Capital Gains Tax Explained
In Germany, the withholding tax applies to a wide range of capital gains, including earnings from fixed-term deposits, savings books, private pensions, life insurance, and more. However, there are ways to mitigate this tax, especially for minors and private investors.
For minors, the withholding tax can be avoided by issuing a tax exemption order with all legal guardians' signatures. This exemption order applies to earnings from children's accounts or savings books, as long as the annual interest income does not exceed €1,000 for a single person or €2,000 for married couples.
Private investors can also exempt their capital gains of up to €1,000 from the withholding tax with a tax exemption order. Married couples with joint accounts can exempt €2,000. It's important to note that a separate tax exemption order must be issued for each bank to ensure the total amount of the saver's allowance is not exceeded.
Losses from securities transactions can be offset against capital gains, but only against securities gains. If a loss is made at one bank, a loss certificate should be requested to enable the tax office to offset the loss against gains at another bank.
The withholding tax on fixed-term deposits (interest income) is calculated by applying a 25% flat capital gains tax, plus a 5.5% solidarity surcharge on the capital gains tax, and, if applicable, church tax of 8% or 9%. This means the effective tax rate including all surcharges is approximately:
- 26.375% total if no church tax is due,
- About 27.82% if church tax at 8% applies (Bavaria and Baden-Württemberg),
- Or roughly 27.99% if church tax at 9% applies.
The tax is applied only on the interest earned above the annual saver’s allowance of €1,000 per person (€2,000 for married couples). The financial institution (bank) normally withholds this tax automatically before paying out interest.
Here's a breakdown of the calculation for interest income tax on fixed-term deposits:
- Calculate taxable interest income = total interest earned during the year – €1,000 allowance (if exemption order is submitted to bank).
- Apply 25% withholding tax on the taxable interest.
- Add 5.5% solidarity surcharge of the 25% tax (i.e., 5.5% of the withholding tax, which equals about 1.375% on the taxable interest).
- If applicable, add church tax, calculated as either 8% or 9% of the 25% withholding tax.
For instance, using 9% church tax as an example:
[ \text{Total tax} = \text{Taxable interest} \times (0.25 + 0.01375 + 0.0225) = \text{Taxable interest} \times 0.2799 \quad (27.99\%) ]
If no church tax applies, the total rate is (25\% + 5.5\%) of 25% = 26.375% of taxable interest.
If annual interest income does not exceed the saver’s allowance, no tax applies if a “Freistellungsauftrag” (exemption order) is submitted to the bank. If no exemption order is submitted, the bank will withhold tax on all interest income; any overpaid tax can be reclaimed via tax return.
Capital gains earned at a bank with a seat abroad must be declared in the income tax return in the Anlage KAP - Income from capital - schedule.
What about personal-finance strategies for investing in Germany? For private investors, securities losses can be offset against capital gains, but only against securities gains. Additionally, private investors can exempt their capital gains of up to €1,000 from the withholding tax with a tax exemption order, just like minors, who can avoid the withholding tax on earnings from children's accounts or savings books if the annual interest income does not exceed €1,000 for a single person or €2,000 for married couples.
