Capital gains tax in Germany explained: How investment income is taxed

What is capital gains tax in Germany?

Capital gains tax 💬Kapitalertragsteuer (KESt) is an income tax on capital income which mainly consists of investments in securities and company shares. Anyone who owns savings, shares or fixed-interest securities, including in the form of investment funds, or who owns shares in a company, must pay capital gains tax on the income from these assets. This applies not only to interest and dividends but also to capital gains and capital appreciation.

When is capital gains tax due in Germany?

Capital gains tax is always due when you receive income from your investments – at the time that income is distributed.

Capital income subject to capital gains tax

• Dividends and profit distributions by corporations
• Interest and similar income paid by banks
• Interest from fixed-interest securities
• Distributions from investment companies, even if these are reinvested, e.g. accumulating funds
• Profit distributions from silent partnerships
• Certain life insurance contracts
• Gains from forward transactions
• Profits from the sale of securities or other financial products
• Accrued interest incurred on the sale of fixed-income securities

Capital income on which no capital gains tax is payable

• Income from private and business loans (loans from non-banks)
• Interest from mortgages and land charges
• Income from foreign accumulating funds (since no money flows, a tax deduction by a German credit institution is not possible)
• Income from endowment life insurance policies concluded before January, 1 2005 (so-called old policies) with a policy term of at least twelve years

Important: The above income must still be declared in the KAP annex to the income tax return. They are still components of income that must be taxed.

How much is capital gains tax?

Capital gains tax is levied at a flat rate of 25% on all investment income. In addition, there is a solidarity surcharge of 5.5% and, depending on the federal state, 8 or 9% church tax.

How to calculate capital gains tax

Assuming you have a capital gain of €300 and are subject to church tax in North Rhine-Westphalia, your bank will calculate the capital gains tax as follows:

Note: The KESt was standardised in 2009 and its calculation was simplified. Previously, different tax rates were applied to the different types of capital income.

How do I pay capital gains tax?

Capital gains tax is deducted directly by the paying agent at the time of distribution and passed on to the tax authorities. In many cases, the paying agent is a bank or insurance company. At the end of the year, they will send you a statement showing your investment income and the withholding tax paid on it.

Final withholding tax vs. capital gains tax

The capital gains tax is also referred to as the final withholding tax 💬Abgeltungsteuer because the income tax on capital income is deemed to have been paid by deducting the capital gains tax at source (§ 43 para. 5 EStG). However, the two terms are not entirely synonymous. The final withholding tax was only introduced in Germany in 2009. Since then, domestic investment income no longer needs to be declared in the income tax return, as it is already settled by deducting withholding tax.

This direct deduction of the final withholding tax by the paying institution has a discharging effect. In other words, the taxpayer is generally no longer required to pay capital gains tax on domestic investment income, except in certain specific cases.

How high is the tax-free amount on capital gains tax?

Capital gains are tax-free up to a certain amount. The tax-free amount on capital gains tax for single persons is €801 per year, for married persons it is €1,602 per year.

If you have not issued any exemption orders, you can reclaim the excess capital gains tax paid from the tax office by completing the KAP annex to your income tax return. You enclose the tax certificate from your bank with the return.

Consider issuing an exemption order

To save or at least ease the effort of filing the KAP annex, it is best to give your bank an exemption order. Your bank will provide you with a form for this purpose. You can also split the exemption order between different institutions. For example, you give an exemption order for €200 to the bank where you have savings, and in parallel give an exemption order for €500 to the bank that manages your securities account, and so on.

When to get a non-assessment certificate

People with no or low income have another option: They can get a non-assessment certificate from their local tax office. This is where the tax office certifies that you (as a natural or legal person) are unlikely to be liable for income tax. If you do not have to pay income tax, you do not have to pay capital gains tax. You have to present the non-assessment certificate to the paying agent, who will then waive the withholding of KESt.

When should I file the KAP annex?

If the final withholding tax paid at the source is not equal to the amount you should have paid in capital gains tax, then file the KAP annex with your income tax return.

Too much or too little capital gains tax paid?

You have paid too little capital gains tax if you have:

• earned income from foreign investments
• received interest income from personal loans
• not paid church tax because the tax office did not know your religious affiliation
• not issued any or insufficient exemption orders

You have paid too much capital gains tax if:

• your marginal income tax rate is below 25% and
• you have not submitted a non-assessment certificate

How to fill in the KAP annex correctly

You enter the details for your capital gains tax in the KAP annex as follows:

Interest certificates of the banks must be submitted together with the tax return.

