Germany offers a wide range of investment product choices. The quality of these investments range anywhere from excellent to questionable, so you should be aware that not all investments in Germany will produce the results you desire.
Also, if you reside in Germany as a U.S. investor, you may be required to trade through a platform that reports to the U.S. Internal Revenue Service (IRS).
What to Know Before You Start Investing in Germany
The type of capitalism practiced in Germany is known as a “coordinated market economy.” This type of capitalist economy relies on formal institutions to not only regulate capital markets but also to coordinate interactions between customers, employees, suppliers and financiers.
A coordinated market economy facilitates long-term relationships between employers and trade unions. It also favors employer associations and the production of high quality, value-added goods. Therefore, investments intended for the German public have been structured around major financial institutions.
German investors traditionally invest through one of the many banks in the country, although foreign residents, and particularly U.S. citizens, may be denied investment accounts at German banks. Germany wants to avoid penalties in case an investor fails to pay required taxes to their country of origin.
While you may or may not be able to open an investment account at a German bank, you can still make investments in Germany through international online brokers and other platforms designed for foreigners in Germany.
Knowing how to trade and invest is just as important as choosing the right broker. You could either get an investment plan from a German broker or you could work out your own plan. Ideally, your investment plan would include your time horizon, expected return and the type of investment vehicle(s) you choose to implement your plan.
Also, do you plan to invest and take your profits with you when you return to your country of origin or do you plan to stay in Germany? You’ll need to take into account the anticipated timeframe of the investments you select.
Laws and Regulations
First, familiarize yourself with the laws and regulations of foreigners making investments in Germany and consult with an accountant to determine how any profits you make will be taxed.
The financial sector of the German economy, including stock markets, forex, derivatives and commodity trading, has oversight from the Bundesanstalt für Finanzdienstleistungsaufsicht (BaFin), which is the German Federal Financial Supervisory Authority.
BaFin has made regulatory arrangements with the appropriate national regulators of 45 countries, including the U.K. and the United States. U.K. investors have oversight from the Financial Conduct Authority (FCA) and the Prudential Regulatory Authority (PRA).
U.S. regulators include the Securities and Exchange Commission (SEC), the Office of the Comptroller of the Currency, the Federal Reserve Board (FRB), the Federal Reserve Bank of New York, the Commodities Futures Trading Commission (CFTC) and the New York State Department of Financial Services.
If you stay in Germany for more than 6 months, you would be considered “ordinarily resident” there, which would make you subject to unlimited tax liability and the requirement to pay taxes on your worldwide income in Germany.
On the other hand, if you have not lived in Germany for 6 months, then you are not a tax resident yet, but you still need to pay German taxes on the income you earn in Germany. This tax obligation ends once you leave Germany to work and reside elsewhere.
Furthermore, if you’re a U.S. citizen or permanent U.S. resident living in Germany, you’ll be required to file taxes with the IRS every year. The United States has provisions in place to avoid double taxation. The Foreign Earned Income Exclusion for 2019 taxable income allows you to decrease your taxable income by the first 5,900 you earn while living in Germany.
You may also lower your U.S. tax obligations by taking a Foreign Tax Credit if you’ve paid German taxes. You might also be able to take a Foreign Housing Exclusion, which would exclude certain amounts for expenses incurred by living overseas.
Germany’s personal tax rate is high compared to U.S. rates, but the taxes you pay upfront in Germany can be saved on your U.S. tax return when filing with the Internal Revenue Service (IRS) as an expat. Employment income is considered taxable after the allowed and standard deductions.
German tax rates apply to all foreign investors living in Germany after a certain threshold and timeframe. These threshold levels are as follows: €9,169 for individuals and €18,338 for a couple filing jointly. No taxes are due on any yearly income amount below the appropriate threshold level. You can also take a €4,000 deduction for each child.
Germany’s progressive tax rate based on income applies if you earn from €9,169 to €55,962 annually, and the applicable tax rate rises progressively from 14% to 42%. For taxable income from €55,963 to €265,326, the tax rate is stable at 42%, while above €265,327 the tax rate is stable at 45%.
Germany has a large degree of influence on the economic and geopolitical events that occur throughout the entire European continent. Germany’s use of the euro and the European Central Bank’s (ECB) control of interest rates and monetary policy can directly affect all German investments, especially if you are a foreigner who plans to exchange euros into another currency when you leave Germany.
With the current economic and political climate in Europe that has resulted in low Eurozone inflation rates despite increasing growth, the ECB has announced plans to continue to further lower its already negative benchmark interest rates and possibly restart its quantitative easing program via bond purchasing.
You can invest in a number of ways, depending on your risk tolerance and investing capital. Here are some of the more popular investment methods that you can use while living in Germany.
