Investing in a wide market index is the simplest approach to gain exposure to the whole German stock market. Using ETFs, this can be done at a reasonable cost.
There are four indices that are monitored by ETFs on the German stock market. In addition to these indexes, 9 other indices are provided.
Do ETFs exist in Germany?
ETFs that invest in German companies’ stock are known as Germany ETFs. Germany, being the largest economy in Europe, is also a strong exporter. There are various ways for investors to have access to the entire German stock market. Fixed-income Germany ETFs that track the bund futures are also available.
In Germany, how are ETFs taxed?
The majority of key tax sources are in German. There are English-language sources, although some of them may be obsolete or incomplete. When it comes to translating online pages from German to English, Google Translate comes in handy. You can instantly translate pages using the Chrome browser. I am not proficient in German, therefore I rely heavily on Chrome’s translation.
Because you may need to do some simple Google queries in German, I added all of the names for the required terms in German.
This isn’t tax advise, but rather my understanding of Germany’s investment-related tax requirements. This interpretation may be inaccurate or erroneous, or the law may change, despite my best efforts.
Investment gains
In Germany, all investment income (capital gains and dividends) is taxed at a flat rate (Abgeltungssteuer). The tax rate is 25% plus a 5.5 percent solidarity surcharge and a church tax of 8% in Bavaria and Baden-Württemberg and 9% elsewhere. The effective tax rate is 26.375 percent (i.e. 25 percent + 5.5 percent of 25 percent) without the church tax. The effective tax rate rises to 27.82 percent in Bavaria/Baden-Württemberg and 27.99 percent elsewhere with the church tax.
Gains that are less than 100% taxed may not be taxed. There is a partial exemption (also known as Teilfreistellung), which means that just a portion of the gains (for example, 70%) are taxed. This exemption was created to compensate investors for dividend leakage in the first tax bracket. The exemption proportion varies based on the assets in which the fund invests:
- Funds having a minimum of 25% stake get a 15% tax break (i.e. only 85 percent of the gains are taxed)
Without church tax, the taxes on €1000 in taxable investment profits from an equities fund, with a 30% exemption, are €184.625 = €1000 * 26.375 percent (Abgeltungssteuer) * 70 percent (Teilfreistellung).
Tax-free allowance
For investment gains, there is a tax-free allowance (known as the Freibetrag). It costs €801 if you’re single and €1602 if you’re married. Investment income is tax-free up to the allowance. As a result, only €1199 (€2000-€801) of total taxable investment gains is taxed.
Pre-payment income
The computation procedure for pre-payment revenue (i.e. Vorabpauschale) is difficult, yet it is easy in theory. The pre-payment income permits the state to tax a portion of the accumulating funds’ profits that would otherwise be exempt from the flat tax (Abgeltungsteuer).
This tax only results in the payment of capital gains taxes in advance. The amount already pre-paid is subtracted from the flat tax when shares are sold (Abgeltungssteuer). As a result, the capital gains will not be taxed twice. Keep in mind that maintaining track of any pre-payment income tax already paid will necessitate some bookkeeping on your part.
The gains from a risk-free investment over the course of the year make up the basic income. The German Federal Ministry of Finance determines the investment’s growth rate at the start of the year. For 2020, the basic income rate (also known as basiszins) is 0.07 percent.
- Basic income is calculated as follows: basic income rate * ETF value at the start of the year * 0.7.
So, for a €10,000 fund with a 0.07 percent basic income rate at the start of the year, the basic income would be €4.9 (€10,000 * 0.07/100 * 0.7). You would receive €190 in dividends if the fund distributed dividends at a yield of 1.9 percent, which is significantly greater than the basic income.
Dividends are generally less than basic income. As a result, distributing money almost never has to pay taxes on pre-payment revenue because pre-payment income is zero.
The “min” part of the above pre-payment income formula is crucial. You won’t pay any more taxes for that fiscal year than your unrealized capital gains. As a result, if your fund lost value that year, your pre-payment income would be zero. If your fund only increased in value by €3 but your basic income remained constant at €4.9, your pre-payment income would be €3.
