Germany occupies second (!) place in the world by the size of taxes and social contributions, levied on the working population, second only to Belgium. On average, around 40% of the salary of an unmarried, childless German worker is automatically deducted and paid to various tax and social security authorities. You can read more about taxes in Germany in the following article: INCOME TAX IN GERMANY
Tax authorities did not overlook the investment sector either. In 2009, a law came into force in Germany obliging all German investors to regularly pay tax on income from their investments: Abgeltungsteuer (flat-rate withholding tax) — legislation and legal bases regarding the changes since 1 January 2009 (www.abgeltungssteuer-dachfonds.de)
And since the German Finanzamt (tax office) is a very serious organisation where everything has to be completely transparent, and taxes are a rather tricky subject, it is hardly surprising that many novice investors are puzzled by questions of how, where and how much tax they should pay.
Let us dispel all your questions and doubts regarding this thorny topic and examine all the nuances of investor taxation.
Right, let’s go.
Investors in Germany pay the following taxes:
- Abgeltungsteuer (tax on profits from capital investments) – set at 25%;
- Solidaritätszuschlag (solidarity surcharge) – 5,5 % of the Abgeltungssteuer, i.e. 1,375 %;
- Kirchensteuer (church tax) – 8–9 % of the Abgeltungssteuer, i.e. 2–2,25 %.
Thus, if you are not officially a member of a “paid” church (let us assume hereafter that this is the case), your standard investment tax is – 26,375%.
This tax applies to the following income classes:
- Bank deposits (Girokonto, Tagesgeldkonto, Sparbuch – current, instant-access savings and passbook savings accounts),
- Securities (shares, bonds, investment funds of any kind, certificates),
- Derivatives (derivatives such as options and futures),
- Foreign exchange transactions.
Tax is charged at the moment income is realised, i.e. when you sell an asset that has increased in price, or receive dividends. Dividends arrive already “cleared” of taxes. You don’t need to declare them separately either.
Tax is deducted automatically from the brokerage/bank account and there is no need to list your investment income separately in your tax return. The broker pays the tax to the tax office (Finanzamt) itself and reports to the BZSt (Federal Central Tax Office) only the amounts exempted under your Freistellungsauftrag (exemption order).
All of this applies to individuals who are tax residents in Germany. At the beginning of each year, a document called a Jahressteuerbescheinigung (annual tax certificate), containing a list of all your tax deductions for the previous year, usually appears in your broker’s personal online account. This document can always be downloaded.
If your brokerage account is held with a foreign broker, you have to report your securities income separately in your tax return. Examples include Interactive Brokers, eToro, Freedom Finance. Therefore, when choosing a broker, you should pay attention to the country in which the broker is registered.
Sparerpauschbetrag
There is a tax allowance, the Sparerpauschbetrag (saver’s allowance), on profits of up to 1,000 EUR per year per person, or 2,000 EUR per year for two people (a married couple). This limit has been in effect since 01.01.2023
Example
The investor made a profit of 1,500 EUR over the year. The majority of their profit, amounting to 1,000 EUR, will be tax-free.
Taxes will only need to be paid on the remaining part:
Tax = 26,375%*(1500-1000) = 26,375%*500 = 131,88 EUR.
If the brokerage account is held by only one adult family member, for example the husband, then the husband can use the allowance for two, i.e. his profits of up to €2,000 per year will be tax-free.
How do you get the Sparerpauschbetrag?
To do this, fill in a Freistellungsauftrag (exemption order) online in your personal account with the broker/bank, entering the amount for which you would like to use the allowance with this broker (maximum €1,000).
The thing is that if you have several accounts with different brokers, you can split the entire allowance between the accounts. The Freistellungsauftrag works at the bank level, which means that it must be completed at every bank (with every broker) where you want to use the allowance.
IMPORTANT: every investor should realise profits of up to €1,000 every year (if any), i.e. sell and immediately buy back the exact same assets, even if they have no intention of selling them, for the sole purpose of “using up” the annual tax allowance: Sparerpauschbetrag of EUR 1,000.
