Germany’s Flat Tax on Income from Capital, Investments
As the 2009 tax year is drawing to a close, below we briefly discuss a recent reform that may impact taxpayers’ returns for the first time this year.
The 2008 Business Tax Reform Act introduced a flat tax of 25 percent with effect from 1 January 2009, for non-business investment income (income from capital, including interest, dividends, and capital gains) derived by individuals.
The amendments do not only concern the applicable tax rate, but also the types of income that fall under the term “investment income” and the assessment base. Certain financial instruments, as well as capital gains on the sale of shares in corporations with holding periods of more than a year, that have been tax exempt under the current regulation, now also fall under the scope of the new law, regardless of how long they are held.
The new law also abolishes the “half-income system,” under which an individual shareholder was entitled to a dividends-received exclusion from taxable income in an amount of 50 percent of the gross amount.
The new tax is assessed and withheld by the income payer (e.g., bank) and is final. Such income is no longer to be declared in the annual tax return (effective for the 2009 returns). However, should the personal tax rate be lower than the flat tax, the tax office can reassess the tax due. The flat tax on foreign income, which has not been subject to withholding in Germany, is collected in the annual tax assessment process.
On the flat tax, the solidarity surcharge of 5.5 percent and church tax (8 percent to 9 percent) for members of the Catholic and Protestant churches apply. Both surcharges are calculated on the amount of flat tax. Foreign tax can be credited against German tax due.
Furthermore, the new law only allows the deduction of a lump sum for expenses connected to this type of income of up to €801 in the case of a single filing or €1,602 for a joint filing. Exceeding expenses do not qualify for a deduction. Losses can only be offset against the same type of income and can only be carried forward.
Capital gains from investments acquired until 31 December 2008, are not governed by the new law. This means that capital gains from stocks remain tax exempt if the stocks were acquired before 1 January 2009, and a holding period of one year has elapsed even if the sale occurs after 31 December 2008.