Many people who relocate to Spain continue to hold bank accounts, securities portfolios or brokerage accounts in Germany. While this may seem unproblematic at first glance, it often results in a significant tax issue in practice: German banks continue to withhold German capital gains tax, even though such tax is generally no longer due once the account holder has become a tax resident of Spain.

This capital gains tax, which has been withheld incorrectly, cannot be credited against Spanish tax and must instead be reclaimed from the German tax authorities through a separate refund procedure. The following article explains the legal background, highlights common mistakes and outlines how they can be avoided.

Tax Residence as the Decisive Factor

For the taxation of investment income, the decisive factor is not where the bank account or brokerage account is located, but exclusively the taxpayer's country of tax residence.

Individuals who are considered tax residents of Spain are subject to unlimited tax liability in Spain. Consequently, all investment income—including income generated in Germany or any other country—must generally be declared and taxed in Spain (except where the Beckham Law applies).

Common Mistake: Failing to Notify Banks and Brokers of Your Change of Tax Residence

One of the most common mistakes made by individuals moving abroad is that they deregister their residence with the German registration authorities but fail to notify their banks or brokers of their change of tax residence.

As a consequence, German financial institutions continue to treat the customer as a German tax resident and automatically withhold 25% German capital gains tax (Kapitalertragsteuer), plus the solidarity surcharge and, where applicable, church tax.

In Spain, however, investment income is taxed as part of the savings income tax base (base del ahorro) under a progressive tax rate system.

Investment income subject to taxation in Spain includes, among others:

- Interest earned on bank deposits

- Dividends from shares and investment funds

- Income from investment funds and ETFs

- Capital gains realised on the sale of securities

Particularly in the case of low and medium levels of investment income, the Spanish tax burden is often considerably lower than Germany's flat 25% capital gains tax. This results directly from the progressive tax rates currently applicable in Spain:

- 19% on the first €6,000

- 21% on the portion between €6,000 and €50,000

- 23% on the portion between €50,000 and €200,000

- 27% on the portion between €200,000 and €300,000

- 28% on amounts exceeding €300,000

Because of this progressive system, even taxpayers with substantial investment income continue to benefit from the lower tax rates applicable to the first income brackets. It is therefore particularly disadvantageous if German banks continue to withhold German capital gains tax even though the taxpayer has already become tax resident in Spain.

 

No Tax Credit for German Capital Gains Tax in Spain

One important and frequently overlooked aspect is that German capital gains tax wrongly withheld cannot be credited against Spanish income tax.

Under Spanish Personal Income Tax rules, only foreign withholding taxes may generally be credited. German Kapitalertragsteuer, however, is not regarded as a withholding tax for these purposes but as a final withholding tax under German domestic law. According to the Double Taxation Agreement between Germany and Spain, Germany has no taxing right over these investment gains once the taxpayer has become tax resident in Spain.

As a consequence, the investment income must be fully declared and taxed in Spain, while the German capital gains tax withheld cannot be taken into account as a tax credit. This may result in effective double taxation. The only available solution is to request a refund of the German capital gains tax through a separate procedure in Germany.

In practice, this results in additional administrative work and often considerable cash-flow disadvantages.

Refund of German Capital Gains Tax Wrongly Withheld

If German capital gains tax has continued to be withheld despite the taxpayer being tax resident in Spain, the only remedy is to apply for a refund from the German tax authorities.

The refund is not granted automatically and must be requested by submitting a formal application. In most cases, the competent authority is the German Federal Central Tax Office (Bundeszentralamt für Steuern – BZSt). A separate application must generally be submitted for each calendar year and requires careful preparation of the supporting documentation.

The refund procedure generally requires the following documents:

- Official application for the refund of German capital gains tax using the prescribed forms.

- Proof of tax residence in Spain, usually in the form of a Spanish Tax Residence Certificate.

- Evidence of the German capital gains tax withheld (for example, tax certificates issued by the bank or broker).

The German Federal Central Tax Office (BZSt) provides an electronic application procedure for claiming refunds of German capital gains tax. Applications for relief or refunds may be submitted through the following portal:

BZSt – Electronic Application Procedure

The refund process is often time-consuming and may take several months to complete.

How to Avoid Unnecessary German Tax Withholding

The best way to avoid the refund procedure is to ensure that your tax residence is correctly communicated to your bank or broker.

In practice, this has become relatively straightforward in many cases. In particular, many online brokers allow customers to update their tax residence directly through their online account. Once a foreign tax residence has been registered, the broker will generally treat the customer as a non-resident taxpayer and will no longer withhold German capital gains tax.

Traditional banks and certain brokerage firms, however, often require customers to complete a "Change of Customer Details" form, which is usually available on the institution's website. The completed and signed form must then be submitted to the bank or broker so that the change of tax residence can be processed.

Our law firm will be pleased to analyse your individual situation, carry out the necessary administrative procedures on your behalf and assist you with the preparation and filing of the relevant tax returns. Should you require personalised advice or have any questions regarding the taxation of investment income between Germany and Spain, please do not hesitate to contact us by email or telephone.

Author:

Rike Füllgraf
Tax Advisor
info@sspartners.es
Tel: (+34) 951 12 13 06
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