The income from prepayments is taxed at a fixed rate (Abgeltungssteuer). Here’s how to figure it out:
- Income tax on prepayments = income on prepayments * flat tax * (1 – partial exemption)
- Basic income is calculated by multiplying the basic income rate by the ETF value at the start of the year by 0.7.
- ETF value at the end of the year – ETF value at the beginning of the year = Deemed capital gains
You won’t be estimating the pre-payment revenue on your own in practice. There are numerous calculators available on the Internet (example). You simply need to understand how it works in order to determine which dividend distribution scheme is best for you.
Should I choose an accumulating or distributing fund?
The unused tax-free allowance is not carried forward to the next fiscal year. As a result, you are encouraged to make full use of the tax-free allowance because it permits you to earn tax-free profits.
If you choose a distributing fund over an accumulating fund, you’ll use up your tax-free allowance sooner. During the holding period, a distributing fund generates more taxable profits than an accumulating fund. Gains subject to a distributing fund’s flat tax (Abgeltungssteuer) are higher than gains subject to accumulating funds’ pre-payment income tax (Vorabpauschale).
As a result, dispersing funds is favored until your tax-free limit is exhausted. After that, accumulating funds is favoured because the income tax on prepayment is minimal, allowing you to postpone paying taxes (tax deferral). Compounding enhances your investment returns over time when you defer taxes.
Worldwide income
If you are a German fiscal resident, all of your worldwide earnings are taxable in Germany. It doesn’t matter what country you’re from. It makes no difference if the bank account or broker is located in another nation. You might not be charged twice if you have a double taxation treaty in place.
Tax return
Only under certain circumstances is it necessary to file a tax return (i.e., Steuererklärung). Nonetheless, you should file it since you may be able to deduct expenses, which could result in a tax refund.
Individuals with foreign income are required to file a tax return. You must file a tax return if you have a foreign broker (e.g., Degiro, Interactive Brokers).
Using a web tool like SmartSteuer to submit taxes is the most convenient option. The purpose of this page is not to explain how to fill out the required annexes/forms.
I urge that you keep a watch on tax code changes. There are a plethora of relevant publications (in German) available. Every year before I file my taxes, I make it a point to double-check them. You should look up “Steuererklärung” on Google to discover what’s fresh. There are some excellent articles on Finanztip, but there are others as well.
Are ETFs available to Europeans?
- When compared to buying ADRs or foreign companies directly, European ETFs are typically thought to be the simplest way to invest in Europe.
- If you’re not in the midst of a crisis, European ETFs are a terrific method to diversify your stock portfolio with relatively low-risk investments.
- European EFTs aren’t ideal for everyone. They’re vulnerable to contagion, have slower growth rates, and, in certain situations, aren’t unpredictable enough for risk-takers.
In Germany, where can I buy stocks?
Now that you’ve learned about the many financial instruments accessible, you might be wondering, “How can I invest in Germany?” Let’s have a look at some of the possibilities:
Trading/Broker apps
If you’ve been following the Gamestop saga, you’ve probably heard about trading and broker apps like Robinhood. These apps are particularly popular because they allow anyone to start trading virtually instantly, even if they have no prior experience with investing or a little initial deposit. They’re also compatible with any device.
Please keep in mind that using trading apps and services entails putting your own money at risk. Before making any decisions, please educate yourself thoroughly and attempt to diversify your portfolio as much as possible.
Pros and cons:
There are advantages and disadvantages to using trading applications to conduct stock trading in Germany, just like anything else in life. The following are some of the benefits:
- When inexperienced, ease of use and trading without access to a broker might result in significant losses.
Fees
Different fees and pricing systems apply to digital brokers and trading apps. They are, however, usually among the most affordable ways to begin trading. Before you sign up, check the many alternatives to see which one has the best fees for the type of trading you want to conduct. If you’re investing for the long haul and just expect to make monthly installments, this won’t have much of an impact. Fees might easily pile up if you plan on day trading and making many trades per day. The following are examples of typical fees:
Financial advisors and brokers
If you’re a first-time trader learning how to trade in Germany, getting help and trading through a financial advisor or broker is definitely something to think about. Their experience and knowledge can help you get the most out of your money based on your investment objectives. German brokers are likewise familiar with German legislation and can offer you with accurate annual statements for submitting tax returns.
