It is likely that many citizens will already have been subject to withholding tax without having noticed it. This may be due to the fact that, for instance, capital gains tax of 25% is deducted by the bank
before paying out credit interest. This income then counts as “taxed income”, and thus does not need to be declared anymore. However, any person whose personal tax rate is lower than 25% has the option of recovering the excess amount paid as capital gains tax from the tax office according to the “most favourable tax treatment” procedure.

However, withholding tax has been criticised on the grounds that it is unconstitutional. The Fiscal Court of Lower Saxony has referred this issue to the Federal Constitutional Court (BVerfG) after it arose in a legal dispute before it. It takes the view that withholding tax results in unequal treatment that cannot be reconciled with the principle of equal treatment laid down in the German Basic Law. As a result, taxpayers who only receive income from capital gains are only taxed at a rate of 25%, whereas other taxpayers who do not receive any income from capital gains are obliged to submit to income tax rates of up to 45%. It is argued that there is no justification for this unequal treatment.

Withholding tax was originally established in order to simplify taxation for taxpayers and to make Germany more attractive as a financial centre. Since until a few years ago it was still not possible to review the tax status of capital gains earned abroad by German citizens, the aim pursued was to secure tax revenues and to combat tax evasion. The Fiscal Court takes the view that these reasons have now been superseded. The Federal Constitutional Court will now review its constitutionality.

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