Abgeltungssteuer tax on savings interest

It sounds like the Finanzamt are doing what they do best - extracting money from anyone with savings . I have a modest amount in a US$ denominated stock based fund and the management company has just sent me a 20 page tome in wonderful German that appears to be asking me if I want to move the account to Luxembourg. The amount isn't large, the company is reputable (Noramco's Alger Funds) so I'm sure it's all legal but I have no idea what the background is to all this.

Anyone got any words of wisdom? I'll sit down with a pot of tea at some point and plough through it, but so far it seems a mystery.

It is a new tax from 1st Jan 2009 which will tax all savings at source with, I think, 25% rate instead of taking it into account on your tax declaration. Moving the savings to Luxembourg won't stop them from being taxed, they just won't be taxed at source until Luxembourg also introduces the tax ( I think they have to as it is an EU directive), instead you will have to declare the interest as income on your tax declaration at the end of the year. If you don't, well, you will probably get away with it but you run the risk of being done for tax evasion.

edit: Luxembourg has a tax at source on savings as well but only 10%, not the 25-28% as in Germany.

Thanks OG, so they tax interest every year at 25%? Thus destroying the compounding effect, reducing the end value of your savings by a huge amount. The bastards.

"modest amount"... if you make less than €800 (€1600 married) annually in dividends or interest, not worth thinking about really, as that's what they leave untaxed.

you make profit -> you'll have to pay tax on the profit .. easy ...

If it's an IRA or 401k, then it happily compounds along as usual. If it's a regular old investment account, and you're not already declaring it now on an annual basis on both your US and German tax returns, you're lucky you haven't been caught. The good news is that if the amount is small, you'll likely not have to pay quarterly estimated on either side ... and you won't have to pay until c. 18 months later and get the compounding inbetween.

But in both Germany and the US right now interest income is taxed at your marginal income tax rate ... so the 25% Abgeltungsteuer is actually an improvement. The finance minister of Germany convinced the usual communist/redistributive elements in the Bundestag who want to make it 100%, implement a "wealth tax" etc., by saying "better 25% of something than 40% of nothing." It closes the truly unfair loophole of 0% long-term capital gains tax in Germany (vs. 15% now [and likely back to 28% after Obama wins] in the US) and eases US-style treatment of short-term capital gains as income taxed at your full marginal rate.

It's not an additional tax ... it actually brings German treatment of investment income into alignment with the way it's treated in a lot of other places.

Am pretty sure this still happens in the UK, eg: interest on savings accounts was treated as income and taxed at source.

Moreover, it only applies to investments made on or after 1.1.2009.

I highly recommend this document from Price Waterhouse Coopers:
PWC: Abgeltungssteuer explained (English, pdf)

Err, afaik that only applies to taxes on gains made through selling your investments again. And only if you sell during 2009.

Kato's correct. Which is why locking in long-term stock/mutual fund purchases between now and the end of the year combined with markets setting new lows could end up presenting an amazing tax-advantaged opportunity for the German investor.

erm...so do i have to pay this tax of my hard earned already taxed few bucks im trying to put into savings each month??? (sorry just havent got a clue)

The tax is on investment income (interest, dividends, distributions, etc.) once it's cooking along in the account.

You've presumably already paid c. 42% income tax on whatever you have left over to save, so they're not going to tax that another 25% and then tax the investment income another 25%.

Yes it is an improvement if you are in a higher personal income tax bracket than 25%. As right now any profit in investments gets added to your income and taxed accordingly depending on how high your personal income is (max. income tax is 42%).

So these people in high income tax brackets pay only 25% Abgeltungssteuer + Solidaritätszuschlag (+ Kirchensteuer, if registered for this bullshit "service"), I think it is max. 28,5% in total all up and they have a fair bit of tax relief on investment profits then.

For others who are below the personal income tax bracket of 25% they do not have to worry. You are gonna be taxed on your investment profits in the same way as right now by how high your income tax rate is and thats it (which is not bad news at all).

All that scaremongering from the banks or other institutions in their advertising that this Abgeltungssteuer is the next horrible thing similiar to syphillis or Y2K is just bulldust.

Well put. Agreed on the scaremongering. Most investment houses in Germany are so desperate for inflows that they'll do just about anything to snag some more assets under management.

Just curious, but is anyone in Germany really paying an effective marginal rate of 25% or less?

If so, Expaticus, I am sure they are laying low!

Please hook me up with whoever's doing their taxes for them sofort

Those of us who are married have no problem here. I'm only paying about 15% and my wife (who's lumbered with Steuerklasse 5) is also only paying about 25%, so it's not that dificult and we don't exactly have to hold out the begging bowl to get by!

Warning:

Being single in Germany is detrimental to your financial health.

You touch upon something that has always mystified me about German culture: There is an amazingly relaxed attitude toward unmarried couples living together (compared to most young professional boyfriend/girlfriend pairs in a place like New York maintaining separate apartments because their parents/peers would generally disapprove of "living together"), with the prevailing social more appearing to be to marry only upon accidental pregnancy.

I recently thought I'd do an administrative employee of mine a solid and give a EUR200 per month raise. I was later told that this bumped the person into a higher tax bracket and the effective increase in take-home pay was only EUR80!

