When you need to pay withholding tax in Germany

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.    

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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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. 

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. 

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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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 

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.

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.  

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. 

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. 

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. 

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. 

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. 

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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