several accounts or custody accounts. Each institute requires its own exemption order, whereby the savings allowance may not be exceeded in total.
But don’t worry.
If you have an account which meets the German legal requirements (most EU banks accept German residents: all depot accounts are 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 have to enter the numbers from the report into your tax returns form, and you are good to go.
Jahressteuerbescheid
Your German bank or investment platform will send you an annual tax report, also called the Jahressteuerbescheid. This report will show the total amount of investment income received during the tax year and any taxes that are due on that income. In case you had
The report will also show any deductions or credits the investor is eligible for, which may reduce the amount of taxes owed. If the investor has already paid more taxes than are due, the Jahressteuerbescheid will show a refund. If the investor has not paid enough taxes, the Jahressteuerbescheid will show the amount that is owed.
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 by 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 no dividends are paid out, the taxes on accumulating funds are 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€.
Source: https://www.toytowngermany.com/forum/topic/375653-fund-taxation-in-2018-and-fiktive-veräußerung/?do=findComment&comment=3635807
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€.
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€
Source: https://www.toytowngermany.com/forum/topic/375653-fund-taxation-in-2018-and-fiktive-veräußerung/?do=findComment&comment=3635807
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€.