What is dividend distribution tax

Tax Free Dividends: Too Good To Be True?

German companies are distributing more than 57 billion euros in dividends to their shareholders at this year's annual general meeting. The warm rain also has a particularly pleasant surprise in store for some stock savers, because sometimes the dividend even ends up in their own checking account gross for net. The tax authorities get nothing when companies like Deutsche Telekom and Deutsche Post pour out the cornucopia. But is that really the case and how does it work? Is there a nasty surprise at the long end?

Most of the listed German companies are not affected by the phenomenon. Either because they do not pay out any dividends to their shareholders or because they distribute profits made in previous years to their shareholders. They pay a flat rate of 25 percent withholding tax plus solidarity surcharge and possibly church tax after using up the saver lump sum of 801 euros for single persons and 1,602 euros for married couples.

So every saver has to shell out the 26.375 percent, with church members it is effectively 27.99 percent that the state pays in. The custodian bank carries out the withholding tax directly - as a private investor, you don't have to worry about anything to meet your tax obligations.

Exotics in the dividend rain

But sometimes you don't have to pay any taxes. A handful of German companies have been paying tax-free dividends for years, making stock marketers' hearts beat faster. As is so often the case in life, the blessing of money has its advantages and its pitfalls. For the distribution, these companies fall back on their capital reserves and not - as is usual with normal dividends - on the profits generated from their actual business.

Strictly speaking, it is payments from capital increases and contributions from previous years that flow back to the current company owners in the form of a "dividend". The custodian bank does not apply any withholding tax, solidarity surcharge or church tax to the payments. Even an exemption order that has been issued is not nibbled on - that creates room for other lush income.

The dividend ends up in the investor's bank account without any tax deductions. Attentive stockbrokers, however, notice a different effect if they take a careful look at their securities account. At the same time as the dividend is paid out, the cost prices for the company's shares shown in the deposit are reduced by exactly the same amount.

Also read: The best dividends in the Dax

Tax-free or tax deferral?

Whether the dividends can actually be collected tax-free in the end depends solely on when you bought the shares. Anyone who deposited Deutsche Post, Telekom and Co. (see table) in their custody account before 2009 is now looking forward to robust and actually tax-free dividends in the low interest rates because the entire stock is parked in the tax-free area inaccessible to the tax authorities.

  • Biallo tip Even those who inherit such old stocks from their ancestors are fine. With the inheritance, you also take over the original purchase time and the cost of the shares. The tax exemption is passed on to the next generation.

Shareholders who have only acquired the blue chips since 2009 are worse off. After the introduction of the final withholding tax, the one-year speculation period fell. Newly acquired securities price gains have been taxable for an unlimited period since the beginning of 2009. Since the (initially) tax-free dividends are deducted from the originally paid purchase price for the shares, these investors only receive a tax deferral until the point in time at which they part with their shares.

The realized price gain, which results from the difference between the sales price achieved and the original acquisition costs for the shares less the dividends received, is then subject to withholding tax.

Buying and selling expenses for the securities transactions are included in a tax-reducing manner. Long-term investors already have to pay taxes on the dividends when the distributions of the capital reserves have arithmetically consumed their own acquisition costs for the securities in the custody account.

  • Biallo tip: The day on which taxes are due is determined by the shareholders themselves. The right timing therefore helps to avoid the deferred tax burden later or at least to keep it within tolerable limits. Tax foxes place the time of sale in years in which they have made losses with other securities that can be offset against the profit from the sale. It can also make sense to sell after retirement, if the total income and thus your own tax rate are no longer as high as in working life.

Also read: How investors can claim losses for tax purposes

Annual general meeting brings clarity

Only a few companies are definitely certain that they will again be paying their dividends completely "tax-free" this year - including the Dax heavyweights Deutsche Post and Telekom. Many others only distribute part of their capital reserves - the rest of the resolved dividend then comes from actually generated profits.

At DIC Asset, just under 90 percent of the dividend of EUR 0.48 remained tax-free at the end of March, while Deutsche Euroshop, which invited its shareholders to the Annual General Meeting on June 12, only left the announced dividend of EUR 1.50 per share 0.93 euros tax-free, 0.57 euros are subject to the final withholding tax. At Geratherm Medical, the majority of the proposed dividend for 2018 (EUR 0.40) is taxable at EUR 0.27.

If a shareholder has used up his saver lump sum, the custodian bank withholds taxes from this part of the dividend. All of the companies listed in the table paid distributions from capital reserves in the past year. Whether and to what extent they will do this for the dividend season that has just started will in most cases only be determined after the general meeting.

