Index Fund Taxing: Efficiently Levying Taxes on Exchange-Traded Funds Without Filing a Tax Return
In Germany, the advance tax on Exchange-Traded Funds (ETFs) is a crucial aspect to consider for investors. This preliminary lump sum, known as the "Vorabpauschale" or preliminary lump sum, is calculated annually by banks or brokers and deducted even if you have not sold your ETF shares.
The calculation involves determining a basic yield set yearly by decree depending on market performance. Any gains above this basic yield are used to calculate the preliminary lump sum. This sum forms the basis for assessing the capital gains tax (a flat rate of 25%, plus a solidarity surcharge of 5.5% and church tax if applicable) on the ETF profits.
For equity ETFs containing at least 51% stocks, a partial exemption of 30% applies, meaning you only need to tax 70%, while 30% is exempt from tax. This means that the tax rate increases to up to 28% with church tax.
The broker or bank automatically calculates and deducts this advance tax at the beginning of the year. You do not pay it if your ETF showed a loss in the previous year, and if you later sell the ETF, the advance tax already paid is deducted from the tax due on the actual sale profits, avoiding double taxation.
For example, if your return from ETFs is €1,100, after deducting the saver's allowance, the taxable return is €70, resulting in a tax of approximately €18.46 (or €19.50 with church tax of 9%).
The base rate for 2023 is 2.55%, and for 2024, it is slightly lower at 2.29%. If the base rate is negative, as it was in 2022, it is counted as 0.
For distributing ETFs, the advance tax does not apply since there are no distributions. On the other hand, for equity ETFs, the advance tax equals the base income.
If you hold your ETFs with a German broker or bank, you do not have to declare them in your tax return as the withholding tax is a source tax.
In summary, the advance tax is based on an annual deemed income ("basic yield"), collected upfront on ETF profits before the actual sale. The normal capital gains tax rate of 25% applies, plus solidarity surcharge (5.5% of the tax) and church tax if relevant. The advance tax paid is credited against final capital gains tax at the time of sale.
This system ensures steady tax collection on ETFs held long-term, even if gains are only realized upon sale. It is a form of upfront taxation of future value increases, particularly relevant for accumulating ETFs.
- What about the impact of this advance tax system on personal-finance, especially when it comes to investing in ETFs? Could it affect my overall investing strategy?
- Despite the advance tax applying to equity ETFs, I should remember that a partial exemption of 30% applies, and any gains above the basic yield are considered for the actual tax calculation, not just the advance tax - finance.
