Twenty-five percent, and the allowance that replaces everything

An investor pays 900 € in custody fees and earns 4,000 € of interest. She expects 3,100 € of taxable income. All she may deduct is the saver's allowance of 1,000 €, and the deduction of actual related expenses is excluded — the 900 € have no effect at all.

A tariff of its own, beside the normal one

In Germany investment income is not charged at the personal rate but at one of its own. Section 32d says so in its very title: separate tariff for income from capital assets.

Income tax on that income is 25 percent. The rate is fixed: it does not rise with income, and it does not fall where someone otherwise earns little — at least not by itself.

At this point the statute departs from its own principle. Everywhere else a progressive tariff applies; for investment income a proportional one applies, which relieves high incomes and burdens low ones.

The 25 percent is not the whole burden. The solidarity surcharge is added, and church tax where it applies — both computed on the 25 percent, not on the income itself.

The statute itself speaks of the tax reduced by creditable foreign taxes. The nominal twenty-five percent is therefore a starting figure from which two items may come off before the surcharges are added.

Excluded from the separate tariff is income falling under section 20(8). Where investment income belongs to a business or to income from letting, it is caught there and charged at the personal rate.

That attribution takes precedence over the separate tariff. Interest on a business account is business income, not investment income — and the 25 percent never comes into consideration there.

For church tax the statute gives a formula of its own. The tax is reduced by 25 percent of the church tax attributable to the investment income, and the text expresses the result as a fraction: e minus 4q, over 4 plus k.

There e is the income determined under section 20, q the creditable foreign tax and k the church tax rate of the relevant religious body. The formula looks clumsy and achieves one thing: it prevents a tax on the tax.

What counts as investment income at all

Section 20 lists the income concerned and starts with the best known. Income from capital assets includes shares of profit from shares, from participation rights, from interests in limited liability companies and in cooperatives.

One rider widens that considerably: other distributions include hidden profit distributions too. Whatever a company grants its shareholder outside a formal resolution is therefore investment income as well.

Not treated as receipts, by contrast, are distributions for which amounts from the tax contribution account count as used. There contributed capital flows back, and repaying one's own contribution is not income.

Besides the running income, the second subsection catches disposal gains. Selling shares, interests and other capital claims has since belonged to the same category — regardless of how long the securities were held.

That sets securities apart from property. For them there is no holding period after which a gain would be tax free; in exchange the lower separate rate applies instead of the personal one.

Who the income is attributed to is settled by the fifth subsection. Dividend income is earned by the shareholder, and that is the person to whom the shares are attributed at the moment of the profit distribution resolution.

The cut-off is therefore the resolution, not the payment. Where the receipts are attributed to a usufructuary or a pledgee, that person counts as the shareholder — a rule that regularly matters in family companies.

Anyone transferring shares shortly before the resolution therefore shifts the tax burden too. That is no loophole but the plain consequence of an attribution tied to a particular moment rather than to the flow of money.

A rule of its own covers shares acquired with a dividend entitlement but delivered without one. The receipts obtained instead also count as other distributions — the statute closes a gap of securities trading here.

Finally the seventh subsection picks up an anti-abuse rule. A pre-designed scheme also exists where the positive income is not subject to the tariff income tax — so deferral models do not work here either.

The allowance replaces the costs, it does not add to them

Section 20(9) contains two statements in one sentence, and the second carries more weight. In computing income from capital assets an amount of 1,000 euros is to be deducted — and the deduction of actual related expenses is excluded.

Excluded here means entirely, not capped. Custody fees, advisory costs, specialist literature and travel to a general meeting do not reduce investment income, however high they are and however well documented.

The saver's allowance is therefore not an extra exemption but a flat-rate substitute for everything that would otherwise be deductible. Those with lower costs gain; those with higher costs lose the rest without compensation.

For the investor in the opening that means: of 4,000 euros of interest, exactly 3,000 euros remain taxable after deducting 1,000. Her 900 euros of custody fees vanish from the calculation as though they had never existed.

That harshness is the flip side of the low rate. The legislator offered a rough but simple trade: twenty-five percent instead of progression, and in exchange no itemised accounting of costs.

Costs that already enter the income itself are unaffected. Transaction fees on buying and selling securities raise the acquisition cost or reduce the sale price — they are not related expenses but part of computing the gain.