I then undiplomatically asked why the person didn't just marry the long-time live-in "friend" and received only a puzzled look.

Any ideas?

Doing so in a high-cost area like Munich even more so.

Great thread - particularly the point about buying shares before the year end (speaking as one who sold up close to peak last year and is thinking about what to do next with th resulting cash).

I pay less than 15% tax . My income is decent enough - above German average - but the allowances and deductions (as selfemployed) and the (to me unfathomably) generous treatment of my UK income under double tax make the tax billl low . It's worth remembering though that healthcare and (part of a pension at least) are de facto taxes too, ceetainly comparing with the UK where tax includes them.

My OH - a German higher earner who is also self employed - hasn't paid tax for years.

I'm single but I have a paid for home. Strip that out and life's a heck of a lot easier / cheaper.

As to being paid for being married, it always makes me laugh when Brits go "oh but Germany / France etc has allowances to encourage families stay together". What they never mention is that the divorce / separatiuon rate here is high and so it seems to have little real impact.

Sorry, "single" in the "tax" sense, that OH and I run separate financial affairs and homes etc, don't have kids etc.

for HellesAngels and the others, some words of financial wisdom about the Abgeltungssteuer (AS for the rest of this contri) from a professional you know (and hopefully trust):

1) as mentioned above, the AS is nothing to get scared or terrified of. While banks and financial sales institutions try to use this for hard-selling any kind of stuff to the public based on "oh, you must try to avoid this terrible tax" scheme, there is no need to do something rash and hasty...
2) for many people who have reported their interest and yields from investmens in the past, nothing much will change and in many case, if their personal income tax was/is higher than those 25%, it will even improve the situation. in order to simplify things I would just have wished they would have set the tax rate at the same level like the lowest income tax rate, because now people with lower income tax rates have actually to file for reimbursment of the difference and I find that unnecessarry and also a bit unfair..
3) a couple fo things need to be done nevertheless. if you have already a portfolio of investments from the past like investments funds or shares/stocks, make sure that you open up a new account for your new investments starting Jan. 1st 2009 so that these do not get mixed up. because your old investments are excempt from this new tax, but if you buy new shares of the same stocks or investment funds in the near future, whenever you sell something it will get complicated to divide between old and new. While the costs for an additional investment account may be annoying, it is worth the trouble
4) if you have some investments that will necessarrily end/mature in 2009 and which you can cash in now, you might want to think about this in order to re-invest now with a longer duration...
5) taxes on interest will be each year, taxes on other investments where the growth of the investment is the main provider of "yield" will be taxed at the end only when the investment is sold and the profit is cashed in.
6) banks currently offer a number of special "Dachfonds" and "Dachfonds-Zeritifikate" and other great new tools in order to make long-term investments attractive by evading paying taxes in the meantime when changes of stocks and investment funds occur within these tools and not within your own portfolio. So far virtually all these new tools have proven to be of mediocre quality at best and there are other well know mixed investment funds with long track records (like Carmignac Reacitve 75, to name just one) who use a mix of stocks and bonds which can be used just the same . the problem with most of the new "Dachfonds" is that they appear to remain to small for a long life and will get dissolved in a few years and then you are in up a certain river without a paddle.. I you want to invest your money in a tool where there is a strategy behind the investment for long-term, use an investment funds with a long track record instead of one of those newly invented investment funds or certificates. But you can also simply chose 5-6 different investment funds yourself in order to diversify your portfolio and let your investment rest untouched and unchanged for 10-20 years in order to generate the same effect. The only thing that will be punished tax wise from Jan 1st 2009 on is churning your portfolio (which hopefully stops some bad financial advisors to do just that with your money).
7) some investments still carry tax advantages. Open real estate funds will have up to 50-60 of their profits untaxed and thus your profits with these investment funds is getting less taxed actually (if anyone needs more details, PM me. If many TTners want to have more details about this, let me know and I'll write another contri here). Actually investment in real estate will still carry tax excempt capital gains if you have held the property for 10+ years. RIESTER plans if held (like life insurance, but I would not recommend the latter due to the piss-poor performance among German insurance companies) are taxed only with half of their profits if held for longer then 12 years and paid out/cashed in only after your 60th birthday.

Thus, there are a couple of things to bear in mind for the second half of the year and it could be worthwhile to consider some changes or alignment of your investments for tax optimization, but there is no need to fall for these many sales pitches from "interested parties"... A talk with an independent advisor could help you to understand your situation during summer and fall and to make you more immun against the shitstorm of marketing sure to hit the media in Oct-Dec from banks and financial sales organisation in the last quarter.

And millions of Germans will fall for the same stupid advice like in the past AGAIN and wonder eventually why Germans have the highest savings ratio within the OECD but the lowest yield from savings at the same time... But as was said a couple of years before: "Der Steuervermeidungstrieb ist in Deutschland ausgeprägter als der Geschlechtstrieb!------ I wonder if someone can translate this properly

Cheerio
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At first glance, I would translate it roughly as "The urge to avoid taxes is more powerful than the urge to have sex".