In an article by @Johannes_J the letter from the BMF (Federal Ministry of Finance) and the prime rate as at 02.01.2023 are mentioned. With regard to this and my reference to the payment ("or rather" payment not to be made this year), there was a question as to how exactly this now plays a role for accumulating and distributing ETFs.
Below is a layman's tax explanation on the subject of basic interest and advance lump sum.
What is the prime rate for calculating the advance lump sum?
The base interest rate is a variable interest rate according to which valuations for capital services are to be made in Germany and Austria. In Germany, the Deutsche Bundesbank is responsible for determining this rate, which is calculated and officially published every six months (at the beginning of each half-year) on the basis of European Central Bank guidelines.
The prime rate for calculating the advance lump sum is based on federal bonds with a term of 15 years.
Due to the official announcement, the interest rate has a special status, 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 default interest and penalties for court judgments.
In addition to the above applications, the prime rate is decisive for determining the annual upfront lump sum on capital-linked investments.
What is the advance lump sum?
The advance lump sum is a regulation introduced by the Investment Tax Act of 2018 (InvStG) for the taxation of investment income. As a result of this taxation, a flat-rate tax is levied annually in advance on future profits.
This advance lump sum in turn means that it is offset in the year 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 investors. However, it is critical to note here that this is not completely lifted, especially when it comes to low prime rates and only a small portion is taxed in advance, which means that the tax deferral becomes a distant prospect, especially with regard to the subsequent tax burden of the taxpayer investor.
How does the calculation of the advance lump sum work?
The basic income is calculated for the advance lump sum, then the basic income is compared with the capital appreciation of the investment and the tax payable is calculated on this basis.
Example based on a scenario of capital appreciation in 2023 with the prime rate for 2023 set at 2.55% on January 2, 2023 (Assumption: Accumulating ETF with at least 51% equity component, e.g. MSCI WORLD/EM or ACWI) :
Value of the investment as at 01.01.2023:
10.000€
Value of the investment on 01.01.2024:
10.500€
Increase in value:
500€
Base yield10,000€ x 2.55% (prime rate) x 0.7 (70% of the prime rate) = 178.50€
1) The basic income is less than the increase in value of €500 in the previous year, therefore the following applies:
Use of the base yield as a taxable advance 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% equity component, this can be partially exempted with 30% and only 70% has to be taxed. This usually includes World, ACWI and EM ETFs as well as other equity funds.
Calculation:
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 be paid
Summary:
The advance lump sum is payable by all investors. However, the advance lump sum is only payable for investments in funds and ETFs. Gains from individual shares will continue to be taken into account for tax purposes when they are sold. ETCs with physical deposit are also exempt from the advance lump sum.
As can be seen above, there are a) two different scenarios for calculating the tax (i.e. depending on the amount of basic income and capital gains; 1 or 2) and b) the tax treatment of 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% equities, a mixed fund (i.e. less than 51% equities, e.g. bonds mixed with equities, The following applies here: equity component higher than 25% = 15% partial exemption, full taxation below) or other funds (e.g. pure bond funds or commodity funds without physical deposit).
Various calculators can be found on the Internet which can make a calculation for the respective year. Please refer to the sources below.
A distinction is also made here between distributing and accumulating ETFs and funds.
There were no advance lump sums for 2021 and 2022, as the base interest rates were negative in each year (most recently -0.05%, as at 02.01.2022) and therefore no advance lump sum could be calculated.
Since on 04.01.2022 (i.e. today) the BMF set the prime rate at 2.55% with effect from 02.01.2023, it is clear that in the event of an increase in the value of your ETF or fund units held on 01.01.2023 as at 01.01.2024, this prime rate will be used as the basis for the base yield.
What exactly does this mean for "me"?
If you have an increase in the value of your ETFs or funds, keep your clearing account on 31.12.2023 at least the expected tax amount ready. The tax is usually paid by your broker from 02.01. of the following year (i.e. 2024)!
As this is a sovereign tax, your clearing account will also go into the red if the cover is not provided. The penalty interest is usually very high at the broker (especially when a clearing account is overdrawn), which is why you should ensure sufficient cover here.
In general, you should plan to pay the tax in November or December and pay it in accordingly. The payment will then be made fully automatically by the broker.
If you do not have an increase in the value of the shares held on 01.01.2024 from 01.01.23 (because everything went down the drain), the advance lump sum is also waived. 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.
Supplement:
Exemptions and therefore no tax burden if...
- your exemption order has not been 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:
The information provided is purely from a layman's point of view and is published to the best of my personal knowledge.
I have no tax training, nor do I know your personal tax particularities, nor am I providing tax advice. I am providing information purely as an end in itself and in line with the community guidelines. There is no claim to correctness and completeness. 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 the law:
https://www.buzer.de/gesetz/12129/a199930.htm
Prime rate: https://de.m.wikipedia.org/wiki/Basiszinssatz
Publication on the prime rate for advance lump sum and its calculation 02.01.2023 by the 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/
