What is the advance lump sum?

The so-called advance lump sum ensures that a certain minimum taxation takes place at the investor level - even in cases where a fund makes no or insufficient distributions. The amount of the advance lump sum always refers to the previous year. When the shares are actually sold, the advance lump sums taxed up to that point are deducted from the proceeds of the sale (proceeds of sale minus acquisition data minus advance lump sum).

This means that a capital gain is reduced (and thus the tax burden). In the case of a capital loss, the advance lump sum already calculated increases your capital loss. Double taxation is therefore excluded.

The advance lump sum has been levied and taxed since the beginning of 2019.

What is the advance lump sum?

What is the advance flat rate?

At the beginning of January 2019, the German tax authorities charged investment savers an advance lump sum for the first time for the year 2018. This was used to tax income from accumulating and partially accumulating funds. The advance lump sum is, economically speaking, a pre-taxation of future capital gains. Therefore, it is deducted from the actual capital gain when the fund shares are sold.

The advance lump sum is not based on the actual profits but is calculated using a specific formula. The advance lump sum amounts to 70 per cent of the annual base interest rate of the Bundesbank multiplied by the value of the fund share at the beginning of the year (so-called base return). The base return is limited to the excess amount that results between the first and last redemption price plus distributions. If no redemption price is set, the stock exchange or market price applies instead.

For the year 2020, the BMF announced a base interest rate of 0.07 per cent, which the Deutsche Bundesbank calculated on 2.1.2020 based on the yield curve data. 70 per cent of the base interest rate is 0.049 per cent. The withholding tax of 25 per cent plus solidarity surcharge and, if applicable, church tax is then applied to this. And this amount is to be taxed as an advance lump sum. However, the - fictitious - inflow only occurred in the following year, specifically on 4.1.2021. The inflow regulation results from the legal provision of § 18 para. 3 InvStG (BMF letter of 29.1.2020, BStBl 2020 I p. 218).

Currently, the following applies to the advance lump sum for the year 2023:

• The base interest rate on 2.1.2023 is 2.55 per cent. 70% of the base interest rate is 1.785 per cent. The withholding tax of 25 per cent plus, if applicable, solidarity surcharge and church tax is then applied to this.
• The advance lump sum is deemed to have been received by the investor on the first working day of the following year, i.e. on 2.1.2024 (BMF letter of 4.1.2023, IV C 1-S 1980-1/19/10038:007).

What is the advance flat rate?

What is partial exemption?

For certain domestic income, there is an additional burden of corporation tax at the fund level for public investment funds. To offset this pre-taxation at the fund level, fund distributions, advance lump sums, and capital gains from the sale of fund units are partially exempt from tax. This is referred to as a "partial exemption".

The rate of the fund-specific partial exemption depends on the type of fund (as of October 2018):

• 30% for equity funds (at least 51% equity according to the investment conditions)
• 15% for mixed funds (at least 25% equity according to the investment conditions)
• 60% for real estate funds (at least 51% in real estate or real estate companies according to the investment conditions)
• 80% for real estate funds with a foreign focus (at least 51% in foreign real estate or foreign real estate companies according to the investment conditions)

The classification of a fund into a fund category is based on the investment policy by the fund company (investment company). They provide the qualification of the fund (e.g. equity or mixed fund).

The tax certificate from the custodian banks usually states: "Total of all positive capital income, gains and earnings (including distributions, advance lump sums and gains from the sale of investment units after partial exemption)." The individual items are then explained in more detail. Investors should carefully check whether this is also the case with their tax certificate. If the disclosure has not been made: You should request the statement on the equity ratio, real estate ratio, etc. from your fund provider if it has not already been sent to you unsolicited.

These figures are often already published online in the annual reports. Check the relevant ratios of your fund. If, for example, the equity ratio is consistently more than 50%, a partial exemption of 30% should be applied, which must be claimed in the tax return - and not with the fund provider or the custodian bank. Failure to do so may result in paying too much income tax on your capital income.

What is partial exemption?

Which funds are affected by the advance flat rate?

In principle, all domestic and foreign investment funds (including ETFs) can be affected by the advance lump sum.

For distributing funds, any distribution made is taken into account when calculating the advance lump sum. If the distribution is sufficiently high, no advance lump sum is incurred. It can therefore be assumed that the advance lump sum mainly affects accumulating funds.

Which funds are affected by the advance flat rate?

Is the withholding tax on the advance lump sum credited upon a later sale?

Yes, when the fund shares are sold at a later date, all advance lump sums of the fund that have already been taxed are deducted from the sales proceeds on a pro rata basis.

This is to avoid double taxation.

Is the withholding tax on the advance lump sum credited upon a later sale?