From 2025: action required on foreign currency accounts

The tax authorities’ new view of tax on profits from foreign currency balances  

In February 2024 we told you about the new approach to taxing profits on foreign currency balances following para. 131 of the Federal Ministry of Finance (BMF) Circular of 19 May 2022. According to this, profit and loss from interest-bearing foreign currency balances are now to be included in capital assets. 

Starting from 1 January 2025, all German banks are obliged to deduct capital gains tax from profits on interest-bearing foreign currency accounts and to report these profits in their tax certificates.

The tax authorities have used this Federal Ministry of Finance Circular to publish a new approach to calculating and taxing profits and losses in foreign currency. They now differentiate between three types of foreign currency account:

• Non-interest-bearing balances in foreign currency, including non-interest-bearing payment accounts, which continue to be calculated and taxed as private sales transactions under Section 23(1) sentence 1 no. 2 of the Income Tax Act (EStG).
• Interest-bearing foreign currency balances not including payment accounts are now to be included in capital gains under Section 20(2) no.7 in conjunction with subsection (4) of the Income Tax Act. This means all payments made into interest-bearing foreign currency accounts are considered as a purchase of foreign currency – regardless of where the payment originates or whether a difference is made between crediting income and other payments. If the capital is later paid back in foreign currency, this is considered a taxable sale of foreign currency as defined by Section 20(2) sentence 2 of the Income Tax Act.   
• Interest-bearing payment accounts are to be exempted from taxation under both Sections 20 and 23 of the Income Tax Act due to a lack of intention to make income (except for interest income, which continues to be liable for tax under Section 20(1) no. 7).

New rules compulsory for German banks from 2025

Applying the new rules on the German banks’ deducting of capital gains tax will be compulsory from 1 January 2025. In future, banks will therefore also have to report profits in foreign currency in their annual tax statements. For securities accounts abroad, however, only the taxpayer has the duty to declare them. Some foreign banks also offer German investors the service of calculating their profits and losses in foreign currency from interest-bearing foreign currency accounts.  

Practical advice: check your foreign currency accounts for past years too  

it should be expected that starting from the 2025 tax year, the tax authorities are going to start checking foreign currency balances more closely. Affected investors should therefore make sure that they have applied the law and the authorities’ understanding to past tax years as well and made their declarations accordingly.  

We’ll be glad to assist you in putting the past years in order as well, and filing any adjustments.