Abgeltungsteuersystems

Abgeltungsteuersystems, commonly referred to as the Abgeltungsteuer, is the German withholding tax system for capital income. Established to tax investment earnings at a uniform rate, it largely treats capital income as final taxation at the source. Banks and other financial institutions deduct the tax and remit it to the tax authority, so many taxpayers do not need to declare these items in their regular income tax return.

The core feature is a flat tax rate of 25 percent on most capital income, plus a 5.5 percent solidarity surcharge on the tax and, where applicable, church tax. This withholding tax (Kapitalertragsteuer) is typically the final tax burden for residents on interest, dividends, and capital gains from securities and similar investments. In some cases, taxpayers can opt for the traditional progressive income tax treatment if it yields a lower overall tax through a mechanism known as the Günstigerprüfung, which compares the flat rate with the personal tax rate.

Tax allowances and reliefs reduce the amount subject to withholding. The Sparer-Pauschbetrag (801 euros for individuals, 1,602 euros for married couples) exempts a portion of capital income from tax. Taxpayers may use a Freistellungsauftrag to ensure these allowances are respected by withholding agents.

Non-residents and cross-border situations involve reliefs such as foreign tax credits to mitigate double taxation, and the administration of the Abgeltungsteuer may differ outside Germany. The system aims for simplicity and transparency in capital income taxation, while maintaining flexibility through allowances and opt‑in procedures.