The draft tax bill of the Tax Amendment Act 2015/2016 introduces an increase in the tax rate applicable to the investment income of individuals from 25% to 27.5%. Apart from interest from bank deposits and from non-securitized debt claims towards credit institutions, any kind of investment income (including dividends) will be affected by such tax rate increase, which will be applicable beginning 1 January 2016.
Increase of tax rate
Currently, the investment income of individuals is either subject to a special rate of 25% or to the individual's progressive income tax rate of up to 50%. Investment income generally comprises interest, dividends, gains from the sale/realization of investment assets such as bonds, stock and shares, as well as income from certain derivative instruments.
Under the new rules, investment income previously subject to the special rate of 25% will now be taxed at an increased rate of 27.5%. Only interest income from bank deposits (Geldeinlagen) and from non-securitized debt claims towards credit institutions (nicht verbriefte sonstige Forderungen bei Kreditinstituten) will remain subject to 25% income tax. In addition, income from security lending and repos, in particular compensation for distributions on the securities (Ausgleichszahlungen) and securities lending fees (Leihgebühren) will be explicitly excluded from the special rate of 25%.
Taking into consideration the corporate income tax rate of 25%, the tax rate on the investment income of corporations will remain at 25%.
Side effects of tax rate increase
Corresponding to the increase in the income tax rate, the withholding tax rate on investment income will be increased to 27.5%, expect for interest from bank deposits and from non-securitized debt claims towards credit institutions.
The increase in the tax rate for investment income also affects restrictions on the offsetting of losses. Non-business income of individuals and losses from investment assets to which the special tax rates of 25% and 27.5% will apply may still not to be offset with non-business income and losses from investment assets to which the special rates do not apply. However, income and losses from investment assets to which different special tax rates (25% and 27.5%) do apply may be offset against each other (subject to general restrictions). Business losses (investment assets to which the special rates (25% and 27.5%) will apply) may in the future be offset with an amount equal to 55% (50% under current law) with other business income of the individual.
The new rules will be applicable beginning 1 January 2016. In practice, the increase of the tax rate on dividends to 27.5% makes it less attractive for individuals to pursue a business by means of a corporation, since the combined corporate tax rate of 25% and the increased dividend tax rate of 27.5% will now result in an overall tax exposure of 45.625% (instead of 43.75% under current law).