Taxable income from foreign investment funds without sale or distribution!
Oliver Biernat
by Oliver Biernat
Some of our clients recently received a letter from their tax office stating that they have received documents from Luxemburg or Switzerland indicating there was taxable income from those countries that was not included in their tax declaration. These clients contacted us in a high state of agitation as this could lead to criminal tax proceedings. They said they just received notices from those funds about retention of profits. As they neither had dividend income nor sold any funds they were not aware of any tax liability.
The background to this can be found in the German investment tax act (Investmentsteuergesetz) and is quite unknown among normal investors. Section 16 states that not only dividends or distribution from funds are taxable, but also so called âadvance flat ratesâ (Vorabpauschalen) which can be found in Section 18. The advance lump sum is defined as the amount by which the distributions of an investment fund within a calendar year fall short of the base income for that calendar year. Only now it becomes evident that if there are no distributions and there is a positive base income there is an amount to be taxed.
Base income is calculated by multiplying the redemption price of the investment unit at the beginning of the calendar year by 70% of the base interest rate. The basic income is limited to the excess amount between the first and the last redemption price set in the calendar year plus the distributions within the calendar year. If no redemption price is set, the stock exchange or market price shall take the place of the redemption price.
The base interest rate is derived from the long-term yield achievable on public-sector bonds. This is based on the interest rate calculated by the Deutsche Bundesbank on the basis of interest rate structure data on the first trading day of the year. The German Ministry of Finance publishes the relevant interest rate in the Federal Tax Gazette. This base interest rate is different from the one the Deutsche Bundesbank publishes and must not be confused with that one.
Example
If the redemption price of a fund without distributions was 20 at the beginning of 2023 and 22 at the end of the year, EUR 0,357 per share (2.55% of 20 multiplied with 70%) is the advance flat rate. If an investor had 100,000 shares, they must report EUR 35,700 as taxable income in 2024.
As the value development of many funds was negative during and shortly after the Covid pandemic lockdown, and as the base interest rate was negative in 2021 and 2022, many investors did not have this tax obligation on their radar.
Investors should check the reports of funds to see if there is any note to shareholders in Germany that a taxable Vorabpauschale in accordance with § 18 investment tax law (InvestStG), and/or an amount of the deemed investment return per share is mentioned. Donât forget to forward this to your tax advisor!
Oliver Biernat is Founder and Managing Partner of Benefitax. He is a German Chartered Accountant, Certified Tax Advisor and Specialist Advisor for International Taxation with more than 30 years of experience. Since 2008, he has chaired GGIâs International Taxation Practice Group (ITPG), increasing its size to more than 645 experts from 90 countries in the process. Contact Oliver.
GGI member firmBenefitax GmbH Steuerberatungsgesellschaft WirtschaftsprĂźfungsgesellschaftFrankfurt am Main, GermanyT: +49 69 256 227 60
Advisory, Auditing & Accounting,Corporate Finance, Fiduciary &Estate Planning, Tax
The highly qualified team of Benefitax GmbH offers tax consulting, accounting and business consultation for the service sector, industry, trade and individuals. Solving cross-border tax problems, transfer pricing documentation, due diligence, business valuations, tax planning and business succession are also part of their regular services. Based in Germany, they offer their services across the globe.
