Freistellungsauftrag
A Freistellungsauftrag, or "exemption order," is a formal instruction issued by an individual to a financial institution in Germany, directing it not to withhold capital gains tax on investment income up to a specified annual limit. This mechanism is a key component of tax planning for investors in Germany, allowing them to receive a portion of their earnings from investments without immediate tax deduction at the source. The Freistellungsauftrag helps individuals manage their tax liability on investment income such as interest income and dividends. It is directly linked to the "Sparer-Pauschbetrag," a fixed annual allowance for investment income that remains tax-free.
History and Origin
The concept behind the Freistellungsauftrag is rooted in the German tax system's approach to capital income. Prior to 2009, the taxation of investment income, particularly interest, involved a more complex system, including the "Zinsabschlagsteuer" (interest withholding tax). With the introduction of the "Abgeltungsteuer" (flat-rate withholding tax on capital gains) on January 1, 2009, the German system significantly simplified the taxation of most private capital gains. This new flat tax aimed to streamline the process, taxing most investment income at a uniform rate regardless of an individual's personal income tax bracket.13 The Freistellungsauftrag was retained as an integral part of this simplified system, enabling taxpayers to utilize their "Sparer-Pauschbetrag" directly at the source, thus preventing unnecessary tax deductions for income below the tax-free allowance.
Key Takeaways
- A Freistellungsauftrag instructs a German financial institution to exempt a portion of investment income from immediate capital gains tax.
- It allows investors to utilize the annual "Sparer-Pauschbetrag," a tax-free allowance for capital earnings.
- The order must be filed with each financial institution where investment income is generated.
- Without a Freistellungsauftrag, or if the income exceeds the set amount, the institution automatically withholds tax.
- The aggregate amount across all institutions must not exceed the total annual "Sparer-Pauschbetrag."
Interpreting the Freistellungsauftrag
The Freistellungsauftrag is interpreted as an instruction to apply the "Sparer-Pauschbetrag" (saver's lump sum amount) directly at the source of capital gains and interest income. For the years 2023, 2024, and 2025, this allowance is set at €1,000 for single individuals and €2,000 for married couples filing jointly., If12 11a Freistellungsauftrag is in place, the financial institution (such as a bank or brokerage account provider) will not deduct income tax on investment income until the total amount of income received within the calendar year exceeds the sum specified in the order. This ensures that income up to the "Sparer-Pauschbetrag" remains tax-free and immediately accessible to the investor. It avoids the need for individuals to reclaim overpaid taxes through their annual personal finance tax return.
Hypothetical Example
Consider Anna, a single investor in Germany, who has a savings account at Bank A and an investment portfolio with Broker B.
For the current year, Anna anticipates earning €700 in interest from Bank A and €500 in dividends from Broker B.
The annual "Sparer-Pauschbetrag" for single individuals is €1,000.
To avoid immediate tax deductions, Anna can set up two Freistellungsaufträge:
- With Bank A, she could set an exemption for €700.
- With Broker B, she could set an exemption for €300 (€1,000 total allowed - €700 at Bank A).
In this scenario:
- Bank A would pay out the €700 interest without withholding any tax, as it's covered by the Freistellungsauftrag.
- Broker B would pay out €300 of the dividends tax-free, but would withhold taxation on the remaining €200 (€500 - €300), because Anna's total exemption for the year is capped at €1,000 across all institutions.
If Anna had not submitted any Freistellungsaufträge, both Bank A and Broker B would have automatically withheld capital gains tax on all the income they paid out, and Anna would then have to reclaim the tax on the first €1,000 via her tax return.
Practical Applications
The Freistellungsauftrag is a crucial tool in financial planning for German residents with investment income. It is applied across various financial products and institutions, including bank accounts, fixed-term deposits, stock brokerage accounts, and investment funds. Individuals typically file a Frei10stellungsauftrag directly with their bank or broker, often through online banking portals or specific forms provided by the institution.
Financial institutions are legal9ly obligated to report the amounts of capital income that were exempted from tax withholding due to a Freistellungsauftrag to the Bundeszentralamt für Steuern (Federal Central Tax Office) annually. This reporting mechanism allows th8e tax authorities to monitor whether an individual has exceeded their total "Sparer-Pauschbetrag" by setting too high amounts across multiple banks. Properly utilizing a Freistellungsauftrag streamlines the tax process for individuals, preventing immediate tax deductions on income that is legitimately tax-free.
