A guide to investing in ETFs while living in Germany

This guide mostly covers the details around investment taxes and brokerages available in Germany. I have written at length about the fundamentals of investing in index funds while living in Europe elsewhere, so I won’t repeat that in this post.

I don’t know where to start with investing

My “learn investing in 10 minutes a day” series of emails covers this.

Which ETFs should I consider?

This blog post is a quick introduction to my preferences. My book is a more detailed explanation. I think the portfolio does not change depending on the country in Europe.


Most of the primary sources around taxes are in German. There are sources in English, but some may be outdated or incomplete. Google Translate is very useful in translating web pages from German to English. You can use the Chrome Browser to translate pages quickly. I am not fluent in German, and I use Chrome’s translation all the time.

I added all the names for the relevant terms in German because you may have to run some simple Google queries in German.

This post isn’t tax advice but instead my understanding of investment-related tax obligations in Germany. Despite my best attempts, this interpretation may be incomplete, incorrect, or the law may change.

Investment gains

All investment income (capital gains and dividends) is subject to a flat tax (i.e., Abgeltungssteuer) in Germany. The tax rate is 25% plus the solidarity surcharge (5.5%) and church tax (8% in Bavaria and Baden-Württemberg, 9% elsewhere). Without church tax the effective tax rate is 26.375% (i.e. 25% + 5.5% of 25%). With church tax, the effective tax rate increases to 27.82% for Bavaria/Baden-Württemberg and 27.99% elsewhere.

Less than 100% of gains may be taxed. There is a partial exemption (i.e. Teilfreistellung), which causes only part of the gains (e.g., 70%) to be taxed. This exemption exists to compensate investors for dividend leakage in level 1 taxation. The percentage of the exemption varies depending on the assets the fund invests in:

  • Funds with at least 25% equity -> 15% exemption (i.e. only 85% of the gains are taxed)
  • Funds with at least 51% equity -> 30% exemption
  • Real estate funds -> 60% exemption
  • Foreign real estate funds -> 80% exemption

For €1000 in taxable investment gains from an equity fund, with a 30% exemption, without church tax, the taxes are €184.625 = €1000 * 26.375% (Abgeltungssteuer) * 70% (Teilfreistellung). 

Tax-free allowance

There is a tax-free allowance (i.e., Freibetrag) for investment gains. It is €801 when single or €1602 when married. Investment income up to the allowance is tax-free. Therefore with €2000 in total taxable investment gains, only €1199 (€2000-€801) are taxable.

Pre-payment income

The pre-payment income (i.e., Vorabpauschale) has a complicated calculation method, but it is simple in principle. The pre-payment income allows the State to tax part of the reinvested dividends of accumulating funds that would otherwise not be taxed by the flat tax (Abgeltungsteuer). 

This tax only leads to a pre-payment of capital gains taxes. Upon selling shares, the already pre-paid amount is deducted from the flat tax (Abgeltungssteuer). Therefore, you won’t get taxed twice on those capital gains. Note that this requires some bookkeeping on your side to keep track of any pre-payment income tax already paid.

Here is how to calculate the pre-payment income:

  • Pre-payment income = min(basic income, deemed capital gains) – dividends

The basic income is the gains of a competing risk-free investment for the whole year. The German Federal Ministry of Finance sets the growth rate for this investment at the start of the year. The basic income rate (i.e., basiszins) for 2020 is 0.07%

Here is how to calculate the basic income:

  • basic income = basic income rate * ETF value at the beginning of the year * 0.7.

So, for a fund worth €10,000 at the start of the year, a basic income rate of 0.07%, the basic income would be €4.9 ( €10,000 * 0.07/100 * 0.7). If that fund were to distribute dividends at a yield of 1.9%, you would receive €190 in dividends, which is substantially higher than the basic income.

Basic income is often lower than dividends. Therefore, distributing funds rarely have to pay taxes on pre-payment income because pre-payment income would be 0.

The “min” portion of the pre-payment income formula above is important. You won’t pay more taxes than the unrealized capital gains for that fiscal year. So, if your fund lost value in that year, the pre-payment income would be 0. And if your fund only grew in value €3, but the basic income was €4.9, the pre-payment income would be €3.

The pre-payment income is taxed at the flat tax (Abgeltungssteuer). Here is how to calculate it:

  • pre-payment income tax = pre-payment income * flat tax rate.

Let’s put everything together:

  • Pre-payment income tax = pre-payment income * flat tax * (1 – partial exemption)
  • Flat tax = 25% + solidarity surcharge + church tax
  • Pre-payment income = min(basic income, deemed capital gains) – dividends
  • Basic income = basic income rate * ETF value at the beginning of the year * 0.7
  • Deemed capital gains = ETF value at the end of the year – ETF value at the start of the year

In practice, you won’t be calculating the pre-payment income by yourself. There are lots of calculators on the Internet (example). You only have to understand how it works so you can decide which dividend distribution policy is more advantageous to you.

Should I choose an accumulating or distributing fund?

The unused tax-free allowance does not transfer to the following fiscal years. Therefore, you are incentivized to use all the tax-free allowance because it allows you to have tax-free gains.

