Peter Scheller
Berater für Wirtschaftsprüfer, Rechtsanwälte, Steuer- und Unternehmensberater

„Wenn es knifflig wird.“

Income from capital investment

von Peter Scheller

Traditionally Germany has had a so called synthetic tax system. That means that the total income from each and every source is amalgamated and the sum multiplied by the individual tax rate of the taxpayer. This method also means that losses from certain sources (such as trade and business or renting out real estate and property) can be credited against other positive income. Germany abolished this system with regard to income from capital investments and now this kind of income is not part of this amalgamation but is taxed at a special tax rate.

Income from capital investments are dividends, interests, profits from silent partnerships, income from investment certificates, mutual funds and other capital investments such as payments from life insurances with saving elements. Capital gains are also taxed under this regime if the shareholder does not hold more than 1% of the share capital of the company. A full listing of income categories can be seen in paragraph 20 of the German income tax code. However, these earnings do only qualify as income from capital investments if they are not part of business or trade activities.

The income tax rate is 25%. In addition to that a solidarity surplus charge of 5.5% of the income tax has to be paid which makes a total tax rate of 26.375%. Financial institutions and other debtors of capital income who are resident in Germany have to withhold the tax and transfer it to the German tax authorities. In general the tax payer is not obliged to declare this income on his or her German income tax return. There is a general yearly allowance of 801 Euros (1,602 for married couples).

Individuals who are tax resident in Germany have to pay tax on their worldwide income in Germany. This means that income from capital investments held outside Germany are subject to tax in Germany also. In some cases this income will also be taxed abroad; in most cases at source. This is for example the case for dividends from foreign companies paid to shareholders who are resident in Germany. The foreign tax can be credited against the German income tax rate up to certain maximum amounts. Germany has entered into double taxation treaties with many countries In general these treaties limit the tax rates on dividends to 15%. Maximum rates on interests will be between 0% and 10% (depending on the respective Double Taxation Treaty). Germany will only credit the foreign tax up to these maximum amounts. Excessive amounts must either be avoided through a certificate of exemption or a reimbursement claim in the source country.

Example: Person A, who is resident in Germany, receives dividends of 100 from state B. State B withholds 25% at source. The double taxation treaty between Germany and B allows a maximum tax rate of 15% for B. Germany will credit 15 against the German income tax. An amount of 10 (25 minus 15) must be reclaimed from B’s tax authorities.

If capital investments are held abroad (for example in a foreign bank) the capital income must be declared in the German income tax return.

Special rules exist in the following case:

  • Mutual Funds
  • Investment bonds (in the form of endowment insurance policies)
  • Beneficiaries of a trust

Author: Peter Scheller, Steuerberater, Master of International Taxation

Bildquelle: www.fotalia.com

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Einen Kommentar schreiben

Kommentar von Nagappan |

Dear Sir,

I need your advice and willing you take professional help as well from your side, if you can support me.

This my Question :

Lets assume, i transfer 10000 Euro this year (this money after paying tax in Germany) from my savings i made, invest this money in India in Mutual funds, Equity  and also in other investments in India, and after 5 years i am bringing back this money from India (after paying tax in INDIA), is it allowed to bring back money back from india from investment made ? particularly in mutual funds ? And please see further questions regarding this topic as mentioned below,

Question 1 :
When i bring back this money from indian after 5 years, for example the same 10000Euro + Captial Gains, what is the information i need to provide to
finanzamt about the source of the money, and will there be any tax for the
same amount ?

Just wanted to infom you that Capital Gain earned in india is taxable at source, so
meaning, i would have already paid the necessary tax for the Capital Gains Earned.

Capital Gain what i meant here, is that, Interest from bank Deposits, Equity dividends, Gains from MutualFund, Sale of property.

Antwort von Peter Scheller

As long as you remain tax resident in Germany your capital income (dividends, interests and capital gain) will be taxed in Germany. Whether India can tax it depends on the provisions of the double taxation treaty. This also questions you next question since capital income will be taxed in Germany regardless where the money is helt.

Kommentar von Deep Dudhat |

Request for help. I am a student from india presently residing in Germany since last 6 months. I have German address proof as well as German tax identification number. Is it legal to invest in stocks for me. what are the rules of taxes and how can I pay taxes related to investment gains?

Antwort von Peter Scheller

If you invest into shares or other capital investment and you hold these investments in a German bank they will deduct the tax for you and pay it to the tax authorities (about 26%). If you hold the investements with a foreign bank you may be obliged to file a German income tax return.

Kommentar von Sidharth |

Hello!
Thanks for such a helpful article.
I am a resident of Germany and work in Germany for an American company and the company has provided me with some shares. Recently, a part of those shares got vested, and 40% tax was deducted on the amount of total vested shares, which I assume is the US taxes on capital investments. If I now, decide to sell these shares, will Germany also tax me ~26% or some double taxation treaty exist between US and Germany? Also, if there is such double taxation treaty to limit maximum tax on capital investments by US, do I have to file for a refund or I will automatically get a refund?

Antwort von Peter Scheller

This has to be analyzed carefully in order to avoid a double taxation scenario. Much more information and a professional service is required.

Kommentar von Deb Ban |

Dear Sir,

I'm from India and hold Indian passport. As I'm working in Germany since 2016, I also hold permanent residence of Germany. I pay taxes in Germany only. Iam new to stock market and recently started investing in shares. But I'm only buying US shares from s&p500. My question is , if in future I make profit, in which country I need to pay tax? In Germany or in United states or both?

Thanks in advance for your helpful answer.

Antwort von Peter Scheller

The capital income (dividends, interests, capital gains) is taxable in Germany. The US may also be able to withhold taxes (e.g. 15% on dividends). The amounts can be credited against German Tax. However, you have to make sure that you do not pay to much withholding tax in the US. See also https://scheller-international.com/blog-beitraege/income-from-capital-investment.html.

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