Taxes on profit distributions and dividends in Germany (dividend taxation

Taxation of Profit Distributions in Germany (Dividendenbesteuerung)

When a company makes a profit and distributes part of it to its partners or shareholders, additional taxes are levied on these payments. This is called dividend taxation (Dividendenbesteuerung). The exact tax treatment depends on who receives the dividend – an individual or a company.

Who pays tax on distributed profits?

Recipient of the distribution – Subject to tax? – Notes

Individual (natural person)
– Yes
– Taxed either under the withholding tax system (Abgeltungsteuer) or under regular income taxation (Regelbesteuerung)
Company (e.g. GmbH or UG)
– Yes
– but usually at significantly reduced effective rates, as typically 95% of the dividend is tax-exempt

How much tax do individuals pay on dividends?

1. Standard system: Abgeltungsteuer (flat withholding tax)

In most cases, the tax is withheld directly at the time of distribution:

The bank or the distributing entity deducts the tax at source when the dividend is paid out.
The overall tax burden usually consists of:
- 25% flat withholding tax (capital gains tax)
- 5.5% solidarity surcharge on the tax
- 8–9% church tax, if the recipient is liable to church tax

➤ In total, this results in an effective tax rate of around 26.375% to 28%.

Example:

Dividend distribution: 10,000 €
Tax withheld: approx. 2,637.50 €
Net amount received by the shareholder: approx. 7,362.50 €

2. Alternative: Regular taxation (Regelbesteuerung)

This option is available when filing the annual income tax return.

Key points:

It can be beneficial if your personal income tax rate is relatively low.
Under this approach, only 50% of the dividend may be subject to tax under a “half-income method” (Halbeinkünfteverfahren) before applying the personal tax rate.
For individuals with higher incomes, this option is often not advantageous, as the overall tax burden can exceed the flat 25% withholding tax.

Taxation of dividend distributions to companies

(e.g. one GmbH holding shares in another GmbH)

Companies do not pay the flat 25% withholding tax on dividend income in the same way individuals do.

Instead, in many corporate structures the following applies:

95% of the dividend received is tax-exempt, and
5% is treated as non-deductible business expenses and taxed at the ordinary corporate tax and trade tax rates.

In practice, this leads to an effective tax rate on dividend income of often below 2%, depending on the specific situation.

Double taxation: Why are there two levels of tax?

At company level, the company first pays tax on its profits:
- Corporate income tax (Körperschaftsteuer)
- Trade tax (Gewerbesteuer)
  → Together, this typically results in a tax burden of around 30% on the company’s profits.
At shareholder level, when profits are distributed as dividends, the shareholder pays:
- Dividend tax via Abgeltungsteuer, or
- Tax under the regular income tax system (Regelbesteuerung)

This two-step process is known as double taxation (Doppelbesteuerung), because the same profit is taxed once at company level and again at shareholder level.

When is dividend tax paid?

The tax is usually withheld automatically at the time the dividend is paid out or transferred to the shareholder’s account.
The distributing company or bank then remits the withheld tax to the tax office (Finanzamt), typically within the same month.

Key terms

Dividendenbesteuerung – taxation of distributed company profits (dividends)
Abgeltungsteuer – flat withholding tax of 25% on capital income (e.g. dividends)
Regelbesteuerung – taxation based on the individual’s personal income tax rate
Körperschaftsteuer – corporate income tax
Doppelbesteuerung – double taxation (taxation at company and shareholder level)

The editorial team of this website strives to provide accurate and reliable information by conducting thorough research and consulting multiple sources. However, errors cannot be entirely ruled out, and some details may be uncertain or incomplete.
Therefore, the information in this article should be regarded as an initial point of reference only. For binding and definitive advice, you should always consult the relevant authorities or a qualified tax advisor.