Dividend tax in Germany
Tax on dividends in Germany (Abgeltungssteuer) is a tax on income from invested capital. Interest on deposits, shares and bonds is taxed as investment income. This tax is equal to income tax and is shown on your tax return along with other taxes paid.
The bank automatically withholds tax on dividends for individuals. And legal entities pay it when they distribute profits to GmbH or AG companies in which they own a share of the capital.
Withholding tax rate
The tax on dividends and shares in Germany does not depend on the amount of aggregate income, the same flat rate applies to all. The investor pays a flat rate of 25% on all income from dividends, interest and investment funds.
You also have to pay a solidarity surcharge (Solidaritätszuschlag) of 5.5% of the dividend tax. The solidarity surcharge was introduced after the reunification of Germany to support the economy of the eastern German states. In addition, if the payer is a member of a church, the church tax of 8–9% (depending on the federal state) is also assessed.
A total tax burden comprises withholding tax rate of 25% + solidarity surcharge (5.5 x 0.25%) = 26.375%. And with the church tax, it can be as high as 28.6%.
Tax residents of Germany do not pay capital gains tax if income from capital investments does not exceed the non-taxable amount of €801 per person per year or €1,602 per year for married couples. In order to request a tax exemption, you have to file an application with the bank (Freistellungsauftrag).
If dividends are distributed to a foreign tax resident, different rules may apply, often depending on the status of the recipient of dividends: whether it is an individual or a company, as well as on the country of their tax residency.
The taxation rules for the companies that are recipients of dividends:
The first case is when there is no double taxation treaty between the countries, and the recipient of the dividends is not from an EU country. If a German company pays dividends to a foreign parent company, it is taxed at a rate of 26.375% (including the solidarity contribution). However, if a non-resident transfers its profits to a local firm in Germany, there is a possible compensation for the source. The level of taxation then will be reduced to 15.825%. The relief is available for companies that are not subject to a double taxation treaty.
The second case is when there is a double taxation treaty between the countries. Then the maximum withholding rate is indicated in the agreement. Thus, for example, the tax on dividends that a Russian company receives from a German subsidiary may be reduced to 5%. To do this, the Russian company shall own at least 10% of the share capital of the German company that pays dividends, and the size of this share in the capital should be at least €80,000. In all other cases, the dividend tax rate will be 15%.
The third case is when the dividends are paid to a company located in the European Union, which owns at least 10% of the capital of a German company for 2 years. In this case, no withholding tax is imposed. In addition, both companies must be subject to a corporate tax and have a legal structure specified in the EU Council Directive applicable in the case of parent companies and subsidiaries of different Member States dated 30 November 2011.
For individuals, recipients of dividends, the tax is determined by a double taxation treaty, if there is no such treaty, the tax rate will be 26.375%.
If royalties are paid abroad, a withholding tax of 15% is levied in Germany and 15.8% if all surcharges are taken into account. The rate of this tax can be reduced by an international tax treaty. Thus, the tax treaty between Germany and Russia reduces this rate to zero. If royalties are paid to a company located in the European Union, which is associated with the payer, no withholding tax is charged in Germany.
Dividend tax on real estate
Dividend tax is levied on real estate in Germany if the dwelling is registered to a legal entity. The tax is assessed upon the income tax payment when the capital is transferred to the owner of the company. Note that the property owner does not always distribute dividends to himself, for example, he may reinvest profits.
If the property belongs to a company that is registered in Germany and is engaged in a rental business for passive income, and the owner of the company is a natural person and a tax resident of the country that has a double taxation treaty with Germany, then there is no need to pay additional tax in the tax resident’s home country thanks to the double taxation agreement.
At the same time, the mechanism of tax withholding is not simple. First, a certain amount of tax is withheld from a foreign tax resident (an individual), as if he were a resident of Germany. Then the taxpayer provides documents that he is a resident of his home country and the overpayment is refunded.