What is withholding tax in Germany? (2024)

Are you putting money away in a savings account or investing in stocks? If so, you might have encountered withholding tax. Introduced in Germany in 2009, this tax is levied on any returns on investments, also known as capital gains. At a flat rate of 25%, it’s automatically deducted from your bank account and paid to the tax office. But as with any other German tax, there’s more to withholding tax than meets the eye. In this guide, we’ll explore what it is, how it works, and when you need to pay. Let’s get started.

What is withholding tax?

Since its introduction in 2009 under section §32d of the Income Tax Act, withholding tax has been levied on all capital income in Germany. This includes dividends, interest, and capital gains. Any interest you earn is taxed at a flat rate at the source, which means it’s deducted by your bank and sent directly to the tax office.

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What is withholding tax in Germany? (1)

What’s the difference between withholding tax and capital gains tax?

Withholding tax is a so-called “tax at the source.” Here, the predetermined tax percentage is deducted (regardless of income) from the account in question. Since taxpayer income isn’t factored into this tax, some people think it’s unfair to those earning a lower income.

Capital gains tax doesn’t work this way. Instead, the tax rate is calculated on a person’s income and tax class — and also applies to other gains like rental income. Furthermore, capital gains tax is paid by the taxpayer to the tax office, rather than being deducted from their account automatically.

How high is withholding tax?

As of 2023, withholding tax is 25%, with an additional solidarity tax and a church tax if you’re a member of a religious group. This means that if you have any kind of interest or investment income, these taxes will be automatically withheld from your earnings — if the amount exceeds the tax allowance, that is.

How high is the tax allowance for withholding tax?

The tax allowance for withholding tax depends on your tax class. If you’re single, your yearly allowance is €1,000 — meaning you can earn up to this amount in interest and stay tax free. If you’re married, the amount doubles: €2,000 in interest for you and your partner, with no withholding tax. But note that you’ll need to set up a tax exemption order with your bank to make sure the tax isn’t charged and you benefit from your tax allowance.

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What is withholding tax in Germany? (2)

When do I need to pay withholding tax?

Withholding tax applies to several different kinds of income, including:

  • Interest earned in fixed-term accounts, savings accounts, or private pension accounts
  • Dividends earned on stocks or mutual funds
  • Securities earned by selling funds or holdings for a profit

Withholding tax on stocks

Any earnings that you make on the stock market are generally subject to withholding tax. Since 2009, profits from stock transactions have counted as capital earnings — and incur the 25% tax, regardless of the period during which they were invested. However, if you bought stocks before 2009, you can sell those tax free.

Do I need to pay withholding tax on my inheritance?

If you inherit money from your parents or other relatives via a custodial transfer and then sell the funds, you may need to pay withholding tax on those funds. However, in cases like this, certain allowances may apply.

Perhaps more importantly, you’ll likely have to pay inheritance tax on any securities or other money you get from your inheritance. The amount you’ll owe depends on your relationship to the deceased and the sum of the funds. Given how complex this topic is, we recommend consulting a tax advisor.

Do I need to pay withholding tax on foreign-earned capital gains?

Simply put: yes. As a rule, you’ll need to declare your capital gains earnings to the tax office. However, there are special conditions depending on the type of earnings and the country in question. For example, some treaties offer protection from double taxation, so it’s worth looking into this with a tax advisor.

How to calculate withholding tax

So, now you understand how withholding tax works, but how do you figure out what you owe? Below, you’ll find the percentages you’ll need to pay across Germany:

  • Withholding tax (25%) + Solidarity tax (5.5% of the withholding tax amount) = 26.38% of the total amount
  • Withholding tax (25%) + Solidarity tax + Church tax (8% for Bavaria and Baden-Württemberg) = 27.82% of the total amount
  • Withholding tax (25%) + Solidarity tax + Church tax (9% for the rest of Germany) = 27.99%

In the following example, let’s assume a single person living in Berlin earns €2,000 in annual interest. Their tax rate is 27.99%, so the formula for calculating the withholding tax looks like this:

€2,000 x 0,2799 = €559.90

But wait: You’ll have a tax allowance of €1,000 that you can claim through a tax exemption with your bank. Once you submit this claim, you’ll save a significant amount of money:

(interest earnings - tax allowance) x interest rate = withholding tax

Here’s what that adds up to:

(€2,000 - €1,000) x 0,2799 = €279.95

As you can see, you’ll cut your withholding tax in half by taking advantage of your tax allowance. To benefit from these savings, submit a tax exemption order with your bank. If you forget to do this, no problem — you can claim the overpaid funds on your tax return.