Let us consider what benefit an investor can gain from this transaction using an example.
Example:
1. Investor Anya has an investment horizon of 20 years and receives an annual investment income of €1,500.
Anya annually realises part of the gains, amounting to 1,000 euros (equal to the tax relief), and immediately repurchases the assets that were sold for the same €1,000.
Therefore, Anya’s taxable base each year is (1500 — 1000) = 500 euros, and the total for all 20 years will be:
Taxable base = (500 * 20) = 10,000 euros.
How much tax will Anya pay over all 20 years?
Anya’s tax = 26,375% * 10.000 € = 2,637.50 euros
*It should be noted, however, that Anya will lose at least 40 euros in brokerage fees on buy and sell transactions over 20 years (assuming the cost of one transaction is 1 euro), but that’s mere pocket change compared to the amount she’ll be able to save on tax.
2. Investor Vanya has an investment horizon of 20 years and receives an annual investment income of €1,500.
Vanya does not realise annually part of the gains, amounting to 1,000 euros (equal to the amount of the tax relief).
Thus, Vanya’s taxable base is actually 1,500 euros every year, and in 20 years’ time it will amount to:
Taxable base = 1500 * 19 + (1500 — 1000) * 1 = 29,000 euros. At the same time, the tax relief of €1,000 will be taken into account only for the final year.
How much tax will Vanya pay over all 20 years?
Vanya’s tax = 26,375% * 29.000 € = 7,648.75 euros
Conclusion: Vanya will pay a tax almost 3 (!) times higher than Anya’s.
This example clearly indicates that the tax relief should be used annually!
Verlustbescheinigung
If you have realised losses from your investments in some year, this can also be used to reduce the taxable base in subsequent years or on another investment account. To confirm the losses you should obtain from your bank a Verlustbescheinigung (statement of loss). You must request it by 15 December; losses can be carried forward to future years without any time limit.
How do you use a Verlustbescheinigung?
Example:
- In 2020, you recorded a loss of 1,000 EUR and obtained a Verlustbescheinigung (loss certificate) for this amount.
- In the subsequent year 2021, you recorded a profit of EUR 2,000 and attached your 2020 loss statement to your tax return (Steuererklärung, Anlage KAP) at the end of the year.
- Your taxable base for 2021 will be (2000-1000) = 1000 EUR, and, taking into account the Sparerpauschbetrag of 801 EUR: (1000–801) = 199 EUR -> only this amount is subject to the 26.375 % tax. (€801 applied until 2023; since 2023 the allowance is €1,000 per person and €2,000 for spouses)
Loss offsetting
Another useful feature for investors to reduce their taxes is the operation of offsetting losses, i.e. sale and immediate subsequent purchase of assets. This is usually done at the end of the year when investors rebalance their portfolios.
Why do this? In order to reduce your taxable income by the time you are ready to withdraw funds from your brokerage account.
If you can follow the line of reasoning here, you’ll be able to easily “avoid” the lion’s share of your taxes. So please read the following example VERY carefully.
Example:
Over the year part of your assets rose in value by +1,500 euros, while another part fell by -500 euros.
1. If you realise only the gain, that is you sell only the part of your assets that has risen in value, the taxable base will be 1,500 euros. Taking the €1,000 Sparerpauschbetrag into account, your tax comes to (1500-1000)*26,375% = 131.88 euros.
2. If, on the other hand, you carry out offsetting losses, that is, in addition to realising the gain you sell and immediately buy back the part of your assets that was at a loss, then at the moment of sale you realise a loss of 500 euros. This loss is offset against the gain, and your actual profit will be 1,000 euros — exactly the amount of the Sparerpauschbetrag allowance. Tax: zero. Offsetting saved 131.88 euros.
Conclusion: When offsetting, you’ll lose a couple of euros in brokerage fees on the transactions (for both sales and purchases), but you’ll save €131.88 (according to this example) on tax.
