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
- capital gains
- capital investment
- endowment insurance policy
- income tax
- income tax return
- investment bond
- mutual funds