Definitions of Withholding Tax


Withholding taxes are payable directly where income is generated. As a rule, they are automatically discharged. However, the state offers the possibility of exemption for up to 801 euros per person, which investors can use with an exemption order.

  • The name withholding tax comes from the fact that the taxable income is paid directly to the state when it is generated. The tax levy is claimed directly from the source from which the income flows.
  • The most common types of withholding tax in Germany are wage tax, capital gains tax, supervisory board tax and building withholding tax.
  • Withholding tax can be designed either as an advance payment or as a final withholding tax.

Who pays the withholding tax?

The tax levy is levied where the income is generated. In the case of interest and dividend income, the bank deducts the withholding tax before it is credited to the account. The employer transfers the wage tax directly to the tax office. This also applies to the church tax and the solidarity surcharge

What is the withholding tax used for?

Short for WT by abbreviationfinder, withholding tax is an instrument used to secure tax revenue for the state. The direct assertion at the source prevents obfuscation. Direct access also ensures the debtor’s liquidity. Last but not least, the withholding tax relieves the administrative work of the tax authorities.

Withholding tax as an advance payment

In the case of profits from commercial or freelance work, rental and lease income, pension income and profits from agriculture and forestry, the taxpayer must make payments directly to the tax office. For this purpose, the authority usually sets quarterly advance payments for income tax and the solidarity surcharge. The church tax can also include this. Advance payments also include those payments that are due through advance VAT returns. These will be offset against the final annual tax assessment.

Examples of withholding taxes in Germany

The following withholding taxes are the most common in Germany:

income tax

Income tax is levied on income from non-self-employed work. It is a form of income tax. Although the employee is the debtor, the employer calculates this tax and pays the corresponding amount directly to the tax office. He is liable for the wage tax payment, if he does not pay he can be claimed.

Capital tax

Capital tax takes the form of income and corporation tax. It is levied on the beneficiary from the investment income. Or the paying institution, such as a bank, withholds the tax amount and transfers it to the tax office.

Board tax

Taxes that are levied on the basis of remuneration from work as a member of a supervisory board are accordingly called supervisory board tax. It is a special form of income tax.

Construction withholding tax

The tax deduction for construction work is also called construction withholding tax. This form of income or corporation tax has been intended to restrict illegal employment in the construction industry since 2001. The construction companies affected by the law must withhold a tax deduction for construction work carried out in Germany. This is paid to the tax office, which is responsible for income taxation of the payer.

Withholding tax as a final withholding tax

The design of the withholding tax as a final withholding tax serves to simplify matters for the authorities. The final withholding tax is paid directly to the tax office after it has been withheld. It occurs most often as a capital gains tax. This is a uniform tax that is independent of the personal tax rate. It is 25 percent plus any church tax and solidarity surcharge. The transfer is carried out by the institutions that manage the corresponding capital investment.

Use the exemption order

In the case of capital tax, the tax debtor can claim exemptions for his income from an investment. Because the legislature grants him tax-free payments on a basis of the proceeds. In order to benefit from this savings allowance or tax allowance, the debtor must submit exemption orders to all credit institutions from which he expects investment income. The exemption applies to all investment income at the institution; it cannot be limited to specific accounts or portfolios. As a rule, an exemption order once issued is valid until it is revoked.

The exemption order amounts to 801 euros per year for single persons, and twice that for married persons to 1,602 euros. Since every citizen is taxable from birth, parents can increase their tax-free investment income by keeping accounts or custody accounts in the names of their children. A family with two children can issue exemption orders amounting to 3,204 euros.

Foreign withholding tax

If an investor receives interest or dividends from a company domiciled abroad, they are normally subject to withholding tax there by the state. You can claim this tax deduction from the tax authorities in Germany. This avoids double taxation if there is a double taxation agreement between Germany and the respective country. If only parts of the tax are creditable, the taxpayer may have to claim the rest of the withholding tax payments in the other country.