Limitations and Criticisms
While beneficial, the Freistellungsauftrag has specific limitations. The primary limitation is the total annual "Sparer-Pauschbetrag" (€1,000 for individuals, €2,000 for married couples as of 2025). Investors must ensure that the sum of 7all Freistellungsaufträge across all their financial institutions does not exceed this statutory limit. Overlapping or excessive exemption orders can lead to unintended tax deductions or, in cases of deliberate misuse, may trigger closer scrutiny from the tax authorities. The Bundeszentralamt für Steuern (BZSt) implements a control procedure to detect and prevent such inappropriate claims of tax benefits.
Another point of consideration is that 6the Freistellungsauftrag only applies to the flat-rate capital gains tax. Other forms of taxable income are unaffected. Furthermore, the "Sparer-Pauschbetrag" represents a lump sum for expenses related to generating capital income; it does not allow for the deduction of actual, higher expenses incurred. For specific situations, such as very low overall income, a "Nichtveranlagungsbescheinigung" (non-assessment certificate) might be an alternative to the Freistellungsauftrag, allowing for broader tax exemption if total income falls below the basic tax-free allowance.
Freistellungsauftrag vs. Kapitalertr5agsteuer
The Freistellungsauftrag and Kapitalertragsteuer (capital gains tax) are two sides of the same coin within the German tax system. Kapitalertragsteuer is the tax levied on investment income, typically at a flat rate of 25%, plus a 5.5% solidarity surcharge and, if applicable, church tax., Financial institutions are generally re4quired to withhold this tax directly from qualifying investment income before paying it out to the investor.
The Freistellungsauftrag, conversely, is the legal instrument that allows investors to prevent the automatic withholding of Kapitalertragsteuer up to the annual "Sparer-Pauschbetrag." It acts as an instruction to the bank to apply the tax-free allowance at the source. Without a valid Freistellungsauftrag or if the capital income exceeds the specified amount, the Kapitalertragsteuer will be automatically deducted. Therefore, while Kapitalertragsteuer is the tax itself, the Freistellungsauftrag is the mechanism used to claim an exemption from it for a certain amount.
FAQs
What is the maximum amount for a Freistellungsauftrag?
As of 2025, the maximum amount for a Freistellungsauftrag (corresponding to the Sparer-Pauschbetrag) is €1,000 for single individuals and €2,000 for married couples filing jointly. This amount applies to all your investment i3ncome across all financial institutions combined.
Can I have multiple Freistellungsaufträge?
Yes, you can have multiple Freistellungsaufträge with different financial institutions (e.g., your primary bank, a separate brokerage account, or a specialized savings account). However, the sum of all amounts specified in these orders must not exceed your total annual "Sparer-Pauschbetrag." It is your responsibility to manage these amounts to stay within the limit.
What happens if I don't submit a Freistellungsauftrag?
If you do not submit a Freistellungsauftrag, or if your investment income exceeds the amount you've specified, your financial institution will automatically deduct the Kapitalertragsteuer (plus solidarity surcharge and church tax, if applicable) from your earnings. You can still reclaim any overpaid tax (up to your Sparer-Pauschbetrag) by filing an annual income tax return with the German tax authorities.
Do I need to renew my Freistellungsauftrag every year?
No, you can issue a Freistellungsauftrag as an "unbefristet" (unlimited/indefinite) order, which remains valid for future years unless you change it or revoke it. However, it's advisable to review your Freistellungsaufträge annually, especially if your investment situation changes or if there are updates to the tax laws, such as increases in the "Sparer-Pauschbetrag." For example, existing orders were automatically2 adjusted when the limit increased in 2023.
Does Freistellungsauftrag apply to all typ1es of income?
No, the Freistellungsauftrag specifically applies to capital gains and investment income (e.g., interest, dividends, profits from selling securities) that are subject to the German Kapitalertragsteuer. It does not apply to other types of income like employment income, rental income, or income from self-employment.