Pros and cons
- When it comes to financial planning and investment selection, you will save a significant amount of time.
- Having access to experienced, professional advice and programs that are suited to your specific needs
- Investing a significant amount of money in services and financial planning (some financial managers charge percentages of your portfolio value, for example)
- Putting your money in the hands of a stranger. You will be financially harmed if the financial advisor makes incorrect recommendations.
Depending on the transaction, brokers and financial advisors charge varying fees.
Account maintenance fees, fees per trading order, and a deposit charge as a percentage of your assets are the most prevalent expenses for German broker accounts.
The account maintenance fee is traditionally a monthly flat price, however most providers no longer charge it. If you trade a certain number of times each month, certain brokers may waive this cost.
The most significant feature of your broker account is the charge per order. It’s a price that you’ll have to pay every time you buy stocks or ETFs. Some companies charge a fixed price per order, ranging from 1 to 25 euros, while others charge a percentage of your total purchase volume.
Trading stocks in Germany with traditional banks
Many German banks have trading accounts that enable you to trade stocks, options, and other financial instruments. Among the banks that provide trading services are:
Pros and cons
- You may quickly (and almost instantly) transfer funds from your checking account to your trading account and start buying stocks.
- They don’t have the same broad range of stocks and ETFs as traditional and online brokers.
- Because they function as a middleman between you and market transactions, banks charge more fees than digital brokers.
Fees
The fees that banks charge are generally determined by the bank in issue. Depending on the transaction and service, various banks impose varying costs. For example, Vivid charges no commission on trades (just currency exchange fees), whereas ING charges a 0.82 percent – 1.13 percent annual fee based on the value of your account.
Is Vanguard available in Germany?
Vanguard is only offered to retail investors in the United States and the United Kingdom. You will not be able to open a personal account in Germany unless you are a professional investor. Vanguard is available internationally, but not for retail accounts, and no announcements have been made about when it will be available in countries other than the United States and the United Kingdom.
However, being unable to invest through their platform does not imply that you are unable to invest in Vanguard financial products. You are eligible to invest in the wide variety of Vanguard ETFs accessible on the market as a German. Yes, you can invest in an ETF that tracks the S&P 500, DAX, or any other prominent index! There are more than 45 Vanguard ETFs to choose from. Keep in mind that all of these ETFs are based in the European Union. (Be sure to read the explanation below — it’s crucial!)
Because you can invest in Vanguard products but not in their platform, we need to look at other options, which is exactly what we’ve got for you!
Is it possible to buy US stocks in Germany?
Germany has a robust investment culture, with products ranging from great to doubtful; to the point where investing here should be viewed as an entrepreneurial venture, with ‘investor beware’ as a persistent and serious watchword.
When managing German investments, it is frequently beneficial to use a ‘platform.’ Investors retain ownership of their assets, but dividends and payments from stocks, bonds, and mutual funds are collected in an automated and efficient manner. Above all, the cost of using a platform on an annual basis is modest.
Citizens of the United States can invest in stocks, bonds, and mutual funds as long as they do so through a platform that is willing to file the required income tax returns with the IRS. Most German companies hesitate to do so, fearful of the consequences of making an error or omission. However, there are enough professional platforms available to US investors in Germany to make a well-informed decision.
Is it possible to buy US ETFs in Germany?
Residents of Germany who have a brokerage account that does not deduct German investment taxes automatically are REQUIRED BY LAW to submit their taxes. As far as we know, no German broker enables direct purchases of US-ETFs, therefore this applies to practically everyone who owns US-ETFs. Prior to the EU MiFiD rule, it was allowed to buy US-ETFs through German brokerage accounts, although we are aware that not all German brokers appropriately apply the US source tax to foreign ETFs.
Is an exchange-traded fund (ETF) tax-free?