You’ll consume your tax-free allowance faster if you choose a distributing fund instead of an accumulating fund. A distributing fund leads to a higher amount of taxable gains during the holding period than an accumulating fund. The gains subject to the flat tax (Abgeltungssteuer) of a distributing fund are higher than the gains subject to the pre-payment income tax (Vorabpauschale) of accumulating funds.

Therefore, distributing funds are preferred until you exhaust your tax-free allowanceAfter it, accumulating funds are preferred because the pre-payment income tax is low, which allows you to delay paying taxes (tax deferral). Tax deferral increases your investment returns over the long-term due to compounding.

I discussed this in my earlier post.

Worldwide income

If you are a fiscal resident in Germany, all your worldwide income is taxable in Germany. Regardless of your nationality. It does not matter if the bank account/broker is in a different country. Double taxation treaties may prevent you from being charged twice.

Tax return

Submitting a tax return (i.e., Steuererklärung) is only required in some scenarios. Nevertheless, it is in your best interest to submit it because you may deduct expenses, which can lead to a tax refund.

Submitting a tax return is mandatory for folks with foreign income. If you have a foreign broker (e.g., Degiro, Interactive Brokers), you are required to submit a tax return.

The easiest way to submit taxes is to use a web application like SmartSteuer. Explaining how to fill the relevant annexes/form is outside the scope of this post.

I recommend you keep an eye on changes for the tax code. There are many useful publications (in German) out there. I make a habit of checking them every year before I submit my taxes. You want to Google for “Steuererklärung [YEAR]” and see what is new. Finanztip usually has great articles, but there are others.


Cross-border brokers are available to German residents (e.g., degirointeractive brokerstrading 212).

You may also consider using a local broker. Many prefer local brokers for these reasons:

  • They withhold taxes – this means you don’t have to do any fiddling around with taxes. The broker correctly accounts for the tax-free allowance, pre-payment and flat taxes. At the end of the fiscal year the broker sends you a tax certificate indicating how you are supposed to fill the tax return.  
  • They often offer a product called “sparplan” (i.e. savings plan) – a savings plan is a service that allows you to configure a periodic direct debit that invests into an ETF. They support fractional shares. Some prefer this product because it is a “set it and forget it” approach, and is simpler for inexperienced investors. You don’t need to mess around with order types, order books, etc. The fees for savings plans are usually low.

A savings plan (sparplan) aggregates the orders from all customers and executes them at once on specific days of the month (e.g., day 5 and 20 of every month) in a particular exchange. Aggregating all orders makes it easy for the broker to offer fractional shares. There are a few downsides to this approach:

  • You don’t have the flexibility to trade whenever you want – The market dropped 30% today, and you want to buy stocks on the cheap?! Too bad! You’ll have to wait 15 days for the next window.
  • You don’t have insight about the spread – The spread is a form of hidden fee. I don’t know if these transactions are getting a reasonable price or not. I have seen claims that there is a significant spread in these transactions, but I haven’t been able to confirm.

Most German brokers will have their websites in German. If you are not fluent in German, you’ll have to get used to translating the web pages or memorize the terms. 

There are lots of comparison sites for savings plans (e.g. justETF). You can google for them using the term “sparplan vergleich”. If you want a regular broker, you can also search for broker comparison sites (e.g., justETF) using the term “broker vergleich”.

Last time I shopped for German brokers (March 2019) I noticed the following things:

  • I prefer savings plans with flat fees (e.g., €1.5 per transaction) instead of percentage fees (e.g., 1.5% of the total transaction amount). The flat fee brokers get cheaper as your transaction amount increases.
  • Onvista only accepts clients who are citizens from certain countries.
  • Some brokers have zero-commission ETFs on their savings plans. Often the ETFs are from Amundi and Lyxor, which are not my preferred ETF providers. There is nothing wrong with them I just have a biased preference for Vanguard/iShares, and I don’t think €1.5 per transaction is a lot of money.
  • Regular brokerage services (i.e., no savings plan) are typically expensive when you compare them with the cheap cross-border brokers, but flatex and onvista are affordable.
  • Flatex charges a negative interest rate on your uninvested cash balance. 
  • Many banks offer savings plans. Your uninvested cash sits in your regular bank account.

If you choose a bank (instead of a brokerage), you should be aware that the brokerage experience isn’t as modern as you would see in a full brokerage like Interactive Brokers or Degiro. DKB, for example, does not have a proper order book so, operations outside their savings plan aren’t that smooth.

Recently Trade Republic became popular. They are a zero-commission broker from Germany. I never looked into them, so I don’t have any comments to share.

This blog focuses on helping folks that want to manage their own investments. I have documented my research process for learning about taxes and brokers in my “Guide to taxes” and my “Guide to brokers“. I have used that process in multiple countries. Those guides will help you become less overwhelmed with these topics and more confident in your decisions.

Those guides are add-ons to my book “Introduction to investing index funds and ETFs“. You can download the first chapter of the book by subscribing below.

Disclaimer: This information is for educational and entertainment purposes only. This does not represent, in any case, specific investment, legal nor tax advice nor recommendations to purchase a particular financial product. Learn more at https://indexfundinvestor.eu/disclaimers/