Anyone emigrating from Germany often assumes that a new residence abroad also takes them out of the German tax authorities’ reach. For capital income from German sources, that is only partly true. German shares, GmbH interests, or investment fund units frequently remain in the portfolio after emigration – and the German bank holding the account continues, in many cases, to withhold German withholding tax (Kapitalertragsteuer) unchanged, regardless of where the investor is now resident. Whether, and to what extent, Germany may retain this tax deduction after emigration depends on the type of capital income, the applicable double taxation agreement (DTA), and on whether and how relief is applied for at the Federal Central Tax Office (Bundeszentralamt für Steuern, BZSt). This article sets out what applies to dividends, interest, and investment fund distributions respectively, and which procedures are available to reduce the withholding tax.
Limited tax liability after emigration: the basis in Section 49(1) No. 5 EStG
Where unlimited tax liability in Germany ends upon emigration, German taxation does not disappear entirely. For certain types of income with a German connection, limited tax liability applies instead, under Section 1(4) of the German Income Tax Act (Einkommensteuergesetz, EStG) in conjunction with the catalogue in Section 49 EStG. For capital income, Section 49(1) No. 5 EStG is decisive. In essence, the provision covers several categories:
- Profit shares (dividends) and similar income from shares, GmbH interests, and income from convertible bonds and profit-participation bonds, where the debtor – i.e. the distributing company – has its seat or place of management in Germany.
- Interest on capital claims secured by a mortgage or charge over German real property or German ships.
- Income from partial debentures and certain other capital investments, where payment is made through a German credit institution.
What matters is therefore not nationality or previous residence, but the German connection of the specific item of capital income. German dividends therefore, as a rule, remain subject to German tax even after emigration – ordinary interest on a German bank balance, by contrast, as shown below, generally does not.
Withholding at source: the Kapitalertragsteuer under Sections 43 and 43a EStG
Technically, the taxation of capital income in Germany is secured through deduction at source. Section 43 EStG specifies which types of capital income – including dividends within the meaning of Section 20(1) No. 1 EStG, as well as certain interest income – are subject to withholding tax (Kapitalertragsteuer). The rate is set by Section 43a(1) No. 1 EStG: the standard rate is 25 percent of the capital income, plus the solidarity surcharge (Solidaritätszuschlag). The paying agent – for a domestic securities account, usually the custodian bank – withholds this amount directly on payment and remits it to the tax office.
For persons subject to unlimited tax liability in Germany, this withholding generally has final effect under Section 43(5) EStG: once withheld, income tax on the capital income is settled. For persons subject to limited tax liability following emigration, the position is different, because the flat rate of 25 percent is frequently higher than what Germany may actually claim under the applicable DTA.
Dividends from German shares and funds in detail
For dividends from German public companies, the starting position is clear: the 25 percent withholding tax is deducted by the bank regardless of the investor’s place of residence, because the debtor – the German company – is resident in Germany. Without further action, this full rate remains in place even where the applicable DTA would only permit a lower withholding rate. German law provides no automatic reduction of the full withholding tax in such cases; the reduction must be actively pursued through the exemption or refund procedure described below.
What applies to interest on German accounts and bonds
For interest income, the position is often different from that for dividends. Interest on ordinary bank balances – for example, on a current, instant-access, or fixed-term deposit account with a German bank – does not fall within the categories listed in Section 49(1) No. 5 EStG, unless exceptionally secured by a charge over German real property. For persons resident abroad, such interest therefore generally does not count as German-source income and is not subject to limited tax liability in Germany.
In practice, this means: once the emigration has been evidenced to the bank – usually by a deregistration certificate from the German residents’ registration office or an equivalent certificate of residence abroad – the bank can stop withholding tax on this interest. If the change of status is not reported to the bank, it may continue withholding tax even though there is no longer any legal basis for doing so after emigration; a correction is then only possible via a subsequent refund. At the same time, it is important to note: the end of German tax liability does not automatically mean the income is tax-free. The new state of residence will generally tax such interest income under its own law as part of residence-based taxation there – frequently on a worldwide-income basis. Whether, and to what extent, this is the case is governed exclusively by the tax law of the destination country.
