Taxation and investment accounts: How they compare across Europe

Anyone wishing to buy or sell shares, bonds, ETFs or other financial instruments must first open an investment account.

In Europe, there is no law that uniformly regulates these instruments, let alone one that determines a single type of taxation. This means that both the essential features of the investment accounts that can be used and the taxation to which they are subject vary, sometimes considerably, from country to country.

For example, while the United Kingdom offers both a tax-efficient way to invest through a stocks and shares ISA and standard investment accounts with no annual limits but subject to taxation, Italy allows investors to open only one type of securities account, which is subject to taxation.

In this article, we will explore the main differences in taxation between investment accounts in some European countries.

Investment accounts in Europe: What is taxed

As mentioned in the introduction, European investment accounts are not uniform in terms of taxation. In particular, while some countries do not impose any type of taxation or, as in the case of the United Kingdom, offer tax-exempt solutions, others impose taxes on capital gains and dividends.

Investment accounts and capital gains taxation

Capital gains are generated when an investor sells a share, bond or other investment instrument or product at a higher price than the purchase price. This amount, which constitutes the profit made on the investment, is in many cases taxed. However, the type of taxation applied is not the same everywhere.

Depending on the country in which you are located, you may be subject to taxation at a:

• fixed rate: the percentage applied remains the same regardless of the amount of capital gains or other factors;
• variable: the rate applied to capital gains generated through investment accounts may vary depending on the amount of profit generated, the type of financial instrument, the total taxable income or other factors.

In addition, some countries provide for variable allowances or exemptions for securities held for a minimum period of time.

Taxation of dividends

Just like capital gains, dividends are also a form of profit. In this case, however, the gain does not come from the sale of financial instruments or products but, for those who hold shares, from the distribution of profits generated by the issuing company.

The income obtained through dividends may be subject to the same type of taxation as capital gains or ordinary income, or it may be subject to a separate, fixed or variable tax rate. Again, the situation varies from country to country.

Taxation of investment accounts in Europe: Some examples

At this point, it may be interesting to take a look at the taxes imposed by some European countries on capital gains and dividends accrued on investment accounts.

Let’s start with Germany, which imposes a fixed tax of 25% on capital gains and dividends, withheld at source, on financial income exceeding £1,000 for single persons and £2,000 for married couples, plus a solidarity contribution of 5.5%. A similar percentage, but without exemptions, applies in Italy, where the rate is 26%, but drops to 12.5% if the capital gains derive from the sale of government bonds.

The United Kingdom, as mentioned in the introduction, allows you to opt for an ISA, a tax-free investment account with an annual deposit limit of £20,000. Alternatively, those wishing to invest larger amounts can opt for a GIA, which is subject to capital gains tax of 18% or 24% and dividend tax of 8.75%, 33.75% or 39.35%, depending on taxable income.

The highest tax rate is imposed by Denmark, which is 42% and applies to both dividends and capital gains. Capital gains accrued on investment accounts in Belgium, the Netherlands (where, however, there is a wealth tax on high-yield portfolios) and Luxembourg (for financial instruments held for more than six months) are tax-exempt.