Withholding tax - Questions and Answers
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- What is the purpose of withholding tax?
- What amount of withholding tax has to be paid?
- Which kind of income is affected by withholding tax?
- Are losses on disposal taken into account by withholding tax?
- How are losses on investments accounted for?
- Do I have to disclose any losses in my income tax statement?
- Does the withholding tax include capital gains on the sale of real estate?
- Can I continue to deduct advertising costs from investment income and gains on disposals?
- How are shares and other securities that have been purchased before 1.1.2009 treated for tax purposes?
- Are discounted bonds (e.g. zero bonds) that come to maturity after 1.1.2009 subject to withholding tax?
- What happens with bank or investment savings plans that were made before 2009?
- What effect does withholding tax have on Riester contracts that serve as pension provisions?
- Is withholding tax also applicable to any return on capital of pensioners, students, or persons with low income, who do not pay income tax?
- Will the exemption order continue to exist?
- What can be done if the individual income tax rate is below the withholding tax rate of 25 %?
- Are foreign returns on capital subject to withholding tax?
- Can the withholding tax imposed abroad be taken into account despite the flat rate withholding tax in Germany?
- How is church tax imposed on private returns on capital since 2009?
1. What is the purpose of withholding tax?
Withholding tax is there to organise and facilitate the taxation of private returns on capital. Capital gains and gains on disposal used to be subject to highly different taxation rules. Because of the often very difficult distinction between fully, partially or not at all taxable investment income, a large number of investment alternatives had emerged. Such was this diversity that even experts were often unable to say with absolute certainty how the investments were to be treated in terms of tax. Since 2009, interest, dividends and private gains on disposal are subject to a standardized tax rate. An investor can make his investment decisions independently of specific tax considerations. Taxation is mostly done by the banks via deducting the amount when gains are credited. For the investor, that is all. He now no longer has to include capital gains and gains on disposals in his income tax statement.
2. What amount of withholding tax has to be paid?
The standardised tax rate for all capital gains is 25%. After the solidarity surcharge of 5.5% and, if applicable, church tax are added, the final burden can be at between 28% and 29%. Withholding tax however only arises if the then valid savings allowance of 801 euros per person per year is exceeded. This savings allowance is established by aggregating the current tax-free allowance of 750 euros and the flat-rate advertising cost allowance of 51 euros.
3. Which kind of income is affected by withholding tax?
All privately incurred capital gains, e.g. interest from fixed or time deposit investments, savings schemes, interest-bearing securities, certificates or bonds, returns on investment funds or forward transactions, dividends from securities and price gains on securities sales. This specifically means that the taxation of only one half of dividends and gains from share sales according to the half-income system is no longer valid and that all gains from securities sales are subject to taxation for an unlimited period of time.
4. Are losses on disposal taken into account by withholding tax?
Losses from private securities and forward transactions are, like gains, with regard to tax accounted for without a time limit and always to the full amount. Since the omission of the half-income system, the same is also applicable to losses on shares. The restrictions with regard to the type of income against which these losses are offset do however still have to be taken account.
5. How are losses on investments accounted for?
In the context of withholding tax, share losses can now only be offset against gains from shares. Losses from any other securities or forward transactions can not only be offset against gains from these respective transactions, but also against current earnings from investments, such as interest and dividends.
6. Do I have to disclose any losses in my income statement?
As long as the investments are done through a domestic bank, the latter carries out the loss offsetting for the client and then retains an accordingly lower withholding tax. If at the end of the year losses cannot be offset due to a lack of gains, the bank will carry over these losses to the next year and continue offsetting them then. It is also possible for the bank to issue a confirmation of loss to the client, if the latter wishes to use that loss for the purpose of compensating taxable capital gains from other sources in the context of income tax assessment. Any such documentation has to be ordered from the bank by the 15th December of the year. Investment losses incurred abroad can always only be accounted for in the income tax statement.
7. Does the withholding tax include capital gains on the sale of real estate?
No. Here, the legal position has remained unchanged. A capital gain on the sale, within 10 years of purchase, of property not occupied by the owner himself is subject to taxation. Taxation is done in the context of the assessment of the individual tax rate.
8. Can I continue to deduct advertising costs from investment income and gains on disposals?
No. Since 2009, only the savings allowance of an annual 801 euros is deducted from these capital gains. Beyond this, no further advertising costs (e.g. deposit fees, wealth management fees, travelling cost for journeys to the financial advisor or the Annual Meeting) are taken into account. The expenses directly connected to disposal or forward transactions (e.g. commission payments) do however continue to be deductible.
