What is the Advance Flat Rate?
The Advance Flat Rate (Vorabpauschale) is a legally mandated tax prepayment on unrealised profits from investment funds, particularly accumulating funds like ETFs.
This rule was introduced as part of the 2018 Investment Tax Reform (Investmentsteuerreform) to align tax treatment across different fund types.
Legal basis
The Advance Flat Rate is based on German tax regulations, specifically:
- Section 16 (1) No. 2 InvStG β Classifies the Vorabpauschale as investment income.
- Section 20 (1) No. 3 EStG β Defines the Vorabpauschale as income from capital assets.
- Section 43 (1) Sentence 1 No. 5 EStG β Establishes the withholding obligation for such income.
For official and binding details, refer to the German Investment Tax Act (InvStG) and the Income Tax Act (EStG).
How is the advance flat rate (Vorabpauschale) calculated?
The tax on the advance flat rate (Vorabpauschale) is an annual notional income tax applied to investment funds. Its calculation is based on various factors, including the fund's value at the beginning and end of the year, as well as the base interest rate set by the German Federal Ministry of Finance.
π Base interest rate for 2024: 2.29% β Relevant for the calculation of the advance flat rate in 2025.
β If your fund did not increase in value during the year, the advance flat rate will be β¬0.00.
Important: This is just an example. For a more precise calculation of your tax liability, various online calculators are available.
Step 1: Calculating the base yield
The base yield serves as the foundation for taxation and is calculated as follows:
- Formula:
Fund value at the beginning of the year Γ Base interest rate Γ 0.7 - Example calculation:
Suppose your fund was worth β¬10,000 on 1 January 2024:
β¬10,000 Γ 2.29% Γ 0.7 = β¬160.30 (base yield)
Step 2: Comparing with actual value growth
- Actual value increase:
If your fund grew to β¬10,700 by 31 December 2024, the increase is β¬700. - Application:
The base yield (β¬160.30) is compared to the actual value increase (β¬700). The lower value is used for calculating the advance flat rate (Vorabpauschale). - Examples:
- Fund increased by more than β¬160.30 β Advance flat rate: β¬160.30
- Fund increased by less than β¬160.30 (e.g., only β¬100) β Advance flat rate: β¬100
- No increase in value β Advance flat rate: β¬0.00
Step 3: Tax calculation
Since money market funds do not qualify for a partial exemption (Β§20 InvStG), the entire advance flat rate amount is taxable.
- Capital gains tax (incl. solidarity surcharge): 26.375%
- Tax due: β¬160.30 Γ 26.375% = β¬42.28
β Since no partial exemption applies to money market funds, the full advance flat rate amount is subject to taxation.
How is the tax collected?
- The tax is automatically deducted by the investment provider.
- Investors receive a tax statement to document the transaction for tax reporting.
What happens if there arenβt enough funds in my account?
- If there are insufficient funds to cover the tax, the provider cannot deduct the tax and must report the outstanding amount to the tax authorities.
- This could lead to late payment interest or additional charges.
- Investors are responsible for paying any outstanding tax directly.
Key takeaways
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The Advance Flat Rate applies annually, even without a distribution.
β
The taxable amount is based on a government-set formula, not actual earnings.
β
The tax is automatically deducted, and investors receive a tax report.
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Investors should ensure sufficient funds are available to avoid issues with tax payments.
π‘ For more details, consult a tax advisor.