What tax rules apply to ETFs in Germany?

German taxation of funds and ETFs has been simplified compared to earlier rules, but it still has a few specific quirks worth knowing about.

Capital income is taxed at a flat 25% (Abgeltungsteuer) plus the Solidaritätszuschlag (5.5% of the tax) and, where applicable, church tax. For most savers without church tax, the effective combined rate works out to around 26.375%. For equity ETFs, 30% of distributions and gains are tax-exempt under the Teilfreistellung rule, which lowers the effective rate further. Bond and mixed funds have their own (lower) Teilfreistellung rates — equity exposure is rewarded, conservative funds less so.

Every saver has an annual tax-free allowance (Sparerpauschbetrag) of currently €1,000 per person (€2,000 jointly), which you activate by submitting a Freistellungsauftrag to your broker — usually with a single click in the online interface.

Accumulating ETFs (which reinvest dividends rather than paying them out) are subject to a small annual prepayment tax called the Vorabpauschale. Your German broker calculates it based on a notional return, deducts the small amount automatically each January, and credits it against your eventual capital gains when you sell. Distributing ETFs are simpler: tax is taken when the dividend is paid out.

If you stay with a German broker, none of this requires active management on your part — it just happens. Foreign brokers shift all of this work onto your tax return, which is where most of the problems with foreign brokerage tend to appear.