The withholding tax is a uniform tax on investment income that does not depend on the personal tax rate. It is 25 percent plus any church tax and solidarity surcharge.
- The final withholding tax is a withholding tax, as it is paid directly when taxable income is generated.
- The withholding tax is paid by the institutions that hold or manage the investment that led to the taxable profit.
- In order to use their statutory exemption of 801 euros per year, investors must distribute this sum across all banks from which they will receive interest income and submit separate exemption orders for each of them.
This income is taxable
Short for WT by abbreviationfinder, the final withholding tax applies to all investment income. These include:
- Interest on current accounts, savings deposits, time deposits and overnight money
- Interest from fixed income securities, money market and pension funds
- Reinvested profits from mutual funds
- Income from profit participation certificates
- Stock dividends
- Price gains from sales of stocks, bonds or funds
- Income from open real estate funds
- Profits from trading derivatives
Investment funds that reinvest the profits do not distribute them to the investors, but invest them immediately in new fund units. However, these profits are also taxable and are treated by the tax authorities as “distribution-equivalent income”.
This income is not taxable
Profits from foreign exchange transactions are not charged with the final withholding tax, provided that they were based on a specific purchase and sale of a currency. Profits from closed funds are also not subject to the withholding tax, since in these cases they are profits from an entrepreneurial activity.
Use the exemption order
The legislature provides that every taxable citizen in the Federal Republic of Germany is entitled to an exemption of 801 euros per year on the above-mentioned investment income. For married couples, this means an allowance of 1,602 euros. Families with children can set up accounts and custody accounts in the name of the children and thus book an additional 801 euros per year tax-free in investment income. However, the exemption order must be submitted by the investor himself; it is not automatically set up by a bank or similar institute.
What happens in the event of a security loss?
If an investor has a call money account and a stock account , it is reasonable to assume that he can reduce his interest income from overnight money by possible price losses when selling shares. Unfortunately, this assumption is wrong. Only gains and losses from one asset class can be offset against each other within a year. Losses on stock sales can be extrapolated against profits, interest income on a bond with a possible price loss on the sale of the paper.
Determination of the tax
In principle, the banks pay 25 percent of the amount exceeding the exemption order to the tax office for every payment flow that represents income. However, in order to ensure that the profits and losses of an asset class are offset, the banks keep so-called tax pots for accounting purposes. Opposite the control pot is the loss pot. While in one the profits are accumulated, the other accumulates the accrued losses. The actual tax liability then results from the balancing of the two pots.
The final withholding tax is not an exclusively German phenomenon. Almost all European countries now use this form of withholding tax. The difference, however, is in the amount. Anyone who has invested money in a country with a higher withholding tax rate can have the difference to the German final withholding tax credited back in their personal tax return. The cross-border fiscal policy now enables data to be exchanged between a bank abroad and the local tax office.
Personal tax rate below 25 percent
For some investors, however, there is another reason to file a tax return on investment income. If the personal tax rate is below 25 percent, you have the right to have the German tax office reimburse you for the difference to the withholding tax withheld.
Foreign funds as a tax trap for the withholding tax
Many fund companies offer funds that are set up under foreign law. In this case, accumulation funds represent a real tax trap. On the one hand, the income must be declared annually as part of the AUS annex to the tax return. On the other hand, if the shares are sold, the tax office taxes the full increase in value since acquisition. Investors run the risk that their retained earnings will be taxed twice.
The only legal means of preventing this is to prove to the tax office on the basis of past tax returns that the income has already been taxed. If investors do not report these profits annually in the tax return, but wait until the units are sold, this is an unauthorized tax deferral, which in turn can only be granted by the tax office.