Capital gains tax

Definition and legal basis:

Capital gains tax is a special form of income tax or corporation tax levied on investment income. It is withheld directly at the source of the capital income and paid to the tax office. The legal basis can be found in the Income Tax Act (EStG), in particular in Sections 43 to 45d EStG. Capital gains tax was introduced in Germany in 1920 and has undergone several reforms since then, with the introduction of the flat-rate withholding tax in 2009 being one of the most significant changes. The purpose of capital gains tax is to secure tax revenue and simplify the taxation process. For natural persons, it is generally a final withholding tax, i.e. the tax liability on this income is generally settled once the tax has been withheld. For corporations, on the other hand, capital gains tax has an advance payment function.

Taxable investment income and tax rate:

Various types of investment income are subject to capital gains tax, including: 1. dividends and other profit distributions
2. Interest from bank deposits, bonds and other fixed-interest securities
3. Income from investment funds
4. Gains from the sale of shares and other securities (since 2009)
5. option writer premiums The standard tax rate is 25% plus solidarity surcharge (5.5% of the capital gains tax) and, where applicable, church tax. This results in a total tax burden of 26.375% (without church tax) or up to 27.819% (with church tax). Exceptions or special regulations apply to certain investment income:
– Exemption order: Investment income of up to EUR 801 per person (EUR 1,602 in the case of joint assessment) is tax-free.
– Favorable tax assessment: The personal income tax rate can be applied on request if it is lower than the flat-rate withholding tax rate.
– Partial income procedure: For entrepreneurial investments, 60% of the income can be taxed at the personal tax rate.

Collection and transfer:

Capital gains tax is levied by the debtor of the capital gains or the paying agent (e.g. banks, corporations). These are obliged to withhold the tax and pay it to the relevant tax office. The taxpayer receives a tax certificate documenting the tax deduction. Special features of collection:
1. Foreign investment income: In the case of investment income earned abroad, the taxpayer must generally declare this in their tax return.
2. Offsetting losses: Losses from capital assets can only be offset against positive investment income.
3. Church tax: Church tax is paid automatically, provided this has not been objected to.
4. Tax refund: If too much capital gains tax has been withheld, a refund can be applied for as part of the income tax return.

International aspects and double taxation:

Double taxation agreements (DTAs) play an important role in cross-border situations. They regulate which country has the right of taxation and to what extent. Important aspects are 1. withholding tax abroad: many countries levy a withholding tax on investment income paid to foreigners.
2. crediting of foreign taxes: As part of the German tax return, tax paid abroad can be credited under certain conditions.
3. Exchange of information: Increasing automatic exchange of information between tax authorities in different countries.
4. EU Savings Directive: Regulates the exchange of information on interest payments within the EU.

Current developments and discussions:

The capital gains tax and the flat-rate withholding tax in particular are the subject of ongoing discussions: 1. Abolition of the flat-rate withholding tax: There are political efforts to abolish the flat-rate withholding tax and to tax capital income at the personal income tax rate again.
2. Financial transaction tax: Discussions about the introduction of a tax on financial transactions that could supplement the capital gains tax.
3Digitalization: The increasing importance of digital assets and cryptocurrencies poses new challenges for taxation.
4. International harmonization: Efforts to harmonize tax regulations at EU and OECD level to combat tax avoidance.
5. Sustainable investments: Discussions on tax incentives for sustainable investments.

Practical significance for investors and companies:

For private investors: – Simplification through settlement effect, as in many cases no information is required in the tax return – Necessity of optimization through exemption orders and, if necessary, a favorable tax assessment For companies:
– Administrative obligations when calculating, withholding and paying the tax
– Consideration when structuring financing instruments
– Effects on the distribution policy for corporations In summary, capital gains tax is an important instrument for taxing capital income, which is of great importance for both private investors and companies. The flat-rate withholding tax has simplified the system, but has also been criticized for possible unequal treatment of different types of income. The future development of capital gains tax will be significantly influenced by political decisions, international developments and the challenges posed by the increasing digitalization of the financial sector.