German taxation on dividends and capital gains

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This is a question that I will eventually ask my accountant (who is away at the moment), but I thought I'd post here to see if anyone has had personal experience with this. I'd like to cash in a (US) mutual fund I've had for over twenty years and have the money deposited into my US account. Of course this information would be reported to the IRS but I'm also providing the German tax office with all my 1099 forms. I'm unclear as to what the current laws and tax rates are in Germany regarding qualified dividends and long-term capital gains. I see that assets held for over ten years are exempt but I'm not sure if this only applies to real estate (as opposed to investments). Do tax rates vary according to one's tax bracket or is there a flat rate on dividends and capital gains? Any information and/or tips would be greatly appreciated!

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This is all layman's musing and not tax advice, but here goes:

 

Germany doesn't have the concept of qualified dividends, so if you aren't a member of a church, the tax on them is something like 26.375%.

 

With individual equities, those purchased before Jan. 1, 2009 have a cap gains tax rate of 0% in Germany if held for over a year (but you would still have US cap gains tax liability). The main problem in your case is that there has almost certainly been some turnover in your mutual fund since 2009, and a 26.375% tax rate may apply to anything purchased and sold within the fund after Jan. 1, 2009.

 

Unless you have a compelling need to sell, I'd wait to talk to your tax accountant first to confirm those tax rates. Always make any financial decisions afte consulting a tax accountant.

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assets like stocks and mutual funds, if bought before 2009 would actually be free of capital gains tax if held until today. All assets of this kind bought after 2009 will be liable for capital gains tax along the lines Conquistador described. The 10-year rule only applies to real estate.

 

Cheerio

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Does being part of a church make you exempt? When I registered for my steuernummer I checked the non-religious box but someone looked into the Roman Catholic Church records and discovered my 1971 baptism in Augusta, Georgia. Incredible! I was planning on renouncing the Church but should I stay in?

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OP- does the mutual fund hold only equities, or does it also hold ETFs, bonds or commodities?

 

Being Catholic makes you liable for church tax on cap gains (I am not sure about dividends) and doesn't exempt you from the cap gains tax rate mentioned above (which also includes solidarity tax).

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I love this forum- thanks for your quick answers!

 

Starshollow: Let me just confirm because I've literally waited over 15 years to cash in this money so I want to be careful. The mutual fund was purchased in 1986 so I won't be taxed on it at all? Dividends and capital gains will not be added on to my ordinary income?

 

Conquistador: Good question. I think only equities but need to double check. I was 15 at the of purchase so am not very familiar with the fund!

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If the fund contains non-equity holdings it could affect your tax liability. From a pure tax standpoint, it may have been best to sell back in 2008; however, given the bear market that year, you probably are actually going to end up better off even after tax by holding on for a few years afterwards. I would not assume that you will have no German tax liability since there is some turnover every year in a fund,

 

If you PM me the name of the fund, I can check its holdings for you.

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Disclaimer: I'm not a tax advisor and you should really consult one to get firm answers to your questions.

 

As I understand it, things aren't that easy, you can't just say, oh I bought that fund before 1.1.2009 and therefore I don't have to pay tax.

 

I think it works like this (source):

 

  • you don't have to pay tax on the profit you make when selling the fund itself (i.e. "price you get for it when you sell" - "price you paid for it way back then"), since you bought it before 31.12.2008
  • you don't pay tax on reinvested dividends and capital gains of stocks/bonds your fund bought before 31.12.2008
  • you have to pay tax on dividends and capital gains of stocks/bonds your fund bought after 1.1.2009

 

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If your fund had been a German fund held in a portfolio at a German bank, then you would have seen that tax being automatically kept in at the source for:

 

  • distributed or reinvested interest that occured after 1.1.2009, or
  • distributed or reinvested dividends that occured after 1.1.2009, or
  • distributed or reinvested capital gains (= profit when selling stocks/bonds) of stocks/bonds bought by your fund after 1.1.2009.

