The New German Flat Tax on Capital Gains

A new German tax code will be taking effect on January 1, 2009. Until the end of this year the current code for many investments—including stocks or funds—are exempt from tax on profits if one has kept investments for longer than one year. For other forms of profits, such as dividends, the so called “Halbeinkünfte-Verfahren” was applied by taxing only half of the profits with one’s normal income tax rate.

Come January 1, 2009 a new tax code will replace the old code with a flat tax of 25% (plus solidarity money for the former East German states and church tax). This would result in a maximum tax of 28% for future profits from investments. This means, any investments made before the end of the year will be taxed according to the old rules even if it matures or is sold in ten years time.

For many investors the new flat tax will represent a tax increase on investments. Certainly with any tax code there will be exceptions and ways to work around the code, yet the present income tax rules demonstrate that for even the highest income earners (who are taxed at the highest rate at ~45%) the new tax is incrementally higher. Here is an approximate breakdown of current taxable income by income bracket:

Taxable Income (in Euros) for a Single Person Taxable Income (in Euros) for a Married Couple Marginal Tax Rate (2008)
0 - 7,664 0 - 15,329 0%
7,665 - 52,152 15,330 - 104,304 ~15-42%
52,153 - over 104,305 - over ~42-45%

This switch will create organizational stress for investors who will now have to separate “old” investments from future ones in order to avoid problems with tax authorities.

Matthew Hedrick