Capital income is taxable. This also applies to income from fund savings. Nevertheless, the so-called advance flat rate comes as a surprise to consumers.
Since 2009, capital gains from investment funds have been subject to withholding tax, even for long-term fund savings. However, the fact that profits have to be taxed even if a fund share is still in the portfolio, i.e. has not yet been sold, is still new territory for many consumers. The regulation was decided with the investment tax reform 2018.
In January of this year, banks and fund companies debited millions of the advance lump sum from the settlement accounts of German fund savers. A surprise for many of those affected, as the share price gains have remained untouched in recent years.
The base interest rate determines the amount of tax
The fact that the tax authorities took advantage of last year’s profits is due to the changed interest rate environment following the increases in the key interest rate in the euro area from 2023. The advance flat rate, which is the basis for taxing profits, is based on the so-called “base interest rate”. , which the Bundesbank announces at the beginning of each year.
But there has been no base interest rate in recent years, as Tobias Wagner from KSW Vermögensverwaltung explains: “This base interest rate was negative or close to zero in the past. In 2022 it will even be minus 0.88 percent. As part of the advance flat rate Unfortunately, there is no provision for a tax refund due to negative interest rates, simply no advance flat rate has been charged in recent years.”
Advance flat rate is fictitious profit
This has now fundamentally changed due to the increased interest rates. For last year, the base interest rate was already 2.55 percent. Part of this, the advance flat rate, is billed to the investor as a fictitious profit – provided that a fund posted a price gain in the previous year. The withholding tax rate is then due on this fictitious profit.
How much tax has to be paid is determined by a calculation explained by Sebastian Schick from the consumer portal Biallo: “The formula for determining the taxable advance flat rate is: the redemption price of the fund share at the beginning of the year multiplied by 70 percent of the base interest rate according to the Bundesbank results in the base income. From there Any distributions from a fund are deducted, resulting in the “advance flat rate”.
A withholding tax of 25 percent plus solidarity surcharge and possible church tax is then levied on this calculated advance flat rate. The effective tax rate on the capital gains is between around 26 and 28 percent.
Tax exemption depending on fund type
However, depending on the fund type, the taxes are partially reduced. For example, anyone who has funds in their portfolio that are at least 50 percent invested in stocks receives a so-called partial exemption of 30 percent, meaning they only pay withholding tax on 70 percent of their profits.
A complicated process, at the end of which, however, fund owners are asked to pay. And this happens every year, as long as the general interest rate level remains as high as it is currently. “In principle, the advance flat rate applies to all funds,” explains asset manager Wagner.
However, distributions that occur during the course of the year in some funds are already taken into account when calculating the tax – unlike with accumulating funds, which reinvest the income directly in the fund. “Accordingly, the upfront fee for accumulating funds is higher than for distributing funds,” says Wagner.
Tax burden is predictable
Taxes for the previous year are always withheld in January of the following year. In order to estimate the upcoming burden on the deposit account, savers can use online calculators that can be used to calculate the advance flat rate and the corresponding tax burden. As a rule of thumb in the current interest rate environment, experts recommend setting aside three to four euros for every 1,000 euros in portfolio volume.
So anyone whose portfolio is worth 10,000 euros must expect taxes of up to 30 euros for equity funds. With a depot size of 100,000 euros, it is 300 euros. However, this only applies if there are any profits at all in one or more funds.
Make sure your account is funded at the beginning of the year
However, if the tax on the advance flat rate is due, many banks take rigorous action if the deposit account does not have sufficient funds, says Biallo expert Schick: “Deposit providers handle the collection of the tax on the advance flat rate differently. Some banks book the tax liability directly from the clearing account – or current account. If there is insufficient coverage there, the bank can also use the overdraft facility for it. But there are also fund companies that sell fund shares from the investor’s portfolio in order to ensure coverage in the clearing account.”
To avoid this, account holders should first use the tax exemption orders and – where necessary – distribute them across multiple accounts. Savers can exempt 1,000 euros annually from tax as a lump sum, or 2,000 euros for those who are assessed jointly. If the allowances have been exhausted, the estimated tax amount should be transferred to the deposit account at the beginning of the year to avoid an unpleasant surprise after the turn of the year.