 

Table (in German) for this, see area inside red box (source is page 2 of this file):

 

post-24869-13033248488059_thumb.jpg

 

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However, since you have a foreign fund that is also kept in a portfolio at a foreign bank, I think you would have been reponsible for declaring to the German tax department:

 

  • distributed or reinvested interest that occured after 1.1.2009, or
  • distributed or reinvested dividends that occured after 1.1.2009, or
  • distributed or reinvested capital gains (= profit when selling stocks/bonds) of stocks/bonds bought by your fund after 1.1.2009.

 

Table (in German) for this, see area inside red box (source is page 2 of this file):

 

post-24869-13033248445558_thumb.jpg

 

You really should consult a tax advisor to find out for sure how you are affected.

 

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Does being part of a church make you exempt? When I registered for my steuernummer I checked the non-religious box but someone looked into the Roman Catholic Church records and discovered my 1971 baptism in Augusta, Georgia. Incredible! I was planning on renouncing the Church but should I stay in?

 

No. [still giggling at the idea]

 

If you're not a church member you only pay 26.375% tax:

 

  1. 25% Abgeltungsteuer
  2. 1.375% = 5.5% Solidaritätszuschlag on the 25% Abgeltungsteuer

If you're a church member (and you stay a member 2 months after you declare that you want to leave it) you have to pay church tax additionally and have a total tax burden of 27.99%:

 

  1. 24.45% Abgeltungsteuer
  2. 1.34% Solidaritätszuschlag
  3. 2.2% church tax

Please see Filing a Tax Return 2010 for instructions on how to leave the church.

 

Beware: you will still owe church tax for all years when you were still a member, you can't get out of that. Leaving the church will only save you from paying church tax on future income.

 

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If your personal tax rate on all your income is lower than the above cited precentages for the total tax burden, then you can do a German tax return and get tax back.

If it is higher you won't have to pay more tax on your fund, it's capped at that.

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US mutual funds distribute their cap gains, etc. every year and those amounts are taxable- the OP would have gotten a 1099 form from the US for those distributed gains and, AFAIK, should have paid tax on them every year. Those gains might have been distributed as cap gains or as dividends, so I wouldn't go so far as to assume that dividends and short-term capital gains from prior to 1.1.2009 aren't/weren't taxable in Germany, but as usual, only a tax accountant can tell you if you owe any tax or not- I merely bring up a few relevant issues that should be discussed with a tax accountant.

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Thanks everyone. Next week I'm going to officially leave the Roman Catholic Church. Glad Conquistador reminded me of this. (The German interpretation of Church/State separation seems to be very flexible- I'm still baffled by this whole, stupid process). I've got my accountant looking into the capital gains issue now. She seems to think that I would only pay the tax on it in the US and then declare to the German tax office that I've already paid there, in order to avoid double taxation. But that sounds too good to be true. (Given the current rates in the US I'd probably only be paying about 5%).

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5% would be excellent, and if that's correct I guess that's because you bought the shares in the fund over five years ago.

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Here is a question to you unofficial but VERY helpful TT tax mavens: After I pay German taxes on my US investment dividends, will I be able to take a US tax credit or deduction for that tax? I have been told that only "foreign tax on foreign income" is eligible, which would mean double taxation. Many thanks for your advice, now and in past messages!

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Thanks Conquistador.

 

Topic 856 and the link to Form 1116 are really useful.

 

It looks like 2010 taxes will be excruciating since I moved to Germany in the Fall, and I now see that the tax credit is limited to the ratio of foreign to US income. Ouch.

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On 4/20/2011, 8:44:33, PandaMunich said:

you don't pay tax on reinvested dividends and capital gains of stocks/bonds your fund bought before 31.12.2008

PandaMunich - up above you mentioned that you do not pay tax on reinvested dividends if the stocks were purchased before 31.12.2008.  As this was a long time ago, has your understanding since changed?  I found a more recent post where you suggest all dividends regardless of date of purchase are subject to tax.  

http://www.toytowngermany.com/forum/topic/344691-foreign-income-from-dividends/

I used to have Steuerberaters doing my tax and have since taken it over myself, but even when they did it for me, they never considered the date of purchase of stock for dividends, only for Capital Gains upon sale of stock. Could you please clarify your current understanding?  I would appreciate it.  Thanks!

