Important note: There are four variants of the withholding tax currently in effect in the German taxation regime. These include withholding tax on construction, withholding tax on income of non-residents, final withholding tax, and withholding tax on income from capital. This article solely concerns itself with the final withholding tax.

 

What is the tax payable on?

The system for taxing income from capital assets was reformed with effect from 1 January 2009 (via the introduction of the 2008 Business Tax Reform Act, cf. Federal Law Gazette I, p. 1912). The final withholding tax applies only to income generated by private assets.

This tax in particular covers individuals’ investment income, e.g., dividends, interest, earnings from investment funds and futures as well as profits on the sale of securities, irrespective of how long they are held. Losses on capital assets and losses on securities may be offset under certain circumstances. Income-related expenses over and above a saver’s tax-free allowance cannot be taken into account for tax purposes. Foreign tax not subject to the right of reduction may be offset against tax.

Investment income from certified pension contracts (called Riester pensions) and certified basic pension agreements (called Rürup pensions) is not subject to tax in the initial saving phase. There is no final withholding tax on these contracts.

 

Who is liable to be taxed?

Deduction at source

As is the case for other investment income, the investment income generated by personal assets is subject to taxation at source by means of a withholding tax on income from capital. Personal income tax liability on this investment income is generally discharged upon the withholding of tax. Taxpayers do not need to state this investment income in their tax returns.

Mandatory assessment

A tax assessment is required for private investment income that has not been subjected to withholding tax. A separate tax schedule applies to investment income generated by personal assets. A tax assessment is also required if no church tax was withheld during deduction at source.

Optional assessment

In certain cases, taxpayers may elect to have their personal investment income assessed for tax purposes. This may be the case, e.g., if the taxpayer’s marginal tax rate is below the rate for taxation at source.

This optional assessment does not affect the tax exemption on investment income from private pension plans known as Riester and Rürup pensions during the saving phase.

 

How much is the tax?

As a rule, the tax rate for all personal investment income is 25% plus solidarity surcharge and (if applicable) church tax. If the paying agent withheld tax when disbursing the investment income, that tax is generally deemed to satisfy the private investor’s tax liability.

 

What is the legal basis?

There is a need to distinguish between the collection of the tax (by withholding tax on income from capital) and the tax schedule:

The final withholding tax is not a tax in its own right but, similar to wages tax, is a special form of levying income tax. The basis for collection and the full discharge of tax liability for investment income generated by personal assets are governed by sections 43 ff. of the Income Tax Act.

The separate tax schedule for income from capital assets, the assessment of tax and the crediting of the remaining foreign tax are set out in section 32d of the Income Tax Act.

 

Who collects the tax?

The final withholding tax is retained in particular by the credit institutions or companies distributing the profits (i.e., the parties liable to pay investment income). They are required to remit the final withholding tax to the tax office responsible for assessing the income of the paying agent/party liable to pay investment income.

If income tax is to be assessed, the investor’s local tax office is responsible.