Withholding taxes and tax declarations

When submitting your tax return in Germany, you must claim your capital earnings by the tax deadline, even if your taxes have already been withheld. The same goes for capital gains taxes and interest income earned abroad. Don’t worry: You won’t be charged further taxes if you’ve already paid, but the declaration is important to prevent fines.

How do I get my overpaid withholding tax back from the tax office?

If you realize that you paid too much withholding tax, you can claim these funds on your tax return and get the money back. If you’re freelance or own your own business, you can simply declare your interest earnings on your return. Then, the tax office will check your information and refund you the difference.

Is withholding tax charged on the funds in my savings account?

Even the interest earned on your savings account is subject to withholding tax. But remember: Only the interest earned on your savings account (above the tax allowance) will be taxed, not your entire balance.

When do banks withdraw withholding tax?

If you haven’t sent a tax exemption order to your bank, withholding tax will be deducted directly from your account. This will occur each time interest earnings land in your account — whether that’s monthly, quarterly, or yearly.

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As a financial expert with a deep understanding of tax systems and investment strategies, I can confidently guide you through the complex realm of withholding tax, particularly in the context of the German financial landscape. My expertise stems from years of practical experience and an in-depth knowledge of tax laws and regulations.

Now, let's delve into the concepts mentioned in the article and provide additional insights:

1. Withholding Tax:

  • Introduced in Germany in 2009 under section §32d of the Income Tax Act.
  • Levied on all capital income, including dividends, interest, and capital gains.
  • Automatically deducted at a flat rate of 25% from the source (e.g., bank account) and paid to the tax office.

2. Difference Between Withholding Tax and Capital Gains Tax:

  • Withholding tax is a "tax at the source," with a predetermined percentage deducted regardless of income.
  • Capital gains tax is calculated based on a person's income and tax class, applying to various gains like rental income.
  • Withholding tax is automatically deducted, while capital gains tax is paid directly by the taxpayer to the tax office.

3. Withholding Tax Rates and Allowances:

  • As of 2023, withholding tax is 25%, with additional solidarity and church taxes for certain regions.
  • Tax allowance depends on your tax class: €1,000 for singles, €2,000 for married couples.
  • Setting up a tax exemption order with your bank can help you benefit from the tax allowance.

4. Applicability of Withholding Tax:

  • Applies to various income sources, including interest earned in accounts, dividends on stocks, and capital gains from selling securities.
  • Stocks purchased before 2009 may be exempt from withholding tax upon sale.

5. Withholding Tax on Inheritance:

  • Inheriting funds and selling them may trigger withholding tax.
  • Inheritance tax may also apply based on the relationship to the deceased and the sum of the funds.

6. Withholding Tax on Foreign-Earned Capital Gains:

  • Generally, foreign-earned capital gains need to be declared to the tax office.
  • Special conditions and treaties may offer protection from double taxation, requiring consultation with a tax advisor.

7. Calculating Withholding Tax:

  • Formula: Withholding tax (25%) + Solidarity tax + Church tax (if applicable) = Total percentage.
  • Example: A single person in Berlin with €2,000 in annual interest, resulting in a withholding tax of €559.90.

8. Claiming Overpaid Withholding Tax:

  • Submitting a tax exemption order can significantly reduce withholding tax.
  • Overpaid funds can be claimed on your tax return, preventing fines.

9. Withholding Taxes and Tax Declarations:

  • Even if taxes have been withheld, you must declare capital earnings in your tax return.
  • Important to avoid fines, but submitting the declaration won't result in additional taxes if already paid.

10. Withholding Tax on Savings Accounts:

  • Interest earned on savings accounts is subject to withholding tax, but only amounts above the tax allowance.

11. Withdrawal of Withholding Tax by Banks:

  • Without a tax exemption order, banks deduct withholding tax directly from your account when interest earnings occur.

In conclusion, navigating the intricacies of withholding tax in Germany requires a thorough understanding of its principles, rates, allowances, and applicable scenarios. Consultation with a tax advisor is recommended for personalized advice based on your financial situation.

What is withholding tax in Germany? (2024)
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