Germany · Investment Taxation
Investment Funds Under the German Investment Tax Act
How are ETFs, investment funds and other fund interests taxed in Germany? For private investors, the key issues are distributions, advance lump-sum taxation, capital gains and partial exemptions. Where funds are held with foreign brokers, the investor may also need to calculate and report the relevant investment income independently.
German Investment Tax Framework
Fund Taxation on Two Levels
The German Investment Tax Act provides a separate tax regime for investment funds and their investors. At fund level, certain German-source income, particularly German equity and real-estate income, can be subject to tax. At investor level, the income categories specifically defined by the Act are then taxed.
For private investors, the focus is not on every item of income earned inside the fund. Instead, German law uses standardized categories of investment income. This simplifies taxation compared with a full look-through approach.
Partial exemptions are intended to reflect, on a standardized basis, that certain income may already have been taxed at fund level.
Section 16 InvStG
Three Main Types of Investment Income
Distributions
Amounts distributed by the fund are generally treated as investment income and are subject to German taxation at investor level.
Advance Lump Sum
For non-distributing or low-distributing funds, an annual minimum taxation can arise based on the statutory base return.
Disposal Gain
When fund units are sold, the taxable gain is determined under the Investment Tax Act and prior advance lump sums are taken into account.
Section 18 InvStG
Advance Lump-Sum Taxation During the Holding Period
The advance lump sum applies where a fund's distributions for a calendar year are lower than the statutory base return. The base return is calculated using the redemption price at the beginning of the year and 70% of the officially published base interest rate.
The advance lump sum is also capped by the fund's actual increase in value for the year. In the year of acquisition, it is reduced proportionately for full months before the month of acquisition.
- particularly relevant for accumulating or low-distributing funds
- base return = beginning-of-year value × 70% of the base interest rate
- capped by the actual annual increase in value plus distributions
- pro-rated in the year of acquisition
- statutory deemed receipt on the first business day of the following year
- prior advance lump sums are taken into account on a later disposal
Section 20 InvStG
Partial Exemptions for Equity, Mixed and Real-Estate Funds
Depending on the fund's investment policy, part of the investment income remains tax-exempt. For private investors holding the units as private assets, the main rates are:
Equity Funds: 30%
For equity funds, 30% of the investment income is tax-exempt. Under the statutory requirements, the fund must continuously invest more than 50% of its assets in equity participations.
Mixed Funds: 15%
For mixed funds, private investors generally receive half the equity-fund exemption, i.e. 15%. The fund must continuously invest at least 25% of its assets in equity participations.
Real-Estate Funds: 60%
For qualifying real-estate funds, 60% of the investment income is exempt where the statutory real-estate requirements are met.
Foreign Real-Estate Funds: 80%
For funds meeting the statutory requirements for foreign real-estate funds, the partial exemption is 80%.
Fund Classification
The Label “ETF” Does Not Determine the Partial Exemption
What matters is not whether a product is marketed as an ETF, but whether it satisfies the statutory requirements for an equity, mixed or real-estate fund.
For an equity fund, the relevant test is in particular whether more than 50% of the fund's assets are continuously invested in equity participations. For a mixed fund, the statutory minimum is 25%.
For foreign funds, it may therefore be necessary to verify whether the fund documentation or other appropriate evidence sufficiently demonstrates the required investment ratio.
Disposal
The Broker's Reported Gain Is Not Automatically the German Taxable Gain
Sale Proceeds Minus Acquisition Cost
The starting point is the disposal gain determined under German tax rules. For foreign-currency investments, acquisition cost and sale proceeds must each be determined in euros.
Account for Prior Advance Lump Sums
Advance lump sums already recognized during the holding period are taken into account when calculating the later disposal gain so that the same appreciation is not taxed twice.
Partial Exemption Also Applies to Gains
The applicable partial exemption generally also applies to taxable gains from the disposal of qualifying fund units.
Losses Follow the Same System
Partial exemptions also affect losses and therefore reduce the amount of loss that is tax-deductible.
Foreign Broker
With U.S. and Other Foreign Brokers, the German Tax Calculation Is Often Missing
A German custodian bank generally calculates taxable distributions, advance lump sums, partial exemptions and disposal gains for many funds under German rules. A foreign broker usually does not provide this German tax processing.
The relevant amounts therefore have to be determined independently for the German income-tax return. For investment units held with a foreign custodian, Anlage KAP-INV can be particularly relevant.
- fund classification under German InvStG
- distributions converted into euros
- annual advance lump sum
- partial exemption
- historical acquisition cost
- disposal gain in euros
- prior advance lump sums already recognized
- foreign withholding tax where relevant
Germany–U.S.
German Investment Tax and U.S. PFIC Rules Are Separate Systems
For an investor taxable in Germany, a fund is first analyzed under the German Investment Tax Act. For U.S. citizens, green-card holders and other U.S. taxpayers, the same fund can additionally be a PFIC under U.S. law.
A fund can therefore be entirely ordinary from the German tax perspective while creating substantial U.S. tax and reporting consequences.
The German InvStG analysis and the U.S. PFIC analysis should therefore be kept strictly separate and coordinated only after each side has been determined.
Related Guidance
Related Topics
Frequently Asked Questions
Investment Funds Under the German Investment Tax Act
Which types of fund income are taxed in Germany?
What is the advance lump sum?
What is the partial exemption for equity funds?
What is the partial exemption for mixed funds?
Does the German Investment Tax Act also apply to U.S. ETFs?
What is different when the fund is held with a U.S. broker?
German Tax Advice
Holding ETFs or Investment Funds With a Foreign Broker?
We analyze German fund classification, distributions, advance lump sums, partial exemptions and disposal gains and prepare foreign brokerage accounts for Anlage KAP and KAP-INV.
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