It used to be called the “capital gains tax”, but has been known as the final withholding tax for ten years now – the tax that is incurred as soon as there is income from the investment of capital. Examples of this can be interest, but also profits from the sale of shares or dividends distributed by a GmbH or AG .
In this article, we take a closer look at everything to do with the final withholding tax, explain how you can use an allowance and also mention which income is not covered by this tax.
Final withholding tax – definition
Anyone who invests capital does so in the hope of not just holding this sum, but of increasing it through a return. This return on the capital employed can result from interest payments or other services, such as dividends distributed. There is no distinction to be made between how the investment income comes about, but only in what amount it is achieved. This income is the calculation basis for determining the final withholding tax to be paid.
How high is the withholding tax?
Abbreviated as WT by abbreviationfinder, the final withholding tax is set at 25 percent, plus solos and church tax. The calculation basis for the amount to be paid is the actual income, so the capital employed is of course not taxed again here.
The final withholding tax ensures that this sum is finally taxed. While it used to have to be included in income tax when there was still capital gains tax, the payment of the withholding tax means that everything is done at once today.
The rate of 25 percent is also uniform – different tax rates depending on the type of investment income are a thing of the past due to the flat tax. After the withholding tax on interest income is immediately transmitted from the respective bank to the tax office, you don’t need to worry about anything here. It goes without saying that the banks provide an overview of the taxes paid annually. This can usually be downloaded directly from online banking.
What investment income is taxed?
The final withholding tax basically covers all types of investment income. A special feature that could be relevant for some investors is that accumulating investment funds or ETFs are also included. So if an ETF reinvested the income generated and automatically reinvested it instead of distributing it, there is no real distribution to the investors, but the income is still subject to withholding tax.
Apart from this more specific case, the usual forms recorded include, for example:
- Interest on bank balances of all kinds
- Distribution of dividends to shareholders
- Price gains through the purchase and sale of shares and comparable securities
- Income from profit participation certificates
- Income from trading in derivatives
- Income from other forms of investment, such as various funds
- Special products from the financial markets, such as certificates
A common case is therefore not only the dividend on a stock, but also the profit margin achieved when a stock is bought cheaper than it is sold later.
Income that is not covered by the withholding tax
In principle there are only two deals that sound very similar to the ones just listed, but are not subject to the flat tax. These are profits from closed-end funds and foreign exchange transactions. Closed-end fund profits are assumed not to be a capital gain, but an entrepreneurial activity. Thus, the income from this source of income is taxable like any other income from business activities.
Tip – use the tax exemption
Generating investment income is a great thing, especially if you want to build passive income . Even if it sounds like the final withholding tax covers practically every income, there is also a tax advantage. This is an allowance that is just under 800 euros per year for singles. For married couples, the amount will be doubled to 1,602 euros per year. This amount can be withdrawn completely tax-free.
But be careful, that doesn’t happen by itself! First you have to submit an exemption order to your bank or apply for a so-called non-assessment certificate from the tax office. Is it too late and you forgot Then all is not lost. In this case, you can declare your investment income for income tax. There is the KAP annex – with this you can see which investment income you had and thus get back the overpaid withholding tax.
Incidentally, the tax exemption does not apply to each bank, of course, but to each person and per calendar year. So how many different types of investment income you get this amount of does not matter.
Annex KAP – why you should fill it out
Taking the trouble and filling out the above-mentioned KAP annex also makes sense if you have thought of securing the tax exemption in advance. Because this system also brings other relevant information and advantages with it.
Option one is that they forgot to inform the bank of their religious affiliation. This happens quite often, but when it does, church tax isn’t paid. This deficiency can be remedied via the KAP system so that the correct amount is ultimately paid.
Option two is that a return has been made on a personal loan that is also taxable. If the loan was granted between private individuals, no bank can of course take over the payment of the withholding tax directly. The KAP annex informs the tax office of this income and determines the tax.
The third option, which is also quite common, is that capital gains have been made with foreign banks. This could be the case, for example, if you have a deposit account with an online broker whose headquarters are abroad. These banks typically also provide corresponding overviews of the income generated so that the KAP annex can be filled out quickly and these investment income can also be recorded by the withholding tax.
Differences due to the introduction of the final withholding tax compared to the capital gains tax
It was already mentioned in the introduction that the final withholding tax has replaced the previous capital gains tax. This change needed some simplifications. Now there is the uniform tax rate, no matter what the investment income is. This standardization alone means a clear relief when calculating the tax burden.
In addition, the individual investment income no longer has to be laboriously listed in the income tax return. In principle, the switch from capital gains tax to final withholding tax resulted in significant simplifications. Even today, the terms are sometimes used synonymously.
The final withholding tax is very easy to determine and in the most common form, with simple interest income, is paid directly from the bank to the tax office. It is important that solos and church taxes are not forgotten. Due to the very high tax-free amount, almost 800 euros per person can be generated tax-free through investment income. Here you have to make sure that the tax-free allowance is actually used, because anything else would be wasted money. If you forget to pay attention to it or if there are special features in your investment income such as income from foreign banks, the KAP appendix helps with income tax, with which many errors can be quickly remedied and one or the other information can be added quickly, ultimately the correct final withholding tax is paid.