Interest on bonds may be assessed differently where payment is made through a German credit institution or where the claim is secured by a charge over German real property – in that case, Section 49(1) No. 5(c) or (d) EStG applies, and German tax liability continues to apply in principle. This must be examined in the individual case based on the specific investment structure.
Investment fund distributions: the special rule since the 2018 investment tax reform
A point often overlooked in practice concerns distributions from German investment funds – for example, from open-ended retail funds or ETFs with German tax domicile. Until 31 December 2017, income from fund units was expressly treated as German-source income under Section 49(1) No. 5(b) EStG (old version). The 2018 investment tax reform abolished this provision without replacement. Since then, Section 49(1) No. 5(a) EStG treats as German-source income only capital income within the meaning of Section 20(1) Nos. 1, 2, 4, 6, and 9 EStG – Section 20(1) No. 3 EStG, under which income from fund units falls, is not included in this exhaustive list. The statute therefore contains no express exemption clause for fund units; the fact that they are not covered follows simply from the provision’s reference not listing investment income at all. As a result, distributions from investment funds are, for investors resident abroad, generally no longer subject to limited tax liability in Germany.
This must be distinguished from taxation at the level of the fund itself: under Section 7 of the German Investment Tax Act (Investmentsteuergesetz, InvStG), the fund levies its own 15 percent withholding tax on certain German-source income (such as German real estate and equity income) under certain conditions – this concerns the taxation of the fund’s assets themselves and is a separate question from whether the distribution to an investor resident abroad is additionally subject to German withholding tax at investor level. This distinction between the fund level and the investor level is frequently conflated in practice and should be examined in the individual case with regard to the specific fund structure.
Overview: dividends, interest, and investment fund distributions compared
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| Type of income | German-source income under Section 49 EStG on emigration? | Withholding tax deduction by German bank |
|---|---|---|
| Dividends from German shares/GmbH interests | Yes, Section 49(1) No. 5(a) EStG (debtor’s seat/place of management in Germany) | Generally full 25% deduction plus solidarity surcharge; DTA reduction only on application |
| Interest on ordinary bank balances | Generally no (exception: secured by German real property) | Generally no deduction once emigration is evidenced |
| Interest on mortgage-secured claims/certain bonds | Yes, Section 49(1) No. 5(c)/(d) EStG | Deduction possible, case-by-case review required |
| Distributions from German investment funds | Generally no (since the 2018 investment tax reform) | Generally no deduction at investor level; taxation at fund level unaffected |
Reduction under the DTA: exemption and refund at the BZSt
Where limited tax liability continues to apply – as is regularly the case for dividends – the full domestic rate of 25 percent is often not the last word. Almost all German double taxation agreements grant the source state only a limited right to tax dividends. Following the model of Article 10 of the OECD Model Tax Convention, the source state may generally withhold no more than 15 percent of the gross amount for so-called portfolio dividends; for a substantial shareholding, the Model Convention itself provides for a lower rate of 5 percent, tied to a minimum holding of 25 percent of the capital of the distributing company. In practice, individual German DTAs deviate from this model threshold and agree lower shareholding thresholds for the reduced rate, in some cases as low as 10 percent – but this is a matter for the specific agreement concerned, not the Model Convention itself, and must be checked in each individual case.
To actually obtain this reduction, German law provides two procedures under Section 50c EStG, both conducted at the Federal Central Tax Office:
- Refund procedure (Section 50c(3) EStG): Where the full German withholding tax of 25 percent plus solidarity surcharge has already been withheld and remitted, the difference to the DTA rate can subsequently be reclaimed from the BZSt. All individuals and legal entities subject to limited tax liability who are creditors of the German-source capital income are entitled to apply. The application period is four years from the end of the calendar year in which the capital income was received, and does not end before one year has elapsed since the tax was paid. The application must be accompanied by a certificate of residence from the foreign tax authority evidencing residence during the relevant period under the applicable DTA. According to the BZSt’s own statements, processing can take more than 20 months owing to the high volume of applications.
