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This tax guide reviews 'Final Withholdings Tax' and explains the details you need to know and understand for the correct processing of tax deductions.
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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) are not subject to tax in the initial saving phase. There is no final withholding tax on these contracts.
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.
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.
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 tax- payer’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.
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.
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.
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.
Up until 31 December 2008, the domestic paying agents and parties liable to pay investment income retained the withholding tax on income from capital as an advance payment on the income tax that was assessable by the tax office and owed by the beneficiary of the investment income. It was a requirement for the investment income to be entered in the taxpayer’s income tax return, and the investment income was taxed at the taxpayer’s personal rate.
The introduction of the final withholding tax with effect from 1 January 2009 (through the 2008 Business Tax Reform Act, cf. Federal Law Gazette I, p. 1912) revised and simplified the taxation of personal investment income for residents of Germany. Personal investment income such as dividends, interest and capital gains on securities are treated in the same manner for tax purposes. To this end, capital gains from securities were included in the legal provision on income derived from capital assets (section 20 subsection (2) of the Income Tax Act). This means there is no longer a time limit during which the return on the sale or purchase of securities has to be taxed. Church Tax is taken into account by the paying agent (if the taxpayer has requested that this be done).
Thus there is generally no obligation to state personal investment income in the tax return. This is accompanied by the introduction of a separate tax rate for income from capital assets. The outcome is that all personal investment income is taxed uniformly at 25% on the return plus solidarity surcharge and (if applicable) Church Tax.