Which income is considered investment income?
With the introduction of the withholding tax, it is generally no longer necessary to submit the KAP form. However, in some cases you must still complete the KAP form:
- the capital gains are not subject to tax deduction (e.g. sale of GmbH shares of less than 1 percent)
- income from foreign accumulating investment funds
- income (interest, dividends, etc.) from foreign accounts or deposits
- interest from loan agreements between private individuals
- interest on tax refunds
- sale of endowment life insurance policies (for contracts concluded from 2005)
Note: For certain income, you must also complete the KAP-INV form (for income from investment earnings not subject to domestic tax deduction) or KAP-BET form (for income from capital assets in the case of shareholdings, if the income and the tax to be credited have been determined uniformly and separately).
Furthermore, the KAP form must be completed in the case of an optional assessment if:
- a loss carryforward from previous years is to be taken into account or a loss offset of income from capital assets is to be made, or
- the saver’s allowance has not been fully utilised, or
- church tax has not been deducted despite church tax liability, or
- foreign taxes are still to be taken into account, or
- to check the amount of the capital gains tax deduction.
If you wish to apply for a so-called favourable tax rate check, you must also complete the KAP form. This may allow you to benefit from a lower tax rate with your individual tax rate if it is lower than the withholding tax rate of 25 percent.
(2021): Which income is considered investment income?
When is it necessary to complete Form KAP?
With the introduction of the withholding tax, it is generally no longer necessary to submit the KAP form. However, in some cases, submission is still required:
- Capital gains are not subject to tax deduction (e.g. sale of GmbH shares of less than 1 percent)
- Income from foreign accumulating investment funds
- Income (interest, dividends, etc.) from foreign accounts or deposits
- Interest from loan agreements between private individuals
- Interest on tax refunds
- Surrender of endowment life insurance policies (if taken out after 2005)
The KAP form must also be completed if one of the following points applies in the case of an optional assessment:
- A loss carryforward from previous years is to be taken into account or a loss offset of income from capital assets is to be made,
- The saver’s allowance has not been fully utilised,
- Church tax was not deducted despite church tax liability,
- Foreign taxes are still to be taken into account,
- The amount of the capital gains tax deduction is to be checked.
If you wish to apply for a so-called favourable tax rate check, the KAP form must also be completed. This may allow you to benefit from a lower tax rate if your individual tax rate is lower than the withholding tax rate of 25 percent.
Note: For certain income, the KAP-INV form (for income from investment income not subject to domestic tax deduction) or KAP-BET form (for income from capital assets in the case of shareholdings, if the income and the tax to be credited have been determined separately and uniformly) must also be completed.
(2021): When is it necessary to complete Form KAP?
Can I claim income-related expenses from capital assets?
With the deduction of withholding tax, the tax liability for capital gains is generally settled. This means that expenses related to earning income can no longer be considered as deductible expenses upon proof. They are covered by the saver’s allowance of 801 Euro for single persons and 1.602 Euro for married couples.
Actual expenses cannot be deducted even in the favourable tax rate test. If your personal tax rate is below 25%, you can apply for your capital gains to be taxed at your individual tax rate in the tax return in "Anlage KAP" and thus correct the deduction of withholding tax of 25% in your favour (so-called favourable tax rate test). However, even with this "optional assessment at the individual tax rate", it is not possible to claim expenses upon proof (BFH ruling of 28.1.2015, VIII R 13/13).
However, there is an exception for the "mandatory assessment at the individual tax rate": In some cases, income tax on capital gains is not settled with the capital gains tax deduction. Instead, the capital gains must be declared in the tax return and taxed at the individual tax rate. The withheld capital gains tax is then credited against the tax liability. In this case, the normal tax rules for deducting expenses apply. This means that expenses can be deducted in the proven amount, e.g. interest on debt. No saver’s allowance is granted for these earnings (§ 32d para. 2 EStG).
A mandatory assessment at the individual tax rate may apply for
- Capital gains that belong to other types of income, e.g. rental income or business income,
- Capital gains from the sale of shares in a company with a stake of more than 1%,
- Capital gains from investments in companies as business assets,
- Interest from so-called back-to-back financing,
- Interest from a company or cooperative to its shareholders,
- Interest from private loans between related persons (e.g. spouses) if the borrower uses the loan to generate income and deducts the interest as business expenses or income-related expenses. In this case, the interest income for the lender is not subject to the withholding tax rate of 25%, but is taxed like other income at the personal tax rate (§ 32d para. 2 no. 1a EStG).
(2021): Can I claim income-related expenses from capital assets?
How do capital gains affect the reasonable burden and exceptional costs?
In principle, capital gains that have already been subject to withholding tax are not taken into account when determining the total income. If extraordinary expenses were claimed at the same time, capital gains had to be declared in the past.
This was because capital income was included in the income to calculate the individual reasonable burden. This has not been the case since 2012.
The omission of capital gains leads to a tendency for the reasonable burden (x% of the total income) to be lower when deducting extraordinary expenses – an advantage for you.
You do not need to declare capital income if you wish to claim extraordinary expenses.
(2021): How do capital gains affect the reasonable burden and exceptional costs?
Are the costs of a voluntary disclosure deductible as income-related expenses?
Between 2010 and 2014, over 100,000 voluntary disclosures regarding undeclared capital income from Switzerland were submitted. Those affected by the disclosure face two issues: firstly, the conditions for the effectiveness of the amnesty are extraordinarily complicated (see Uli Hoeneß), and secondly, the costs for the disclosure, i.e., for obtaining documents and for the tax advisor, are exceptionally high.
The question is whether the high costs can be deducted as income-related expenses for income from capital assets.
- In principle, since the introduction of the withholding tax in 2009: Expenses related to capital income can no longer be deducted as income-related expenses for income from capital assets upon proof. All expenses are covered by the saver’s allowance. According to the tax authorities, the prohibition on deduction should also apply if the expenses are related to capital income from years before 2009 (BMF letter dated 09.10.2012, BStBl. 2012 I p. 953, para. 322).
The Federal Fiscal Court has confirmed that tax consultancy costs in connection with a voluntary disclosure for capital income from 2002 to 2008 cannot be deducted as income-related expenses in 2010. Although the costs for the tax advisor are income-related expenses for income from capital assets, they can no longer be deducted as income-related expenses from 2009. Only a saver’s allowance of 801 Euro is now taken into account (BFH ruling of 02.12.2014, VIII R 34/13).
(2021): Are the costs of a voluntary disclosure deductible as income-related expenses?
What is the most favourable rate test?
With the tax return, you can request that your income from capital assets be included in the assessment. This means that this income will be taxed at your personal, progressive tax rate rather than the withholding tax rate of 25 per cent.
However, if this so-called favourable tax rate check shows that your personal tax rate is higher than the withholding tax rate, your application will be considered as not submitted. You will not have to pay more than the 25 per cent capital gains tax.
Please note that the application can only be made uniformly for all capital income. All tax certificates must also be submitted to the tax office.
(2021): What is the most favourable rate test?
