Taxation of fund investors

Good news for fund investors: On 6 January 2021, the German Federal Ministry of Finance published the so-called base interest rate for the calculation of the advance lump sum amount (Vorabpauschale) for 2021. The base interest rate amounts to -0.45% and is thus negative for the first time. Therefore, there is no advance lump sum amount for the year 2021. You can find the BMF circular here.

Investors of investment funds within the meaning of the Chapter 2 of the German Investment Tax Act (these are mainly mutual funds and certain closed-ended special investment funds) must, under certain conditions, pay tax on the so-called advance lump sum amount (Sec. 18 of the German Investment Tax Act 2018). This is a notional income attributed to the taxpayer for tax purposes with respect to its units in the fund. For tax purposes, the advance lump sum amount is deemed to have been realised on the first business day of the following calendar year (e.g. the advance lump sum for the year 2020 was realised on 2 January 2021).

The advance lump sum amount concerns mainly accumulating funds. It is due if during a calendar year the distributions of an investment fund exceed the so-called base income. The base income is determined by multiplying the redemption price of the unit in the investment fund at the beginning of the calendar year by 70% of the base rate interest (30% is meant as a lump sum deduction covering business expenses at fund level). The base interest rate is derived from the long-term attainable return of public bonds and is published by the German Federal Ministry of Finance each January. The base income is capped at the actual increase in value of the investment fund unit in the respective calendar year, plus any distributions made during this calendar year.

Due to the negative base interest rate, a negative base income is calculated for the year 2021. Since the distributions mathematically cannot exceed this negative base income, it is definite that no advance lump sum amount will be levied in 2022 for the year 2021.