Favourable tax treatment

If you are on a low income, the tax authorities will give you a favourable tax assessment. This means that the tax on capital gains is not calculated using the flat-rate tax, but using your individual tax rate if this is lower than the capital gains tax rate. You will know that you have received a favourable tax assessment if the capital gains are included in the calculation of taxable income in the tax assessment.

Tip: In this case, you can claim withheld church tax as extraordinary expenses. Enter it in line 42 of the main form.

What was the interest income tax?

Before final withholding tax was introduced in 2009, investment income taxation in Germany was far more complicated. For income received before 31 December 2008, the withholding tax was between 10 and 35% plus solidarity surcharge, depending on the type of investment income. For interest income, the so-called interest income tax of 30% was applied. Today, this tax is part of the final withholding tax.

Holding company and capaital gains tax

Does capital gains tax also apply to a pure holding company?

Yes, this is generally the case. However, if the parent company owns at least 10% of the subsidiary, a capital gains refund can be claimed on the annual return.

Does the parent company of a holding have to pay capital gains tax on distributions?

In the case of holding companies, 95% of distributions are tax-free. However, the distributing subsidiary must withhold 25% capital gains tax and pay it to the tax authorities. It can then claim a refund from the tax authorities in the following year’s annual tax return. The subsidiary can avoid this by applying for an exemption certificate.

This procedure is subject to two conditions:

• The parent company must hold at least 10% of the subsidiary.
• The parent company’s purpose is “acquiring, holding and managing investments”. If it also generates other income, it is not eligible for an exemption certificate.

Find out more about holding companies and capital gains tax here.

How does the apportionment of KESt work for second-tier subsidiaries?

Suppose a holding company has a subsidiary A, which in turn has a subsidiary B (grandchildren), then the holding company is an indirect shareholder of B. In this case, the current legal situation is as follows: Interest on a loan from an “indirect shareholder” to a corporation may be subject to a final withholding tax of 25% if the creditor of the interest income is not a related person with a controlling influence over the company. This is the conclusion reached by the BFH (federal court of finance) in its decision of 20 October 2016.

However, if the lender holding company has a stake in B’s parent company that enables it to exercise its will at the shareholders’ meeting, then there is sufficient proximity to the sub-subsidiary to treat the capital gains tax as in the case of a direct holding company.

Does capital gains tax also have to be paid on the shareholders’ undistributed pro-rata profits?

The federal ministry of finance explains this in a communication:

“Income from capital assets based on a participating interest in a commercial enterprise as a silent partner includes the profit allocated to the silent partner or the loss to be allocated taking into account §§ 15a, 15b EStG. If the silent partner is allocated his credit balance within the framework of the settlement, the profit or loss shares taken into account as current income, which has increased or reduced the settlement credit balance, shall be deducted from the profit or added to the profit when determining the profit within the meaning of section 20(4) EStG.”

FAQ

Who pays capital gains tax?

Natural persons (e.g., shareholders) must pay capital gains tax. The capital gains of companies and other legal entities are only subject to corporate income tax.

When is payment made & to whom?

The paying agent pays the capital gains tax directly to the tax office when capital income accrues. Capital income is taxed at source. This is why the tax type is called withholding tax.

Who may withhold the capital gains tax?

• Banks that manage your securities account or savings balance
• Companies that distribute investment income to you
• Insurances with which you have life insurance

How can you claim back capital gains tax?

If you have paid too much capital gains tax because your tax rate is below 25 or you have not issued an exemption order, you can claim this on your income tax return.

How do you calculate capital gains tax?

The combined rate consists of:

• 25% capital gains tax
• + 1.38% solidarity surcharge
• + 2% or 2.25% with 8% or 9% church tax

This results in three possible total rates:

• 26.38% (solidarity surcharge only)
• 28.38% (solidarity surcharge + 8% church tax)
• 28.63% (solidarity surcharge + 9% church tax)

How do you account for capital gains tax?

You post per capital gains tax to the bank. The account for capital gains tax has the number 2213 in SKR 03 and the number 7603 in SKR 04.

Where can you declare the capital gains tax?

You do this in your income tax return unless the capital gains tax has already been fully settled by the deduction at source.