How to Invest in Germany: Taxes on Investments (ETFs, Real Estate, Pensions, etc)

How to Invest in Germany: Taxes on Investments (ETFs, Real Estate, Pensions, etc)

1. Introduction

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

Saving Taxes is one of the biggest misconceptions in the financial world. So let’s take a look what “tax savings” even mean. Because this misunderstanding leads very often to investment decisions that are made solely for the reason of saving taxes.

You hate paying taxes. We hate paying taxes. Everyone hates paying taxes. But please do not make any investment decisions only for the reason of saving taxes. The highest tax rate in Germany is 45% (income tax rate after earning more than 270.501€ in 2020, fore more info see graphic below).

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.

“Investing into something because it is tax deductible is a myth.

It’s just like when stores offer discounts or a sale. It doesn’t make sense to buy a product simply because it has a 20% if you do not need it. Because you still have to pay 80% out of your pocket.

Please keep that in mind before making any investment decisions. Tax deductions are nice and can boost your return, but they cannot be the major factor for or against a certain investment product.

3. Taxes in Germany

Income up to 9.409€ per year is tax-free in 2020 (twice as much for married people). All (rental) income after 9.409€ is taxed with at least 14%. Example: with an income of 9.410€ per year you would pay 14 Cents in income tax (14% of 1€ after 9.409€). The (rental) income tax rate rises fast up to 42% for income higher than 57.052€ per year. So 42 Cents of every € you earn is payed to German Finanzamt.

PerFinEx Income Tax in Germany

Important for your personal financial calculation is your average tax rate that is calculated as a mixture of all the different tax rates. As you can see in the graph, every € you earn is taxed more than the last €. The more income you generate, the more taxes you have to pay. This is the progressive income tax system.

4. Taxes on Real Estate

The big advantages of rental and Investment Income are, that firstly you do not have to work for it, and secondly most investments are taxed much better than income from work. Except taxes on rental income that are taxed exactly the same way as income from work. But Real Estate is nevertheless a very  interesting asset class from a tax perspective.

When buying a property in Germany, you have to pay the so-called additional purchase costs that amount to about 10% of the property value:

  • 3,5% – 6,5% Ground Taxes (depends on the state)
  • 1,5% – 2% Notary
  • 3,57% Real Estate Agent (if you need one)

Real Estate Investors can deduct these costs from their taxes. Home-owners have to pay these additional purchase costs out of their own pocket.

The running tax implications while renting out your Investment Property are different than the one-time purchasing tax situation. As rental income is taxed like income from work, you have to declare it the same way you declare any other income you have.

Example: if you earn 60.000€ income from work and 3.000€ rental income, you earn in total 63.000€ taxable income. Bad news is that your 3.000€ rental income are taxed with 42% (see graph above). Good news is that real estate investors can counterbalance most of the costs they have from renting against the rental income they generate:

  • (+) Gross Rental Income
  • (-) Interest Rate for Loan
  • (-) Incidental Rental Costs (Property Management Company, Renovations, etc)
  • (-) Depreciation

Depreciation is the single most underrated tool for financial success when investing in Real Estate. From a tax perspective, a property loses 2% of its value per year (can be more for i.e. historical buildings). So after 50 years, the property would be worthless from a tax perspective. Only the property, not the ground your property stands on.

Therefore it is extremely tax efficient to have a high property value and a low ground value in your purchase agreement before you buy an investment property. Knowing and acting on this underrated trick will save you thousands of Euros over the next 50 years.

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5. Taxes on Pensions

The German government wants its citizens to save for retirement. Because when we get old, we could become an expensive problem for the German Social Security System. That is why Germany has such a big pension system and also why all pensions offer some kind of tax benefits. This the German government way of incentivizing its citizens to save money for the long-term. Very beneficial for all investors, who want to save money anyway.

The German Pension System is build in 3 levels that we have to differentiate between payin- and payout-phase:

PerFinEx Taxes on Pensions in Germany

Every employee has at least Level 1: the public pension (Deutsche Rentenversicherung). Together with your employer you are paying in 18,6% of your salary in 50:50 split (only salary up to 82.800€ in 2020 – everything more than that is free of public pension). As Level 1 is tax deductible during payin, put your contributions into your tax declaration and get up to 42% back. Because during payout, Level 1 will be taxed. Same with Level 2.

A very popular question from expats when learning about pensions is: “What is the point of postponing my tax bill?” The delayed paying of taxes will most likely save you a lot of taxes. There’s 2 reasons why level 1 and level 2 can be very beneficial from a tax perspective:

  1. Paying taxes later is better than paying taxes right now (because of Inflation)
  2. Your tax rate while working is probably higher than in retirement


Level 3 is different than the other pension levels in Germany.

While payin is not tax deductible, payout offers certain tax benefits. The amount of tax benefit and the variation depends on the payout you choose. Because level 3 is the only level where you can decide if you want a life-long pension or if you want a one-time sum of all the savings you accumulated over the decades.

An example with the best case scenario would look like this:

  • 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

Another advantage besides the tax benefits becomes obvious when taking a look at taxation of ETFs and Mutual Funds.

6. Taxes on ETFs, Mutual Funds & Bank Accounts

As pensions are taxed only in the moment you get money out of it, other investments like ETFs (Exchange Traded Funds), Mutual Funds, and Bank Accounts are taxed every single years that you hold this investment product.

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.

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7. Conclusion

Hopefully this blog post helped you to understand how taxation on German investments work. If you don’t like paying taxes, investing here can be a nice option to delay your tax bill or even decrease your tax bill.

We are not a tax advisor, but if we can help you with your financial future you can secure your free 30m session with us right here.

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