Set up your declaration for exemption correctly

Many people use interest, dividends or profit from selling securities as additional income. In tax terms, this income is investment income (Kapitalerträge). To ensure that taxes are not owed on returns from the very first euro earned, people living in Germany have access to a savings lump sum (Sparerpauschbetrag). However, your bank will only apply this tax-free lump sum to your returns if you have submitted a declaration for exemption (Freistellungsauftrag).

What is a declaration for exemption? A declaration for exemption instructs your bank to pay out in-vestment income without tax deductions up to a certain amount.

What is investment income?

Investment income is income earned from financial assets. Some examples include:

• Interest (from a savings or fixed-term deposit account),
• Dividends (from shares or funds),
• Profit made from selling securities.

The declaration for exemption allows each person to earn up to 1,000 euro per year in investment in-come tax-free. That means up to 2,000 euro for married couples and registered partners filing jointly. If the income investment earnings go over these amounts, then a flat rate withholding tax (Abgeltungss-teuer) of 25 percent is applied, plus the solidarity surcharge (Solidaritätszuschlag) and church tax (Kirchensteuer) if applicable.

Important: banks automatically deduct the flat rate withholding tax, and will deduct it even from amounts lower than the tax-free lump sum unless you submit a declaration for exemption.

If you have invested money at a variety of different banks, you can also spread out your tax-free lump sum between them. This is only possible if the total of all declarations for exemption does not exceed 1,000 euro (or 2,000 euro if filing jointly). 

This means if you have declared 700 euro in exemptions for a bank, you only have 300 euro of your savings lump sum left to spread across other institutions.

How to submit a declaration for exemption

You can generally submit a declaration for exemption via your online banking portal or via a form. Here’s how:

• Decide how much of the profits you want to remain tax-free at the bank in question
• Enter your Tax ID - if you don’t do that, your declaration won’t be considered valid
• Send your declaration and make sure you save any confirmation you receive.

The declaration for exemption is valid as of 1 January of any given year and will remain in place until it is altered or revoked  - you don’t have to submit a new one each year. Depending on the bank, you may also be asked to submit a declaration for exemption for a single calendar year.

The best way to divide up your tax free lump sum  

If you do not divide up your tax free lump sum optimally, you will end up paying unnecessary deductions. That’s because the flat rate withholding tax could be withheld by one bank even though part of the tax free lump some remains “unused” at a different bank. So it makes sense to organise your declarations for exemption to match the earnings you expect to make. If you expect your earnings to fluctuate (because, for example, you are receiving dividends or the proceeds of sales) you can take a quick look at the values from the previous year.

Did you forget to submit a declaration for exemption?
Not having a declaration for exemption is not necessarily a disadvantage. If you paid too much flat rate withholding tax, you can usually get this money back when filing your taxes. As a general rule, your bank will provide you with a tax certificate. If your personal tax rate is below 25 percent, you may benefit from a Günstigerprüfung, in which the tax office checks whether taxation in accordance with your individual tax rate would be more beneficial, and reimburses any tax you have paid in excess.

What happens if your declaration for exemption is set too high?

If you have submitted declarations for exemption to multiple banks, you should keep an eye on the total amount you have declared exempt. If the amount is more than the allowable tax free lump sum, the tax office can retroactively charge tax on any gains that exceed this sum. So it makes sense to regularly check your declarations for exemption and adjust them as soon as possible when making changes to your investments.