How to Invest in Germany: Taxes on Investments (ETFs, Real Estate, Pensions, etc)
Table of Contents
Taxes are an extremely boring topic. But in a country like Germany – where you pay a lot of taxes – it is also an extremely important topic. Because if you understand just enough about taxation to use it to your advantage, you can save thousands of €s.
Taxes is besides Inflation one of the two factors that weigh heavy on your return on investment. Ignoring taxes and inflation might make you think you have a return on your investment even though you don’t. Generally speaking, the German Government wants its share of every earning. It doesn’t matter what it is (except lottery wins).
But Gambling with your life savings in hope of a tax-free lottery win is not the best investment strategy. Germany knows 7 Different Types of Income that are taxed in different ways. But before we start, let’s clear up the myth between FAKE tax savings and REAL tax savings.
2. The Myth of Saving Taxes Explained
3. Taxes in Germany
4. Taxes on Real Estate
- 3,5% – 6,5% Ground Taxes (depends on the state)
- 1,5% – 2% Notary
- 3,57% Real Estate Agent (if you need one)
- (+) Gross Rental Income
- (-) Interest Rate for Loan
- (-) Incidental Rental Costs (Property Management Company, Renovations, etc)
- (-) Depreciation
5. Taxes on Pensions
The German Pension System is build in 3 levels that we have to differentiate between payin- and payout-phase:
- Paying taxes later is better than paying taxes right now (because of Inflation)
- Your tax rate while working is probably higher than in retirement
- 30.000€ payin (85€/month over 30 years)
- 100.000€ pension value (historical average 7% rate of return of stock market over 30 years)
- 70.000€ profit (that would be taxed without it being a pension)
- 35.000€ is taxed (benefit of level 3 pensions is that only 50% of profit are taxed)
- 10.500€ taxes (with a personal marginal tax rate of 30%)
- 89.500€ net payout
6. Taxes on ETFs, Mutual Funds & Bank Accounts
Banking and investing products have very easy taxation rules compared to Real Estate or pensions. They are taxed with a maximum 25% Tax Rate + Solidarity Surcharge + church tax in case you are a member of the church. If your personal marginal tax rate s lower than 25%, your tax rate on banking and investing products will be also lower.
Another tax benefit for these products is that everyone with a German Tax ID (so everyone) is allowed to make 801€ in capital gains per year completely tax-free. Married couples can make 1.602€ in capital gains per year. German banks will therefore not tax you before you make 801€ in profits if you give them your “Sparer-Pauschbetrag.”
There are more than 70.000 funds available on the German market – investing into basically everything. We strongly believe that no financial product should rule over your freedom to choose your personal investment strategy without any limitations. If you need help in deciding which funds with which investment strategy are right for you, click the button and secure a free 30m session with us.
Most of the time, people misunderstand saving taxes like this: putting 1€ into something that is tax deductible and therefore getting a maximum of 45 Cents back. But that is not a REAL tax saving, because you still had a minimum of 55 Cents in costs. In order to have REAL tax savings, you need to get more than 1€ in taxes back when you put 1€ in.