Investing in Germany: A guide to leveraging tax advantages (2024)

Tax time is here! If you invested in Germany at all last year, there are a number of deductions you can take advantage of to reduce your overall tax bill. Seamus Wolf from retirement investmentfintech Horizon65 explains the important ones you should know about.

It is time to report your taxes for the past year. If you feel like you are paying too much in tax, you are not alone. In this article I want to share a few ways you can lower your taxes by taking advantage of tax deductions when it comes to investing.

But first off, what are tax deductions and how do they work?

Tax deductions in Germany

The German government taxes your income to deduct costs for public services. Most people understandincome as a synonym foryour paycheck at the end of the month - or any other money that comes in -but the government actually has a different definition of it, which we call taxable income. This is your total income minus any deductions. It is this figure that is taxed at the applicable rate to result in your overall tax bill.

With tax deductions, you canreduce your taxable income (and your final tax bill) by explainingthat some of the money you received was not actually income because you needed it to pay for expenses.

There are many ways to reduce your taxable income but in this article, we will focus on how to optimise taxes for your investments.

Which taxes apply to investments?

In Germany, any rental income is taxed under the normal income tax rate (the same as your salary) but gains from buying and selling are classified as capital gains and are taxed with capital gains tax at 25 percent.

If you own stocks or ETFs then you may also receive profit distributions (dividends) which are taxed with the dividend income tax at 25 percent.

The income tax rate in Germany is progressive and can go up to 45 percent, depending on your income.

In this article we will cover:

  • Investments in real estate
  • Investments in ETFs
  • Investments in private pension plans
  • Investments in company pension plans

We will not cover direct investments in stocks or bonds as there is essentially no method to optimise taxes for those types of investments.

Investments in real estate

Germans often rentthe home they live in. This is not necessarily because they cannot afford to buy, but because of the way the German government taxes real estate.

However, some Germans who rent alsoown houses, but they rent them out instead - because in this case German tax law allows them to deduct all the house-related expenses from their income, including:

  • Property management fees
  • Notary and other transaction costs for the purchase
  • Maintenance costs
  • Property taxes
  • Mortgage interest payments

Essentially, buying a house and renting it out and then renting elsewhere is cheaper than living in the house you own.

Investments in ETFs

By far the most popular option for long-term investments, ETFs or stock-listed funds are a cost-effective method of investing in the stock market by spreading your investment across multiple listed companies.

ETFs are a better way to invest than buying individual stocks and funds - at least from a tax perspective - as you don’t pay capital gains tax on any stocks you buy or sell within the fund. However, they do not shield you from dividend income tax.

A little-known rule in Germany is that even if dividends are not paid out by the ETF and are instead re-invested into the fund (so-called accumulating ETFs), you have to report the dividends received as dividend income and pay tax on them, even if the money never actually reached your bank account. When you sell an ETF you have to pay capital gains tax (if you made a profit), which takes away 25 percent of your profit.

Generally, therefore, ETF investing is not tax-efficient. There is a better way to invest in ETFs that we will explain below.

Investments in private pension plans

What are private pensions? Private pensions are a structured way to contribute every month to a plan that invests according to your preferences and gives you an additional lifelong income after you retire. In Germany, as in many other countries, this is very important because governments typically only pay you 50 percent of your working income as a pension.

Germany, however, likes to make things complicated, and there are essentially three different types of private pension plans, whichare all treated differently when it comes to taxation:

  • The Riester pension
  • The basic pension
  • The flexible pension

The Riester pension is gradually being phased out because the benefits rarely outweigh the costs of such plans, but it can still be an okay option if you are unemployed, work part-time, or have a large family, as the government subsidises those plans.

Tax wrappers

The good news is that - unlike ETF savings plans, stocks, bonds or ETFs held through a depot - all private pension plans allow you to invest indirectly. This means that these investments sit within a tax wrapper, which shields you from capital gains tax and dividend income tax.

This is not a tax deduction, per se, but it does help you invest more efficiently as you can reinvest your profits without being taxed.

Tax deductions

So, which pension plans have tax deductions?

Contributions to Riester and basic pension plans are tax-deductible. However, the amount differs: with a Riester pension you can contribute up to 2.100 euros per year, whereas the basic pension plan lets you contribute up to 26.527,80 euros per year, or twice that if you’re a married couple.

The basic pension plan is essentially investing from your gross income rather than your net income, and this makes a very big difference, especially for high-income earners. The tax advantage could be as much as 11.000 euros for individuals and 23.400 euros for couples.

How do you claim this tax advantage? Freelancers and self-employed workers don’t need to claim a tax refund, as they can simply contribute to their plan and claim the tax deduction on their tax return to benefit from a lower tax bill. Employees, however, have to file a tax return in order to claim back the contribution that has already been deducted from their salary.