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The word "dividends" in that sentence from 2011 was a mistake.

So yes, sorry, you always have to pay Abgeltungssteuer + Soli (25% + 5.5%*25% = 26.375%) on dividends, no matter when you bought the stocks, as long as you have already exceeded your yearly tax free amount Sparerfreibetrag (which is 801€ if you're single, 1,602€ if you're married).

 

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Thanks PandaMunich. On the one hand I would love to have tax free dividends, but on the other hand I would be upset to have realized I had been paying unnecessarily. So thanks, status quo to what I have filed before. 

Oh by the way, reinvested dividends make no difference, right? You still pay tax on the dividends regardless if it was reinvested or just saved? Thanks again

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Yes, it makes no difference what you/your investment fund did with the dividends, if you own these stocks as part of your private assets, they always have to be taxed right away.

 

Different taxation for business assets, not relevant for private investors, except if you own 1% or more in a company (overview):

If those stocks are part of your business assets (= Betriebsvermögen) the Teileinkünfteverfahren according to §3 Nr. 40 EStG applies, i.e. you do not tax the dividends or capital gains from selling stocks with 26.375% Abgeltungsteuer+Soli, but you tax 60% of these dividends or capital gains from selling stocks with your personal income tax rate.

If you happen to have owned within the last 5 years at least 1% of the company whose stocks you are selling, then in accordance with §17 Absatz 1 Satz 1 EStG even if those stocks are part of your private assets (= Privatvermögen), they are treated as business assets and capital gains from the sales of these stocks are taxed with the above Teileinkünfteverfahren.

If you own 25% or more in a company, or 1% and more and at the same time work either freelance or as an employee for that company then, even if they are part of your private assets, according to §32d Absatz 2 Nr. 3 EStG you can opt to have dividends taxed with the Teileinkünfteverfahren instead of with the default Abgeltungsteuer. This is more advantageous for everybody whose average personal income tax rate is 41.67% or lower, i.e. for anybody except for very, very high earners.

 

In the case of dividends, if you own more than 15% of the stock in that company which is paying out the dividends, this also means that you're exempted from Gewerbesteuer on that dividend income from stocks held as business assets according to §9 Nr. 2a,7,8 GewStG, that's called the gewerbesteuerliches Schachtelprivileg.

There is no such Gewerbesteuer exemption for capital income from the sale of stocks held as business assets.

 

There is no Gewerbesteuer due on income from private assets, since the Gewerbesteuer is a tax levied only on businesses.

 

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By the way, I saw that the forum update destroyed the above links to the source of the blue overviews in my 2011 post, that file can be found here: https://www.fondsvermittlung24.de/fileadmin/fondsvermittlung24.de/documents/pdf/abgeltungssteuer-thesaurierende-fonds.pdf

 

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PandaMunich, how does Germany see "Capital Gains distributions" - I haven't sold the fund, but they have given me a distribution.  I bought the fund before 2009.  Is this treated like a dividend - ie. taxed in Germany regardless of when I bought it, or as a capital gain - ie. not taxed if purchased before 2009? 

 

Also, how are capital gains taxes on foreign investments calculated?  Specifically, is the gain calculated in foreign currency and then converted to Euro, or is the purchase value and selling value each converted to Euro based on their respective dates and then the difference taxed?

 

For example:

Stock Purchased on 1 Jan 2010 for 100 USD, at the time that would have been 70 EUR

Stock Sold on 1 Jan 2016 for 200 USD, at the time that would have been 217 EUR

 

Is the capital gain calculated as:

a. (200 - 100) / 1.085 = 92.17 EUR

b. (217 - 70) / 1.085 = 135.48 EUR

 

Thanks

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It's a dividend --> taxable.

Only if you would sell the fund itself, would that gain (= Veräußerungsgewinn) be tax free as long as you had bought that fund before 2009.

 

If you make a profit selling a stock/fund (= Veräußerungsgewinn) that you purchased after 1.1.2009, then you have to to tax that profit

Alternative a.

You have to tax that profit in the moment you make it, i.e. now, so simply transform your gain of 100$ (selling price 200$ - purchase price 100$) into €, using these exchange rates.

 

 

 

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