For a domestic shareholder (an investor with a permanent domicile or primary residence in Germany who owns his or her shares in private holdings, dividend payments are subject to the so-called 'half-income procedure'. This means that the investor’s personal income tax rate is applied to only half of the income earned through dividends. This also means that only half of any expenses incurred by the dividends are considered tax deductible.

Investors who own their shares in private holdings can claim a tax-free allowance up to an annual ceiling of EUR750 (EUR1,500 for married couples filing jointly) for their entire earnings from capital assets. In addition, an annual tax deductible amount of EUR51 (EUR102 for married couples filing jointly) may be submitted if no other deductibles exceed these amounts. Finally, dividend earnings are taxed only to the extent that the taxable income and other income from capital assets, less half of any actual expenses or the flat deductible amounts, exceed the tax-free allowance.

The company paying out dividends is required to withhold a capital gains tax of 20 percent and an additional 5.5 percent Solidarity surcharge (a total of 21.1 percent) and turn this amount over to the German Tax Office.

If the investor has not provided his or her depository bank with proof of exemption or a certificate of non-assessment, 21.2 percent of the dividend amount (20 percent capital gains tax and an additional 5.5 percent Solidarity surcharge) will be withheld before payment to the shareholder. The shareholder will receive a tax certificate of the withheld capital gains tax and Solidarity surcharge for tax return purposes. The withheld capital gains tax and Solidarity surcharge amounts will then be calculated against his or her personal income tax liability, provided the shareholder submits the tax certificate when filing his or her personal income tax return.

If the investor has provided his or her depository bank with proof of exemption or a certificate of non-assessment, the depository bank pays out the full dividend amount to the shareholder without any withholding of capital gains tax or Solidarity surcharge. In this case, the shareholder does not receive a tax certificate for tax return purposes.

A foreign shareholder (an investor with a permanent domicile or primary residence outside Germany) has only limited tax liability in Germany if, for example, he or she earns capital gains in Germany. This includes dividends from German joint stock companies.

Taxation on German-earned dividends is applied according to tax regulations in the shareholder’s country of residence.

Foreign shareholders who own their shares in private holdings are not liable for taxes in Germany beyond the amount withheld by the paying joint stock company for capital gains tax (and the additional Solidarity surcharge). The shareholder may not deduct related expenses.

 

The depository bank makes the dividend payment to the foreign investor after withholding the capital gains tax of 20 percent and an additional 5.5 percent Solidarity surcharge (a total of 21.1 percent) required under German law. The shareholder receives a tax certificate detailing the withheld capital gains tax and Solidarity surcharge for personal income tax return purposes.

A discounted capital gains tax can be applied to dividend payments to a foreign shareholder if there is a double-taxation agreement between Germany and the shareholder’s country of residence. The discount is applied by calculating the difference between the German capital gains tax liability (including the Solidarity surcharge) and the tax liability according to the tax rates under the applicable double-taxation agreement. A tax credit request form is then filed with the German Ministry of Finance for a refund of this amount. Tax credit request forms are available from the German Ministry of Finance (An der Küppe 1, 53225 Bonn, Germany or the German website http://www.bzst.bund.de/) at German embassies and consulates. The tax credit request form must be submitted to the German Ministry of Finance by the end of the fourth year following the year of dividend payment.

The explanations above are not necessarily comprehensive due to the numerous potential circumstances in individual cases. Shareholders should not hesitate to obtain individual tax advice which can better take into account individual situations.