Method 1: Open a Fonds Sparpläne, or Funds Savings Plan
A fonds sparpläne is a German savings plan offered by German banks and brokers that allows you to invest a fixed amount of money on a certain day each month into a mutual fund, exchange-traded fund (ETF) or index fund.
The funds saving plan automatically buys the shares in the type of fund of your choice regardless of the price and leaves them in your account. This type of savings plan gives you the advantage of cost averaging your investment and seems ideal for investors with a low level of risk tolerance.
Method 2: Open an Account with an International Broker
This option is probably the easiest and most straightforward way to invest for a foreigner living in Germany. You can invest in German stocks, Bunds, ETFs and mutual funds and other tradable assets.
In addition to German stocks, indices and Bunds, you can also trade ETFs, mutual funds and forex through your Interactive Brokers account. Interactive’s Trader Workstation (TWS) is one of the best-rated stock trading software products in the business. It also features special order types as well as algorithms that provide additional functionality to the platform.
Interactive Brokers’ proprietary SmartRouting software constantly scans the market for the best prices available on the stocks you plan to trade. It then routes orders directly to that exchange or electronic communications network (ECN) to execute your transactions at the best possible price.
Interactive Brokers also offers some of the lowest margin and commission rates in the industry and is an excellent choice for anyone interested in investing in the German market. Interactive Brokers is a great choice for active investors but it does charge an inactivity fee for idle accounts, which might not make it the best choice for buy-and-hold investors, and it requires a rather large minimum initial deposit of $10,000.
Another advantage of using an international broker for German investments involves being able to trade German stocks through American depositary, European depositary or global depositary receipts in your U.S. dollar-based account. That way, you can avoid the currency translation risk, which could detract from any investment gains made in Germany once you return to the United States.
Method 3: Open an Account with a German Broker
A major advantage of opening an account with a German broker is its experience in dealing with German regulations. German brokers also provide you with the proper annual statements to use when filing German tax returns.
Stockbrokers in Germany generally provide clients with a depositary account, or depotkonto, which is the type of account needed to hold the equities necessary to invest in German stocks. A depotkonto account can also be opened at a bank or with a discount broker.
A discount broker provides a depotkonto account that typically costs less than one that a bank or full-service broker offers. Depotkonto costs include a maintenance charge and commission or load fees for buying funds. You’ll also have to pay order fees, which consist of a commission charged on each order. Larger orders for stock cost more.
The disadvantage of using a broker is that your brokerage account is not linked to your bank, so you’ll have to maintain a cash balance in your brokerage account in case you want to make any purchases. Also, once you sell your stock, you’ll have to transfer the money to your bank account, which might take a few days.
Method 4: Open a Depotkonto or Depository Account at a Bank
In Germany, banks like Commerzbank and Comdirect provide a depotkonto to clients who open bank accounts. The advantage of using a bank for financial transactions in Germany is that you have a single entity to keep your funds in and to execute and maintain your investments in a depotkonto.
You would not have to maintain your funds separately with a depotkonto at a bank since your investment costs come directly out of your bank account. Nevertheless, the disadvantage of maintaining a depotkonto at a bank means higher transaction costs, although some banks do provide a sparpläne or savings plan with monthly investments executed and deposited to your account free of charge.
Making Smart Choices while Investing in Germany
Investing while living in Germany requires that you stay on top of your investment profits, costs and expenses, since you’ll have a certain amount of German tax liability each year.
Ideally, you would consult with an accountant in Germany to make sure that your filings with the Bundeszentralamt für Steuern (BZSt), which is the German Federal Central Tax Office, are accurate.
You’ll also have to file income tax returns with the IRS if you’re a U.S. citizen and file German taxes. You’ll also need to consider the time frame and currency risk involved if you plan to eventually repatriate your German investments to the United States.
Frequently Asked Questions
Are there any restrictions when investing in the German markets?
Germany has no restrictions for investing in its markets.
What are the benefits of investing in Germany?
Several of the advantages include the workforce, technology and favorable taxation policies.
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About Jay and Julie Hawk
During her financial career, Julie developed world-class expertise in technical analysis, including Elliott Wave Theory, and was deeply involved in initiating research into automated trading and trading signal systems. As a member of the San Francisco Writers’ Guild, Julie regularly wrote trade strategies, educational material, market commentary, foreign exchange newsletters, reports, articles and press releases. In addition, Julie was interviewed for various financial markets magazines and news wires in her professional capacity as a forex and derivatives expert. Since retiring from working at banks, Julie has been writing and editing books and articles about financial markets for companies like Benzinga, as well as trading forex online and mentoring other traders as part of TheFXperts’ financial team.
In addition to trading stock index, forex and commodity futures and options professionally on exchange floors, Jay also has experience trading stocks and options for private investors and trading forex online for his own account. He has also developed extensive experience in performing and using fundamental economic and corporate analysis to inform his trading and investment activities. Jay is also an expert financial writer with particular expertise in reviewing online brokers and investor services.