- Exemption procedure (Section 50c(2) EStG): Rather than having the full tax withheld first and reclaiming it later, an exemption certificate can be applied for from the BZSt in advance. If it is submitted to the paying agent in good time, the agent will withhold only the reduced rate permitted under the DTA from the outset. Retroactive issuance is not possible – the certificate takes effect at the earliest from the date the application is received by the BZSt; its validity may not exceed five years.
For investors whose emigration is intended to be permanent, the exemption procedure is generally the more practical route, since it avoids the repeated effort of a refund application for every single year of distributions. Anyone who only clarifies their emigration status retrospectively, or who could not submit the certificate in time, is left with the refund procedure.
Reporting obligations of the bank and evidence of residence
For a German bank to be able to act at all, it must be aware of the emigration. Two separate issues are practically relevant here:
- Evidence to the bank for withholding tax purposes. For interest on ordinary bank balances, the bank will only stop withholding tax once the change of status is evidenced to it – usually via a deregistration certificate from the German residents’ registration office or a foreign certificate of residence. Without this evidence, the bank will often continue to treat the account as belonging to a German resident and continue withholding tax unchanged.
- Automatic exchange of information. Independently of the withholding tax, German financial institutions determine the tax residence of their account holders under the Common Reporting Standard and report account and certain income data to the Federal Central Tax Office, which forwards it to the tax authority of the state of residence. In this way, the new state of residence will typically learn of the German capital income even where no German withholding tax is applied.
Anyone who continues to hold a German securities account or bank account after emigrating should therefore keep both aspects in mind: their own tax reporting obligation in the new state of residence, and whether the German bank holds the necessary evidence to apply withholding tax correctly – neither too high, nor wrongly omitted.
Example: dividends after emigration
The following example is entirely fictitious and serves illustrative purposes only; it does not describe any real case or real person. A person permanently relocates to a state with which Germany has a DTA providing for a 15 percent withholding rate on portfolio dividends, and continues to hold a share portfolio with a German bank. Without further action, the bank withholds the full 25 percent withholding tax plus solidarity surcharge on the next dividend distribution. Only once an application for an exemption certificate is filed in good time with the BZSt – supported by a certificate of residence from the foreign tax authority – does the bank subsequently withhold only the 15 percent permitted under the DTA. For the difference already withheld before the certificate was issued, only the subsequent refund application remains available, which must be filed separately and is subject to its own four-year period.
What to check after emigrating
- For each securities account and bank account, clarify whether the capital income held falls under Section 49(1) No. 5 EStG or – as is frequently the case with ordinary bank interest and investment fund distributions – is no longer subject to German limited tax liability.
- Evidence the emigration to the custodian and account-holding banks early and with suitable documentation, so that any withholding tax is adjusted correctly.
- For dividends from German shares and GmbH interests, check what withholding rate the DTA with the new state of residence provides for, and apply for an exemption certificate from the BZSt in good time, rather than relying on a later refund.
- Reclaim any excess withholding tax already deducted within the four-year period under the refund procedure of Section 50c(3) EStG, including obtaining the certificate of residence in good time.
- In parallel, clarify how the new state of residence taxes the German capital income under its own law, in order to identify any economic double taxation and, where the DTA provides for it, avoid it through a tax credit.
Conclusion
Emigration from Germany does not end the German tax authorities’ reach over capital income uniformly. Dividends from German shares and GmbH interests generally remain subject to tax under Section 49(1) No. 5 EStG, and the bank withholds the full 25 percent rate plus solidarity surcharge without a separate application. Ordinary bank interest and – since the 2018 investment tax reform – distributions from German investment funds are generally no longer affected, but are instead subject to taxation in the new state of residence. Anyone who understands the differences between the various types of income and makes timely use of the procedures at the Federal Central Tax Office can avoid or reclaim excessive German withholding tax, rather than accepting it without challenge.
The Fiala law firm has published extensively on international tax law and supports clients in correctly classifying their cross-border capital investments for tax purposes after emigration, and in making proper use of relief procedures at the Federal Central Tax Office. Please contact the firm if you would like to clarify which rules apply to your specific capital income after emigration.