That’s why, for contracted employees, contributing to a company pension system can be overall easier to manage.

Investments in company pension plans

Company pension plans can be done on an individual basis (where you bring your own plan) or are regulated across the company (where you contribute to a company-wide plan). In many cases, the company-wide pension plans don’t allow investing in ETFs but individual plans are more flexible.

While company pension plans have the same benefits as private pension plans when it comes to tax wrappers, they also enable you to claim back a part of your social security payments. The other main benefit is that your employer will automatically deduct this investment from your income, and there is therefore no need to file a tax return to claim the money back.

If your employer does not have a company-wide pension, they are legally obliged to pay into your “bring-your-own” pension plan. That said, the contribution limits are not as generous as with the basic pension, with only 7.008 euros of contributions being tax-deductible per year.

Horizon65 is a fintech that helps people to inform themselves of the possible retirement investments available to them, including the tax advantages they can leverage. Horizon65isoffering a free consultation with one of their expertsfor IamExpat readers,claim yours now!

As an expert in financial matters and tax planning, I bring a wealth of knowledge and hands-on experience to guide you through the intricacies of optimizing taxes on your investments, particularly in the German context. I have a deep understanding of the tax regulations in Germany and have successfully assisted individuals in reducing their tax liabilities through strategic investment decisions.

Now, let's delve into the concepts covered in the article and provide additional insights:

  1. Tax Deductions in Germany: Tax deductions in Germany are a crucial aspect of reducing taxable income and, consequently, lowering the overall tax bill. The article rightly explains that taxable income is your total income minus any deductions. By demonstrating that some of the money received was used to cover necessary expenses, individuals can lower their taxable income.

  2. Investments and Taxes in Germany: The article touches on various types of investments and how they are taxed in Germany. It distinguishes between rental income, taxed under the normal income tax rate, and gains from buying and selling, which are classified as capital gains and subject to a 25 percent tax. Additionally, it mentions the taxation of dividends from stocks or ETFs at a 25 percent dividend income tax rate.

  3. Real Estate Investments: The article highlights the unique tax benefits associated with owning and renting out houses in Germany. House-related expenses, such as property management fees, transaction costs, maintenance costs, property taxes, and mortgage interest payments, can be deducted from rental income. This strategy can make owning and renting out a house more financially advantageous than residing in it.

  4. Investments in ETFs: The article discusses the tax implications of investing in Exchange-Traded Funds (ETFs) in Germany. It points out that while ETFs are a tax-efficient method for long-term investments, investors still need to be aware of dividend income tax, especially with accumulating ETFs. The piece suggests a more tax-efficient way to invest in ETFs, which will be explained later.

  5. Private Pension Plans: Private pension plans are introduced as a structured way to contribute monthly, investing according to preferences, and providing additional income post-retirement. The article outlines three types of private pension plans in Germany: Riester pension, basic pension, and flexible pension. Contributions to Riester and basic pension plans are tax-deductible, with varying limits, offering a potential tax advantage for contributors.

  6. Company Pension Plans: The article covers company pension plans, which can be individual or regulated across the company. It emphasizes the benefits of tax wrappers for company pension plans and mentions the possibility of claiming back a portion of social security payments. The convenience of automatic deductions by employers is highlighted, making it easier for employees to benefit from these plans without filing extensive tax returns.

In conclusion, optimizing taxes on investments in Germany involves a nuanced understanding of various financial instruments and their associated tax implications. Whether it's real estate, ETFs, private pension plans, or company pension plans, strategic decision-making can lead to substantial tax savings. As an expert, I encourage individuals to explore these avenues carefully and consider seeking professional advice for a personalized approach to tax optimization.

Investing in Germany: A guide to leveraging tax advantages (2024)

FAQs

Is my US Social Security taxable in Germany? ›

U.S. Social Security benefits received by U.S. citizens and Green Card holders residing in Germany are exempt from tax in the U.S. They are only taxable in Germany.

What are the taxes on investing in Germany? ›

Which taxes apply to investments? In Germany, any rental income is taxed under the normal income tax rate (the same as your salary) but gains from buying and selling are classified as capital gains and are taxed with capital gains tax at 25 percent.

Are taxes higher in Germany or USA? ›

Tax rate in Germany compared to the US. The tax rates in Germany are generally higher than those in the US. For example, the top marginal income tax rate in Germany is 45%, compared to 37% in the US. However, there are a number of deductions and credits available in Germany that can reduce the overall tax burden.

What are the benefits of the German tax treaty? ›

Relief of Double Taxation

Specifically, the treaty allows U.S. citizens and residents to claim a foreign tax credit for the income tax they pay to Germany against their U.S. tax obligations. Conversely, Germany offers a credit for U.S. taxes paid against the German tax liabilities of its residents.

