The German tax system draws a strict line between employment income (taxed at progressive rates under the Einkommensteuer) and financial investment income. Investment gains are subject to the Abgeltungsteuer (withholding or flat tax).
The flat rate (Abgeltungsteuer):
- Capital gains from selling shares or funds, dividends, and interest would all be taxed at a fixed 25%.
- To this 25%, the Solidaritätszuschlag (solidarity surcharge) of 5,5% on the tax amount itself would always be added, bringing the effective rate to 26,375%.
- If you are registered with a church, the Kirchensteuer (church tax) would be added on top, bringing the total to approximately 27,8% or 27,99% depending on your federal state.
The Sparer-Pauschbetrag (annual exemption): In Germany, the first 1.000 € (or 2.000 € for married couples) of capital gains per year would be completely tax-free. If you earn 1.200 € in dividends and capital gains, you would only pay the 26,375% on the 200 € that exceeds the limit.
Günstigerprüfung (favourability check): If your total income is very low and your personal income-tax rate (Einkommensteuersatz) is below 25%, you could ask the tax office (Finanzamt) to apply your personal rate to your investment income instead of the Abgeltungsteuer. The system would always apply the more favourable option for you.