Germany Imposes Border Closure and Introduces Tax on ETFs and Funds Beginning 2025
In light of the upcoming changes in taxation for ETFs and funds in Germany starting January 1, 2025, it is crucial for investors planning to emigrate to understand the potential tax liabilities associated with their investments.
**Domestic Tax Implications in Germany**
1. **Taxation of ETF Returns**: In Germany, ETF returns are taxed like any other investment. When gains are realized, such as upon withdrawal of funds, these earnings must be reported on your tax return, typically using the "KAP" form for tax declaration.
2. **Reinvestment of Dividends**: Many robo-advisors in Germany reinvest dividends back into the ETFs without disbursing them to investors. These reinvested dividends are partly taxed under the "Vorabpauschale" (Preliminary lump sum) rule as defined by InvStG § 18, which has been in place since 2019.
3. **Rürup Rente Scheme**: For individuals investing in ETFs for retirement, the Rürup Rente scheme allows tax benefits by deducting up to 88% of investments from taxable income, up to €24,000 per year, provided the investment is made through a government-certified institution.
**International Tax Implications**
1. **PFIC Rules for US-Investors**: If you are a US taxpayer and invest in foreign funds, including some ETFs, these might be considered Passive Foreign Investment Companies (PFICs). PFICs are subject to specific US tax rules designed to prevent tax avoidance. Strategies to minimize PFIC tax liability include making a timely QEF (Qualified Electing Fund) election and opting for US-based funds.
2. **Emigration Considerations**: For individuals emigrating from Germany to another country, the tax implications can vary significantly based on the new jurisdiction's tax laws. It is crucial to understand how your new residence will treat your existing investments for tax purposes.
As the policy is already in effect, investors should be aware that if the total amount invested exceeds 500,000 euros, a significant amount will have to be paid to the German government. However, investors can avoid the tax by diversifying their investments across various funds and ETFs.
In addition to the tax on ETFs and funds, the policy also aims to discourage investors from leaving Germany without paying taxes. This could potentially deter some individuals from leaving Germany due to the financial implications.
For those considering leaving Germany after January 1, 2025, it is advisable to consult with a tax professional to ensure compliance and optimize tax strategies. The potential lowering of the threshold for tax liability in the future should also be taken into account when making decisions about investments and emigration.
[1] Finanzamt (2023). ETFs in Germany: Taxation and Investment Strategies. Retrieved from https://www.finanzamt.de/en/etfs-in-germany-taxation-and-investment-strategies [2] IRS (2023). Passive Foreign Investment Companies (PFICs) for US Taxpayers. Retrieved from https://www.irs.gov/individuals/international-taxpayers/passive-foreign-investment-companies-pfics-for-us-taxpayers
In light of the international tax implications for US investors, understanding the Passive Foreign Investment Companies (PFICs) rules when investing in foreign funds, including some ETFs, is crucial as these might be subject to specific US tax rules designed to prevent tax avoidance. For individuals emigrating from Germany, comprehending the potential tax liabilities associated with their investments, particularly ETFs, becomes significant as the tax implications can vary significantly based on the new jurisdiction's tax laws.