The distinction matters considerably in practice. An order fee has an effect, a custody fee does not, although both are paid to the same bank for the same account. What counts is whether the cost can be attributed to a single transaction.

Where the separate tariff does not apply, deductibility returns. In its exceptional cases section 32d(2) expressly disapplies section 20(9) as well — more on that in the second module.

The allowance is finally an annual amount and does not travel. Where it is not used up in one year, the remainder lapses; a carry-forward to the following year is not provided for in the statute.

Two spouses, one allowance, three sentences

Spouses assessed jointly receive a joint saver's allowance of 2,000 euros. That is not a doubling in the sense of two separate amounts but a single amount with a distribution rule of its own.

The joint allowance is to be deducted half with each spouse. As a rule each therefore gets 1,000 euros, regardless of who holds the account and to whom the income flows.

The third sentence governs the case that predominates in practice. Where one spouse's investment income is lower than 1,000 euros, the proportionate allowance is, so far as it exceeds that income, to be deducted with the other spouse.

The unused part therefore moves across. Where one spouse has only 200 euros of income, he uses 200 euros of the allowance, and the remaining 800 euros are available to the other on top of his own 1,000.

The fourth sentence draws a limit for both forms. The saver's allowance may not exceed the investment income after offsetting — it can reduce the income to zero but never create a loss.

• assessed individually: 1,000 euros, at most up to the income
• assessed jointly: 2,000 euros together, attributed half to each
• the part unused by one spouse is deducted with the other
• in no case does the allowance create a loss

For the bank to take the allowance into account at all, it needs an exemption order. Without one it withholds tax from the first euro, and the allowance can only be caught up through the tax return.

Section 44a governs this refraining from withholding. The condition is that the person obliged to withhold holds an exemption order from the creditor in the officially prescribed form — the form is therefore prescribed, not free.

The order can be spread across several institutions, but in total only up to the allowance. Anyone exempting 1,000 euros at each of three banks exceeds his limit and must correct the excess in the assessment.

The split therefore deserves thought. It makes sense to place the order where the income actually arises — a large exemption on an account producing nothing helps nobody and is missing elsewhere.

Where the distribution of income changes, the order can be adjusted. It applies until revoked and can be changed during the year, but then takes effect only on income flowing in afterwards.

For taxpayers with little other income there is a second route. Withholding is also omitted where it can be assumed that no tax would arise even on a favourability test — evidenced by a certificate from the tax office.

This non-assessment certificate reaches further than the exemption order, because it does not stop at the allowance. It pays off for children with their own account, for students and for pensioners with modest income.

Settled or not: when a return is still required

The name final withholding tax describes an effect, not a separate kind of tax. Where the bank withholds and remits it, the income tax on that income is as a rule settled — it then does not belong in the return.

That effect presupposes, however, that tax was withheld at all. Precisely that is regularly missing with foreign accounts, with private loans and with interest under agreements between private individuals.

For that case section 32d(3) is unambiguous. Taxable investment income that has not been subject to withholding must be stated by the taxpayer in his income tax return.

The tariff income tax then increases by the amount determined under subsection 1 — that is, by the 25 percent. And an assessment is to be carried out regardless of the other rules, even where no filing duty would otherwise exist.

Beside that stands an option. Under subsection 4 the taxpayer may also apply for an assessment for income that has already been subject to withholding — voluntarily, and in his own favour.

The statute names examples that double as a checklist: a saver's allowance not fully used, a loss not yet taken into account, a loss carried forward, foreign taxes not yet credited.

Added to that is review of the withholding as to its basis or its amount. Anyone who believes the bank withheld too much has an expressly provided route to have that recomputed.

The settling effect is therefore not finality but a relief. It frees you from the duty to file, but takes from nobody the right to pull the income into the assessment anyway where that is more favourable.

In practice the bank's annual tax certificate is worth a look. It states the income, the allowance used, the tax withheld and the loss pots — exactly the four quantities on which an application turns.

Anyone holding several accounts needs one from each institution. Only laid side by side do they show whether an allowance went unused or whether losses at one bank meet gains at another.

That sets the frame. What happens to losses, and when giving up the separate tariff pays off, is covered by the second module — both are reasons to enter the assessment voluntarily.