Withholding Tax (Abgeltungsteuer) on Capital Gains: All You Need to Know

Germans have a worldwide reputation for being excellent savers – many deposit their extra cash into an untouched savings accounts or an overflowing piggy bank. With interest rates being so low nowadays, it might make more sense to invest in real estate or funds. Not everyone is comfortable with dealing these and prefer to save in the more traditional way.

If you receive income from capital interest or dividends (Kapitalerträge), you might have to pay tax on it. In this article, we will tell you everything you need to know about final withholding tax (Abgeltungsteuer).

One thing at a time

Since 2009, a final withholding tax of 25 percent must generally be paid on capital gains as well as possible church tax (Kirchensteuer) and solidarity surcharges (Solidaritätszuschlag). The most common types of capital gains subject to this tax include:

• Interest (Zinsen), overnight interest (Tagesgeldzinsen), etc.
• Dividends
• Income from commodities (Rohstoffen), certificates, currencies (Währugnen), etc.
• Increase in values from selling stocks (Aktien)

Tax deducted from its source

Before 2009, those with capital gains had to actively pay their own dividend tax (Kapitalertragsteuer) but now withholding tax is deducted from its source (Quellensteuer), meaning it is directly transferred from your bank to your local tax office (Finanzamt) – therefore, you no longer have to take any action yourself. Other taxes deducted directly from the source include wage tax, church tax, and director’s tax (Aufsichtsratsteuer).

If you’ve set up a savings account, you will receive an annual overview of the money you’ve received as well as the interest posted on it. If the interest is subject to withholding tax, the bank will automatically transfer it.

Additional deductions of church tax & solidarity surcharges

Church tax and solidarity surcharges are still due on capital gains. A solidarity surcharge of 5.5 percent is charged to the 25 percent withholding tax, amounting to a tax rate of 26.475 percent on your capital gains. Church members also have an added church tax but that calculation is a bit more complicated.

Example:

• 1,000 euros in profit from selling stocks
• Withholding tax of 250 euros (25%) plus 22.50 euros of church tax (either 8 or 9% depending on state) = 272.50 euros in tax deducted from your capital gains

Are there tax-free allowances on capital gains?

There is a “saver’s allowance” (Sparerpauschbetrag) that allows investors to accumulate income tax-free up until a certain limit. Single people can receive up to 801 euros per year tax-free and married persons up to 1,602 euros. If your capital gains exceed these amounts, withholding tax is due on the excess income (aka only the income received above the limit is taxed).

Note: You must apply for the saver’s allowance, this can be done with an exemption order (Freistellungsauftrag) at your bank. If you do not apply for it, the entire income will be taxed instead of the income that exceeds the tax-free limit.