Investors – Taxation, Exemptions and Foreign Investments

Investors residing in Germany must pay tax on their investment income such as interest, dividends, capital gains, and similar earnings. It does not matter in which country the income is generated. German tax also applies if the securities account is held with a foreign bank.

Below we explain how investment income is taxed, how an exemption order works, and what must be considered in the case of foreign investments. We are happy to assist you with any questions regarding your investments. Please contact us by email or phone.

Capital Gains Tax in Germany

Anyone living in Germany (with their center of life or tax residence in Germany) must pay tax on their investment income in Germany. The tax rate is generally 25% plus 5.5% solidarity surcharge and, if applicable, church tax (withholding tax).

Examples of investment income include:

• Interest, for example from:

  • Call money accounts, Fixed-term deposits, Bonds, Certificates

  Dividends, for example from:

  • Shares, Investment funds, ETFs

  Capital gains, for example from:

  • Shares, Funds and ETFs, Bonds, Warrants, Certificates

  Advance lump-sum taxation, for example from:

  • Accumulating funds and ETFs

If the investment is held with a German bank, the bank automatically withholds the tax (25% plus solidarity surcharge and possibly church tax). In such cases, the tax liability is generally settled by this withholding tax, and the income normally does not have to be declared in the income tax return.

Exemption Order for Investment Income 

There is a tax-free allowance for investment income of €801 per person (or €1,602 for married couples). Up to this amount, no tax is payable.

Banks can take this allowance into account directly. However, to do so, you must submit a freistellungsauftrag (exemption order) to the bank. This can usually be done through online banking or by submitting a paper form.

To apply the exemption order, the bank must also have your tax identification number. This number can be found on your tax assessment notice (usually at the top left) or on most payroll statements if no tax notice is available.

It is important to ensure that the exemption amount is not exceeded. If you hold investments with multiple banks, the total of all exemption orders must not exceed the maximum allowance.

If no exemption order has been submitted, a tax return is generally not mandatory. However, filing one may still be beneficial. Within the income tax return, you can request that the unused allowance be applied retroactively. This can also be useful if exemption orders were distributed unfavorably among several banks.

Capital Gains from Cryptocurrencies

If investment income is not subject to German withholding tax, it must be declared in the tax return. This is particularly common when the investment account is held with a foreign bank.

Different rules apply to cryptocurrency gains (e.g., Bitcoin, Ethereum, etc.).

Such gains are taxed at the personal income tax rate (up to 45%). However, under current law, they are taxable only if the period between purchase and sale is less than one year. If the holding period exceeds one year, the gains are tax-free.

It should also be noted that exchanging one cryptocurrency for another is treated as a sale and purchase, which may trigger a taxable event.

Investment Income with Foreign Connections

Special caution is required in the year of moving to Germany from abroad, particularly for investors who hold funds such as investeringsforeninger.

The taxation of funds and ETFs in Germany differs from that in countries such as Denmark. Until 2018, funds were classified as transparent or non-transparent.

Transparent funds reported taxable income to the German Federal Gazette, and investors were taxed based on these figures. Non-transparent funds did not provide such information, and Germany therefore assumed a taxable amount.

In such cases, 70% of the annual increase in value plus distributions was treated as taxable income, but at least 6% of the fund value as of 31 December. This lump-sum taxation often resulted in a very high tax burden.

From 1 January 2018, the entire taxation system was changed. Instead of relying on information from the fund companies, a general lump-sum taxation was introduced. This is based on a legally defined interest rate applied to the fund’s value at the beginning of the year. Depending on the type of fund, part of this notional income may be tax-exempt.

In principle, anyone living in Germany who holds an investment account abroad must file a German tax return.

Particularly in the case of large portfolios or multiple financial instruments (such as shares, bonds, funds, or corporate bonds), consulting a tax advisor is advisable. The tax assessment can be complex, and statements from Danish banks often do not contain the correct information required for German tax returns.

This issue will become even more important in the future. The EU has concluded agreements with several countries, including Switzerland and Liechtenstein, under which financial institutions report account balances and investment income to the relevant tax authorities. The aim is to reduce underreporting of taxes in each country.

If taxes have not been declared in Germany and suspicion arises, a voluntary disclosure may help reduce potential penalties.