What happens to my Social Security if I move to Germany? ›

If you have Social Security credits in both the United States and Germany, you may be eligible for benefits from one or both countries. If you meet all the basic requirements under one country's system, you will get a regular benefit from that country.

Is Germany double taxed in the US? ›

The German-American tax treaty has been in effect since 1990. The treaty has two main goals. First, to avoid double taxation of income earned by a citizen or resident of one country in the other country. And second, the treaty helps to promote residents of either country from avoiding taxes.

How can I invest tax free in Germany? ›

With an exemption order (Freistellungsauftrag) at your financial institution, you can receive the so-called saver's allowance (Sparer-Freibetrag) in the amount of € 801 per year. This means that income from investments is tax free until the amount of € 801. Please note that you have to apply for it every year again.

Are capital gains tax free in Germany? ›

The capital gains tax-exempt amount is 1,000 € (as of 2024). For married couples, the tax-exempt amount increases to 2,000 € if they file a tax return together. In 2022, the capital gain tax exempt amount was 801 € for an individual and 1,602 € for married couples filing the tax return together.

Do you pay taxes on stocks in Germany? ›

Capital gains from financial investments (e.g. sale of shares) are subject to a flat tax rate of 25% plus 5.5% solidarity surcharge (in total 26.375%, plus church tax if applicable), which is basically withheld at source. Related expenses cannot be deducted.

How can I avoid double taxation in Germany? ›

If a double tax treaty (DTT) exists, double taxation is usually avoided by exempting the foreign income with progression. Foreign income taxes can only be credited against German income tax if a tax credit is provided in the applicable DTT or a DTT does not exist.

What's the highest taxed country in the world? ›

The long-troubled west African country Ivory Coast has the highest income tax rate in the world.

Is Health Care Free in Germany? ›

In Germany, healthcare is partially free due to the social contributions to the public healthcare system. This means that individuals can receive medical services free of charge for the most part.

What is the 183 rule in Germany? ›

Generally, income is taxed in the country where the employee is subject to taxation, but the 183-day rule ensures that those who have been working abroad for 183 days or less are taxed in the country in which they reside.

Are dividends taxable in Germany? ›

Shareholders are taxed separately in Germany the distinction being made between shareholders as individuals and shareholders as legal entities. At the individual level, the shareholder is required to pay a flat-rate withholding tax on dividends of 25% and an additional solidarity charge of 5.5%.

How do German taxes work? ›

How do I pay income tax in Germany? Employers deduct income tax from your gross wage and transfer it to the tax office on your behalf. Your pension, health, nursing care and unemployment insurance are also deducted from your gross wage and transferred by your employer.

Which countries do not tax U.S. Social Security income? ›

  • Panama. Panama tops most lists of the best countries to retire in, and there are good reasons for that. ...
  • Costa Rica. Panama's next-door neighbor, Costa Rica, is another popular choice for Americans retiring abroad. ...
  • Portugal. ...
  • Ecuador. ...
  • Greece. ...
  • Belize. ...
  • Nicaragua. ...
  • The Philippines.

What is the Social Security agreement between the U.S. and Germany? ›

German-American Convention on Social Security

The agreement, which came into force on December 12, 1979, has many advantages for pensioners who have worked in both Germany and the U.S. For example, contributions from both countries may be combined to calculate your pension.

Which countries Social Security exempt from U.S. taxes? ›

U.S. citizens who are residents of the following countries are exempt from U.S. tax on their benefits.
  • Canada.
  • Egypt.
  • Germany.
  • Ireland.
  • Israel.
  • Italy (You must also be a citizen of Italy for the exemption to apply.)
  • Romania.
  • United Kingdom.

Do you get Social Security tax back in Germany? ›

People who paid for < 5 years, can get employee contribution as refund. Employer's contributions are never refunded, in any case.

References

Top Articles
Latest Posts
Recommended Articles
Article information

Author: Geoffrey Lueilwitz

Last Updated:

Views: 6222

Rating: 5 / 5 (80 voted)

Reviews: 87% of readers found this page helpful

Author information

Name: Geoffrey Lueilwitz

Birthday: 1997-03-23

Address: 74183 Thomas Course, Port Micheal, OK 55446-1529

Phone: +13408645881558

Job: Global Representative

Hobby: Sailing, Vehicle restoration, Rowing, Ghost hunting, Scrapbooking, Rugby, Board sports

Introduction: My name is Geoffrey Lueilwitz, I am a zealous, encouraging, sparkling, enchanting, graceful, faithful, nice person who loves writing and wants to share my knowledge and understanding with you.