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 withholding tax on income from capital.


What is the tax payable on?

The system for taxing income from capital assets was reformed by the 2008 Business Tax Reform Act (cf. Federal Law Gazette I, p. 1912). A separate tax schedule applies to investment income from assets held by private individuals. As a rule, the withholding tax on income from capital serves to discharge in full any income tax obligations that private individuals have in respect of that income. The individuals are then not required, in principle, to state the income from capital in their tax returns. In cases where business assets yield capital income, the withholding of the tax merely constitutes a prepayment. The income in question must still be stated in the tax return.

The tax is payable on income from capital assets. Examples include income from shareholdings in companies, the sale of shares, investment funds, futures, and interest. Foreign dividends are also covered if a domestic paying agent credits them to the investor.


Who is liable to be taxed?

Investment income becomes liable to withholding tax on income from capital when it accrues to the beneficiary. Either the source of the income from capital, if in Germany, or a domestic paying agent (such as a bank or credit institution) must then withhold the tax on behalf of the person to whom the income is due.

The withholding of tax is not required under certain circumstances. For example, upon instruction from the recipient of the income, the paying agent can take account, in whole or in part, of the standard savers’ allowance of 801 euros (or 1,602 euros for married couples or registered partners assessed jointly for tax). If certification of non-assessment issued by the tax authorities is presented to the paying agent, the latter is permitted to credit the capital income to the recipient without withholding the tax.


How much is the tax?

Sole traders and partnerships are also subject to withholding tax on income from capital. Exceptions allowing the tax not to be withheld exist for certain corporations. More detailed information is available from banks or credit institutions.

In principle, withholding tax on income from capital amounts to 25% of that income; solidarity surcharge and, where appropriate, church tax are then imposed on top. When deducting the tax, the paying agent may, provided certain conditions are met, offset losses and credit foreign tax for which a reduction is no longer available.

For individuals resident in Germany, withholding tax on income from capital generally has the effect of definitively discharging tax liability in respect of that income (final withholding tax). As a rule, the tax rate is 25% of the income generated by private individuals’ investments. Taxpayers whose marginal rate of tax is less than 25% may apply to have the income from capital included in their income tax assessment.

For non-residents subject to limited tax liability, the withholding tax on income from capital also generally serves to fully discharge that tax liability (withholding taxes on the income of non-residents).


What is the legal basis?

Withholding tax on income from capital is not a tax in its own right but, like wages tax, is a special form of levying the income tax. Its legal basis is found in sections 43 to 45d of the Income Tax Act. As a consequence of the 2008 Business Tax Reform Act, the withholding tax on income from capital has served to definitively discharge the tax liability of private individuals.


Who collects the tax?

Withholding tax on income from capital is collected by the Länder (one of the 16 federal states of Germany). It is then paid over to the tax office responsible, either for taxing the income of the entity generating the capital income or for the paying agent.


How did the tax develop?

In the course of the development of systems of earnings taxation in the 19th century, “capital taxes” were introduced in southern Germany from 1820 onwards (first in Württemberg, thereafter in Bavaria). These gained in significance with the increasing spread of mobile capital invested to generate earnings, but were then incorporated into the new income taxes at the turn of the century. In 1920, Erzberger’s financial reform introduced a separate tax on income from capital which was not credited towards the income tax and corporation tax and did not affect the income and corporation tax liability attached to income from capital. Following the tax reform of 1925, income from capital was always subjected to tax within the scope of income taxation.

The 2008 Business Tax Reform Act (Federal Law Gazette (2007) I, p. 1912) inserted section 43 subsection (5) into the Income Tax Act. This took effect on 1 January 2009, and has the consequence that withholding tax on income from capital now fully discharges private individuals’ tax liability in respect of such income. In other words, withholding tax on income from capital is a “final” tax. The income involved no longer needs to be stated on an individual’s income tax return. To ensure that different types of income are treated equally for tax purposes, capital gains have been included in the category of income from capital since 1 January 2009.