Interested investors should therefore bring themselves up to date with the latest information before making a purchase on the Internet. On the other hand, the management of Deutsche Pfandbriefbank recently made a plannable decision. In a press release on April 16, the bank announced that the distributions for the next five to seven years would flow from the capital reserves and thus initially remain tax-free for German investors.

Also read: Trade Republic - smartphone broker with no commission

Tax deficit for foreigners

Even foreign companies occasionally do not distribute profits, but rather capital reserves. Among them are solid insurance companies such as the Zurich Insurance Group from Switzerland as well as the Norwegian salmon farmer Marine Harvest (now Mowi) or the US retirement home rental companies Omega Healthcare or HCP Inc.

In the past, they have all distributed capital reserves to shareholders, giving them juicy returns of up to eight percent. Different terms such as "return of capital" (Omega Healthcare, HCP Inc.), "capital reduction" (Marine Harvest) or "emission premium (Zurich Insurance AG) appear on the bank's certificates.

With double standards

The special foreign dividends have one advantage - neither the Swiss Federal Tax Administration nor the American or Norwegian tax authorities retain a withholding tax on this type of distribution. The German custodian bank, however, cuts the dividends from foreign companies with the flat rate tax, solidarity surcharge and, if necessary, church tax.

The tax authorities justify the different handling of domestic and foreign dividends with the special provision of Paragraph 27, Paragraph 8 of the German Corporate Income Tax Act. According to this, domestic and even EU-based companies can distribute their equity to shareholders without tax deduction.

However, the regulation should not apply to companies from third countries such as the USA, Switzerland or Norway (BMF letter of April 4, 2016, Az: IV C 2 - S 2836/08/10002). However, there is no clear legal regulation. The Federal Fiscal Court (BFH) has yet to clarify whether the tax offices' approach is legal.

Two revision proceedings are currently pending under file numbers I R 15/16 and VIII R 47/13. With its judgment of August 24, 2018 (Az: 14 K 564/16 E), the Düsseldorf Finance Court ruled that capital repayments from Swiss companies remain tax-free.

  • Biallo tip Object to your tax assessment and, referring to the two above-mentioned revision procedures, apply to the BFH to "suspend the proceedings" if your tax office refuses to correct the investment income certified by the bank. So you can wait in peace without your own litigation risk and hope for a positive judgment from Munich.

German stocks with tax-free dividends

CorporationBranchAGM appointmentWKNDividend in eurosRate in eurosReturn
Siemens Healthineers*Medical technology05.02.2019SHL1000,7036,721,91%
FonterelliHolding company11.02.2019A1TNUU0,201,8011,11%
DIC asset*property22.03.2019A1X3XX0,489,754,92%
Deutsche Telekomtelecommunications28.03.20195557500,7014,994,67%
KPS ConsultingIT services29.03.2019A1A6V40,356,805,15%
KST Beteiligungs AGHolding company18.04.2019A161300,101,258,00%
GEA GroupPlant construction26.04.20196602000,8523,683,59%
DeutzEngine construction30.04.20196305000,158,681,73%
Jost-Werke AGTruck supplier09.05.2019JST4001,1031,703,47%
TTL Beteiligungs- und Grundbesitz AGproperty10.05.20197501000,124,042,97%
German postal servicePost & logistics15.05.20195552001,1529,143,95%
Freenet AGtelecommunications16.05.2019A0Z2ZZ1,6520,288,14%
PSI softwareSoftware development16.05.2019A0Z1JH0,2517,451,43%
TLG real estateproperty21.05.2019A12B8Z0,9126,303,46%
Telefonica Germanytelecommunications21.05.2019A1J5RX0,272,879,41%
S&T AG*technology21.05.2019A0X9EJ0,1623,300,69%
Berentzen Groupbeverages22.05.20195201600,286,744,15%
3U Holdingtelecommunications23.05.20195167900,031,082,78%
Francotyp-Postaliamechanical engineering28.05.2019FPH9000,033,590,84%
IVU TrafficSoftware development29.05.20197448500,128,781,37%
LEG real estateproperty29.05.2019LEG1113,53105,353,35%
7C solar parksSolar power plants07.06.2019A11QW60,113,033,63%
German Pfandbrief BankBank07.06.20198019001,0012,288,14%
German Euroshop*property12.06.20197480201,5026,725,61%
Berlin securities companyFinancial services13.06.20195221300,6018,103,31%
Geratherm Medical*Medical technology14.06.20195495620,409,104,40%
German living*property18.06.2019A0HN5C0,8741,962,07%
RCM Beteiligungs AGpropertyis still undeterminedA1RFMY0,062,122,83%

source: own research; Onvista.de; Courses from 05/08/2019; * Dividends are only partially tax-exempt

Biallo reading tip

Online brokers such as Consorsbank, Comdirect and DKB already offer savings plans with selected ETFs for free.

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