ETFs are a considerably newer sector in India than mutual funds. These ETFs have only been around for a few years, but they have failed to gain traction in India. ETFs are usually developed based on specific benchmarks or assets. You can have an ETF on Gold, an ETF on Silver, or an ETF on any of the indices like the Nifty or the Bank Nifty, for example. What is a Gold ETF and how does it work? The ETF holds an identical amount of gold with the custodian bank and issues gold ETFs in exchange for it. As a result, because your gold ETFs are backed by physical gold held by a custodian bank, they are completely safe. In the same way, index ETFs hold component equities in the same proportion as the index. The Fund of Funds (FOF) module, on the other hand, is a module that creates a portfolio of funds by combining and matching funds to meet your individual needs.
ETFs are distinguished from traditional mutual funds in one significant way: they are listed and traded on a stock exchange. So, just like any other stock, Gold ETFs can be bought and sold on the NSE by paying brokerage and STT. They are credited to your demat account in the same way that any other stock is. There are market makers who make the market for ETFs by providing buy and sell quotes before the real trading begins. Global funds have been the majority of FOFs in India. The FOF route has been employed by Indian mutual funds with global affiliations to establish a portfolio of global funds of their foreign stakeholder, allowing Indian investors to get indirect access to global markets. However, because global markets aren’t exactly producing a lot of alpha, the focus on FOFs has been limited.
ETFs account for less than 1% of Indian mutual funds’ total assets under management (AUM). This is due to three major factors. To begin with, Indians are well-versed in separate loan and equity products. They are apprehensive about a product like an ETF, which is more difficult to comprehend than a pure FD or pure equities vehicle. One of the reasons why ETFs haven’t taken off as expected is a lack of awareness. Second, India is an alpha market. The idea of investing in stock for the sake of obtaining benchmark returns is unappealing to most investors. SIPs in diversified stock funds, they believe, are a superior option. The performance of an active fund is greater since the fund manager can utilize his discretion in stock selection. The Nifty, on the other hand, has remained almost unchanged between March 2015 and March 2017. Diversified equities funds obviously beat an index ETF throughout this time period, while an index ETF would have provided zero returns. Finally, unlike the US and European markets, ETFs are not extremely cost effective. There isn’t much of a cost benefit in ETFs when you sum up the fund management costs and then add in the market brokerage, STT, and related expenses.
Another key reason why ETFs haven’t taken off in India is the tax situation. The tax treatment of ordinary equities and equity mutual funds is same. If they are held for less than a year, they are considered as short term capital gains, and if they are held for more than a year, they are classified as long term capital gains. Long-term capital gains are tax-free in both circumstances, but short-term capital gains are taxed at a reduced rate of 15%. ETFs are at a disadvantage in this regard. To begin, an ETF profit will only qualify as long-term capital gains if it is held for more than three years. In the case of ETFs, anything less than three years is classed as short term capital gains. Second, there is an unfavorable tax rate. Short-term capital gains from ETFs in India are taxed at the investor’s highest marginal tax rate, while long-term capital gains are taxed at either 10% without indexation or 20% with indexation benefits. As a result, ETFs in India score lower in terms of both returns and tax efficiency. Certainly a compelling argument against ETFs!
The concept of a Fund of Funds (FOF) is widely popular in the West and even in Asian nations. When it comes to mutual fund investing, most institutions adopt the FOF method. These FOFs have failed to impress in terms of performance. Anyway, when the entire globe is looking to India for alpha, a FOF focused on global markets isn’t exactly adding value. Second, FOFs are subject to unfavorable taxation. For tax reasons, a FOF that aggregates equity funds is classified as a debt fund. One of the main reasons why FOFs haven’t taken off in India is because of this.
ETFs and FOFs have not yet taken off in India in a large way. Aside from the cost and return considerations, the tax implications play a significant role in why investors choose traditional equity funds versus ETFs.
Is there a tax-free savings account in Germany?
- For singles, the tax-free allowance on capital gains is up to 801€ and for couples, it is up to 1602€.
- These tax-free allowances can be split and used to claim savings from multiple institutions.
- By establishing a tax exemption order, you can ensure that you only pay tax on capital gains that exceed your tax-free allowance.
- When it comes to submitting tax returns, this will save you a lot of time.
