+++ Advance lump sum 2022 and 2023 +++
In a contribution of @Johannes_J the letter of the BMF (Federal Ministry of Finance) and the prime rate as of 02.01.2023 is mentioned. Regarding this and my reference about the payment ("or better" not to be made this year) there was the demand, how exactly this now plays a role for accumulating and distributing ETFs.
Below is a lay tax law explanation on the subject of prime rate and advance lump sum.
What is the prime rate for calculating the advance flat rate?
The prime rate is a variable interest rate according to which assessments for capital services are to be made in Germany and Austria. In Germany, the Deutsche Bundesbank is responsible for setting it, which carries out the calculations for it every six months (at the beginning of each six-month period) on the basis of the European Central Bank's specification and makes them officially known.
The prime rate used to calculate the upfront lump-sum payment is based on German government bonds with a maturity of 15 years.
Due to the official announcement, the interest rate takes on a special character, as it is the only official market interest rate.
The prime rate is a so-called valuation interest rate and is used, for example, in the calculation of interest on arrears and penalties for court judgments.
In addition to the above applications, the prime rate is decisive for determining the annual advance lump sum on capital-linked investments.
What is the upfront lump sum?
The advance lump sum is a regulation introduced by the Investment Tax Act of 2018 (InvStG) for the taxation of investment income. The consequence of the taxation is that lump-sum taxes are already levied annually in advance, i.e. in advance, on the future profit.
The consequence of this advance lump sum is that it is offset in the year in which the investment is sold and only the amount not covered by the advance lump sum is taxed on the capital gain.
The aim of the advance lump sum is to eliminate the tax deferral for the investors. Critically, however, it should be noted that this is not completely eliminated, especially if the prime rates are low and only a small portion is already taxed in advance, thus making the tax deferral more distant, especially with regard to the later tax burden of the taxpayer investing.
How does the calculation of the advance lump sum work?
For the advance lump sum, the base income is calculated, then the base income is compared with the increase in value of the capital investment and the tax payable is calculated on the basis of this.
Example based on a scenario of the increase in value in 2023 with the prime rate for 2023 set at 2.55% as of 02.01.2023 (Assumption: Accumulating ETF with at least 51% equity component, e.g. MSCI WORLD/EM or ACWI) :
Value of the capital investment as of 01.01.2023:
10.000€
Value of the capital investment at 01.01.2024:
10.500€
Increase in value:
500€
Base yield: 10.000€ x 2,55% (prime rate) x 0,7 (70% of prime rate) = 178,50€
1) The base yield is lower than the increase in value of 500€ of the previous year, therefore applies:
Use of the base income as a taxable upfront lump sum.
Example:
Capital gains tax and solidarity surcharge payable thereon: 26.375%.
Special tax feature:
If it is an equity fund with at least 51% of shares, this can be partially exempted with 30% and only 70% must be taxed. This then usually includes World, ACWI and EM - ETFs but also other equity funds.
Invoice:
0,26375 x (0,7 x 178,50€) = 32,96€ Taxes to be paid
2) If the increase in value of the capital investment is lower than the basic income, the increase in value is used as an advance lump sum.
Calculation:
0,26375 x (0,7 x 500€) = 92,31€
Tax to pay
Summary:
The advance flat rate is payable by all investors. However, the upfront lump sum is only due for investments in the area of funds and ETFs. Gains from individual shares will still be taken into account for tax purposes upon disposal. ETCs with physical deposit are also exempt from the advance flat rate.
As can be seen above, there are a) two different scenarios when calculating the tax (i.e. depending on the amount of base income and capital appreciation,; 1 or 2) and b) the tax treatment of capital investments in funds and ETFs.
The tax treatment also depends on whether it is an equity fund (whether ETF or classic) with at least 51% of shares, a mixed fund (i.e. less than 51% of shares, e.g. bonds mixed with shares) or a mixed fund (e.g. bonds mixed with shares), here applies: share proportion higher than 25%= 15% partial exemption, below full taxation) or other funds (e.g. pure bond funds or commodity funds without physical deposit).
On the Internet you can find various calculators that can make a calculation for the respective year. Please refer to the sources below.
Here, a distinction is also made between distributing and accumulating ETFs and funds.
For the year 2021 and 2022, there were no upfront lump sums, as the prime rates were negative in each of the years (most recently -0.05%, as of 02.01.2022) and therefore no upfront lump sum could be calculated.
Since on 04.01.2022 (thus today) the BMF has fixed the prime rate with effect from 02.01.2023 at 2.55%, it is certain that in the case of the increase in value of your shares of the ETFs or funds held on 01.01.2023 for comparison 01.01.2024 this prime rate is used as the basis for the base yield.
What does this mean for "me" exactly?
If you have an increase in value of your ETF or funds, keep your clearing account on 31.12.2023 by at least the expected tax amount. The tax is usually paid by your broker from 02.01. of the following year (i.e. 2024)!
Since it is a sovereign levy, your settlement account will also go into the negative if the coverage is not given. The penalty interest is usually very high at the broker (especially in case of overdraft of a settlement account), which is why you should ensure sufficient coverage.
In general, you should plan for the payment of the tax in November or December and pay it in accordingly. The payment will then be implemented fully automatically by the broker.
Should you not have any increase in value of the shares held from 01.01.23 to 01.01.2024 (because everything went down the drain), the advance lump sum is also omitted. Additional shares acquired during the year do not play a role for the time being and will only be taken into account with the next advance lump sum in 2024.
Addition:
Exemptions and therefore no tax burden if...
- your exemption order is not exhausted,
- you have submitted a non-assessment certificate, or
- general losses that have not been offset offset the tax burden.
Important note in this matter:
This information is purely layman's opinion and published with the state of my personal knowledge.
I have neither a tax education, nor do I know your personal tax peculiarities, nor is there any tax advice here. I inform purely to self purpose and in the sense of the community guidelines. A claim on correctness and completeness does not exist. Only your tax advisor can give you tax advice!
Sources:
Partial exemption of funds: https://www.fondsclever.de/ratgeber/fonds-wissen/teilfreistellung-bei-fonds/
Advance lump sum in law:
https://www.buzer.de/gesetz/12129/a199930.htm
Prime rate: https://de.m.wikipedia.org/wiki/Basiszinssatz
Publication on prime rate for advance lump sum and its calculation 02.01.2023 from BMF: https://www.bundesfinanzministerium.de/Content/DE/Downloads/BMF_Schreiben/Steuerarten/Investmentsteuer/2023-01-04-basiszins-zur-berechnung-der-vorabpauschale-gemaess-paragraf-18-absatz-4-InvStG-basiszins-zum-2-januar-2023.pdf?__blob=publicationFile&v=1
Tax calculator for advance lump sum:
https://www.finanzfluss.de/rechner/vorabpauschale-berechnen/