Form W-8BEN
Each country sets its own tax rate on dividend payments from securities issued in that country to foreign investors. Consequently, investors who purchase shares in foreign companies and receive dividends from them will automatically pay tax on the income from those dividends to the issuing country.
This tax is called Quellensteuer (withholding tax).
We are primarily interested in shares in US companies. The US tax on dividends from US companies is 30%.
A bit much, isn’t it?
But there is some good news: there is a double taxation agreement (Doppelbesteuerungsabkommen) between Germany and the US. Under this agreement, German investors are entitled to halve their tax on dividends from shares in US companies, from 30% to 15%.
Thus, in order to avoid double taxation of dividends, all investors should fill in the so-called W-8BEN form and send it to their broker if they hold individual shares of American companies that pay dividends.
- This concerns shares directly, rather than funds.
- The form can be found online on the broker’s/bank’s page.
Cryptocurrency taxation in Germany
Cryptocurrencies in Germany are considered a separate asset class and are not subject to capital gains tax laws (Kapitalertragssteuer/Abgeltungssteuer). The topic of cryptocurrency taxation in Germany is detailed in this article.
Well, that’s pretty much it. If, after reading this tax epic, you still have questions, jot them down and send them to me via a direct message on my Insta profile @mafin.de.
Also read on the subject of investments
- ETFs in Germany: brokers, taxes, Vorabpauschale (advance lump sum) — where to open an account and how tax is calculated with a calculation example.
- What is an ETF in simple terms — how the fund is structured, replication, UCITS, and the criteria for choosing.
- ETF-Sparplan — savings plan, automatic contribution increases and VL (capital-forming benefits) from your employer.
- DAX — Germany’s main index and its feature as a performance index.
Further reading on the topic
- ETFs in Germany — how index funds work and what makes up their cost
- Accumulation plan for ETFs – how to build a portfolio yourself
- What is an ETF in simple terms
- EasyInvesto, ComfortInvest, Whitebox – portfolio under professional management
- Comparison of easyInvesto and ComfortInvest
- Gold and precious metals – a different tax regime applies there
- Taxation of cryptocurrencies
- Unit-linked life insurance – the 12 and 62 rule instead of capital gains tax
- DAX: German stock index
- Vermögenswirksame Leistungen – employer-sponsored savings
Official sources
- Section 20 EStG — investment income: gesetze-im-internet.de
- § 32d EStG – capital gains tax rate: gesetze-im-internet.de
- § 43a of the Income Tax Act (EStG) — statement of losses, deadline 15 December: gesetze-im-internet.de
- § 44a EStG — application for tax exemption: gesetze-im-internet.de
- Section 18 InvStG — preliminary lump-sum income: gesetze-im-internet.de
- § 20 InvStG — partial exemption: gesetze-im-internet.de
- § 23 EStG – private property transactions: gesetze-im-internet.de
- Bundeszentralamt für Steuern (Federal Central Tax Office) – withholding tax and church tax: bzst.de
- Bundesministerium der Finanzen (Federal Ministry of Finance) – letters and guidance: bundesfinanzministerium.de
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Nice article. However I have 1 question
I bought shares in Philips and Shell in 2023 (Dutch acquisitions). My Philips dividend was cut by 15% and my Shell dividend was cut by 0%. (The broker knows I live in Germany and I believe that’s why Shell has a 0% cut… but it is not clear why Philips remains at 15%).
My question is, for example, Philips was supposed to pay me 100 EUR, but due to the deduction for the 15%, I received 85 EUR. So, when completing my German tax return, should I declare 85 EUR as income from the 15%? (+ solidarity tax)…
In your text, you mention that double taxation could be avoided, and you cited the US example where the US only withholds 15%… so does that mean that, for US shares (after completing Form W-8), I only need to take 10% into account for my German tax?
In the case of the Netherlands, I know the broker is aware that I live in Germany; otherwise, Shell wouldn’t be subject to the 0% deduction. Is Philips a special case where, unfortunately, the Netherlands withholds 15% and Germany then takes 25% from the remainder? Thank you.