9. How are shares and other securities that have been purchased before 1.1.2009 treated for tax purposes?
On the grounds of the protection of legitimate expectations, the previous tax law is applicable to all securities that were bought before 1.1.2009 and sold after 1.1.2009 (and therefore after the introduction of withholding tax). It follows that anyone who had shares or other interest-bearing securities in their deposit for longer than 12 months and who sold these at a profit can continue to earn the gains on the price tax free. Some forms of investment were (independently of the holding period) subject to interest rate rebate at the time of sale (financial innovations such as zero bonds, equity bonds) even before the introduction of withholding tax. Since 1.1.2009, the sale of such securities is immediately recognised by withholding tax. As a specific exception there is an early cutoff date for certain certificates without earnings or capital guarantee: Only those who purchased such certificates before 15.3.2007 are after 1.1.2009 being treated according to the previous tax law without restrictions. Another special provision is planned for shares of special funds and certain other investment assets that attract specific investor groups. This will stipulate that these investments will in the case of a sale after 1.1.2009 not be subject to withholding tax if and only if they have been purchased before 10.11.2007.
10. Are discounted bonds (e.g. zero bonds) that come to maturity after 1.1.2009 subject to withholding tax?
Yes. Taxes must be paid on the gains from discounted bonds (e.g. zero bonds, Disagio bonds) upon maturity. On redemption of these securities which are currently considered as part of the segment of financial innovations, the difference between redemption value and purchase value is as of 1.1.2009 to be subjected to withholding tax regardless of the date of acquisition. This does not apply to the redemption of bonds with regular coupon payments which have at the time of issue merely undergone a small discount of the nominal value that was within the valid staggered discount scale. For bonds purchased after this cutoff date this staggered arrangement is no longer applicable.
11. What happens with bank or investment savings plans that were made before 2009?
1.1.2009 was the cutoff date for savings plans as well. Capital gains that arose before this date were taxed according to the old law; those that came in after were subject to the new law. The price gains of securities that were acquired before 1.1.2009 in the context of such contracts and were sold after this cutoff date and outside the span of a year, continue to be tax exempt.
12. What effect does withholding tax have on Riester contracts that serve as pension provisions?
In contrast to other savings schemes, the Riester contracts are not subject to any withholding tax during the savings phase. When the payout period begins, the investor has the accrued capital at his disposal without any tax deductions. Only at this point does the investor have to pay taxes according to his personal income tax rate on the Riester payouts, which are classed as “other income” in accordance with the deferred taxation regulation. Withholding tax does not apply.
13. Is withholding tax also applicable to any return on capital of pensioners, students, or persons with low income, who do not pay income tax?
No. Individuals who earn less than the basic tax-free allowance of currently 7,664 euros per year and who do not pay income tax can as before apply for a non-assessment note from the financial authorities. If this note is submitted to the bank, the capital gains are credited without tax deduction.
14. Will the exemption order continue to exist?
Yes. Despite the withholding tax, Capital gains and gains on disposals are since 2009 exempt of income tax up to the amount of 801 euros (savings allowance) per year (refer to question 2). The bank can as before take this lump-sum amount into account at the point of tax deduction and credit any gains tax-free, as long as the client submits a corresponding exemption order.
15. What can be done if the individual income tax rate is below the withholding tax rate of 25%?
It is possible to request an assessment from the financial authorities. In this case, all capital gains and gains from disposals are to be stated separately from any other earnings within the income tax assessment. Additionally, the withholding tax that has already been retained is to be disclosed. The necessary data is made available by the banks in the form of a tax certificate. On this basis, the financial authorities will ex officio carry out a so-called most-favored-test (Günstigerprüfung) and will if applicable also use the lower income tax rate on the capital gains. The previously retained withholding tax can be deducted in this process.
16. Are foreign returns on capital subject to withholding tax?
Yes. Provided that gains arise from foreign securities held by domestic banks, they are subject to withholding tax just as domestic gains are. Gains from investments abroad and gains from disposals abroad must as before be stated in the process of income tax assessment, but will like capital gains be taxed at 25%.
17. Can the withholding tax imposed abroad be taken into account despite the flat rate withholding tax in Germany?
Yes. The deductible tax at source that remains after the consideration of discount entitlement because of double taxation treaties will, for gains from foreign securities that are held by domestic banks, be deducted directly when withholding tax is retained. For capital gains obtained abroad, the arising foreign withholding tax will only be considered in the process of income tax assessment.
18. How is church tax imposed on private returns on capital since 2009?
Those who are subject to church tax have the right to choose (until 2013) between two options. They can pay the tax in the context of their income tax assessment by stating the total amount of withholding tax already retained from capital gains. For this purpose the banks will confirm the amount upon request. It is then used to determine the appropriate church tax rate. Alternatively, church tax can be retained directly by the bank as an addition to the withholding tax. The client must specifically request this from the bank with the disclosure of his or her confession, the applicable tax rate and further details. As soon as the planned introduction of a standardised personal tax number is completed and a separate database has been set up at the Federal Central Tax Office (BZSt), church tax on capital gains will in general be paid in the process of tax retention.