Is a mutual fund taxable?

Investment funds: taxation for custody accounts in Switzerland and abroad

A few facts in advance: According to the German fund association BVI, German investment companies currently manage around three trillion euros as trustees for their more than 50 million private and institutional investors. An investment fund works according to a simple principle. An investor pays money into a fund. In return, he receives share certificates. The investment fund bundles the money of all investors and invests it, for example, in bonds, stocks or real estate.

Those who rely on index funds, also known as Exchange Traded Funds (ETFs), pay even lower fees than with a traditional investment fund. Because with ETFs, no fund manager actively selects securities, but the index fund simply maps a market index - for example the DAX.

New rules for the taxation of investment funds

On January 1, 2018, the investment tax reform, InvStRefG for short, came into force. The reform affects equity funds as well as mixed funds and real estate funds. In addition, the InvStRefG also changes the taxation of ETFs. But why the reform? With the new fund taxation, the government expects less effort on the part of the custodian banks and investors, fewer tax loopholes and fewer tax deferrals.

These are the new rules for fund taxation from 2018

An overview of the most important new regulations: As of 2018, it no longer matters whether it is a domestic fund or a foreign fund, or whether the fund is distributing or reinvesting. All investment funds are taxed according to the same principle.

The principle: Fund companies now pay 15 percent corporation tax directly from the fund assets - the investor will therefore receive less money in the future. To compensate for the lower investment income, investors do not have to pay withholding tax on the entire investment income, but only on part of it. We explain the changes in detail below.

By the way:

Until the end of 2017, it was of decisive importance for tax purposes whether it was a domestic or foreign, distributing or accumulating fund. Domestic funds had different rules than foreign funds, which made the taxation of mutual funds incredibly complex. The Investment Tax Reform Act promises a significant simplification of taxation.

Fund companies pay corporation tax on certain income

The reform of the investment fund taxation will ensure that from 2018 onwards, it will no longer only be the investment income of savers that will be taxed. Rather, the fund company now has to pay 15 percent annual corporate income tax on German dividends, German rental income and profits from the sale of German real estate directly from the fund's assets. Incidentally, the fund provider pays corporation tax automatically, the investor does not have to worry about anything.

However, this rule does not apply to interest, profits from the sale of shares and other securities, or income from forward transactions. They are tax-free at fund level, so no corporation tax is due in these cases.

As of 2018, domestic and foreign investment funds will therefore be taxed equally. The legislator would like to avoid distortions of competition.

Partial exemptions provide compensation

By paying corporation tax, investors receive lower investment income from the fund companies. In order to offset taxation at fund level, from 2018 investors no longer have to pay the withholding tax plus solos and, if applicable, church tax on all investment income, but only on part of the income. The legislator calls this principle partial exemption. The amount of the partial exemption, however, depends on the investment fund.

  • In the case of equity funds with a minimum share of 51 percent in shares, 30 percent is exempted.
  • Mixed funds with an equity component of at least 25 percent can be exempted with 15 percent. There is no exemption if the number of shares is lower.
  • Real estate funds with a minimum investment of 51 percent of the assets are exempt from 60 to 80 percent.

The different amounts of the partial exemption should take into account the different burdens at the fund level.

Important: Investors should definitely give the fund company an exemption order. So the provider does not deduct taxes on dividends & Co. as long as the saver lump sum has not yet been exhausted. This is currently 801 euros per year for singles and 1,602 euros per year for married couples.

Distributing Funds and Accumulating Funds

If you want to invest money in a mutual fund, you have to choose between a distributing or an accumulating fund. In the case of a distributing fund, all income such as dividends, interest and profits are distributed, i.e. paid out to the investor.

In the case of an accumulating fund, however, all income is retained and reinvested, i.e. reinvested directly. This form of investment is very common.

Advance flat rate with little or no distribution

There is also a new regulation in the event that the investment fund makes no or only a small distribution. If such a case occurs, a so-called advance lump sum is taxed for the investor. The fund provider calculates how high the advance lump sum will be. The advance lump sum was introduced by the legislator so that investment funds cannot be used as a tax deferral model.

New tax methodology also for the sale of the investment fund

Taxation also changes when units are sold. The advance lump sums that were collected during the holding period of the investment fund are fully offset against the sales proceeds - so there is at least no double taxation. In addition, the sales proceeds benefit from a partial exemption: 30 percent is tax-free for equity funds and 15 percent for mixed funds.

Distributing and accumulating funds are usually taxed differently during the holding period, but due to the new regulations they are treated equally at the latest when they are sold.

Inventory protection no longer applies with immediate effect

One innovation is causing old investors in particular to sit up and take notice: There is no inventory protection. Anyone who had already acquired shares in an investment fund before the introduction of the final withholding tax in 2009 was spared the withholding tax when selling the units until the end of 2017. With the reform of the investment fund taxation, old portfolios will also become partially taxable. In fact, all profits that accrue from 2018 will be taxed. After all, savers are entitled to an allowance of 100,000 euros.

How does it work in practice? The profits until December 31, 2017 will remain tax-free. However, all fund units are deemed to be fictitiously sold on December 31, 2017 and will be fictitiously re-acquired on January 1, 2018. All profits that accrue after this date will be taxed according to the new principle.

By the way

At the end of 2019, the legislature passed new regulations on the tax treatment of offsetting losses from forward transactions. Some of these have been in effect since January 1, 2020 and bring investors disadvantages with regard to tax. You can find out more about this in our article Losses from futures: That is changing.

Simplification for foreign accumulation funds

Until now, investors with a foreign accumulation fund or ETF always had a considerable amount of extra work to do with their tax returns. On the one hand, the reinvested dividends and the creditable withholding tax had to be entered in the tax return, and on the other hand, the receipts had to be kept until the day of sale. With the new regulations, this additional effort is no longer necessary.

Changes do not affect retirement provision

Riester savers can breathe a sigh of relief, because the changes have no impact on pure pension funds. That means: domestic dividends and real estate income are tax-free at the level of the investment fund, there is no corporation tax.

By the way:

The reform of the mutual fund taxation brings many innovations with it. If you are unsure how and whether you should tax your winnings, come to us. Our advisors will be happy to assist you and prepare your tax return. Find a counseling center near you here: Consultant search.

This is an editorial text from the VLH editorial team. There is no advice on topics that are outside the tax advisory powers of an income tax aid association. Consulting services in specific individual cases can only be provided within the framework of the establishment of a membership and exclusively within the advisory authority according to ยง 4 No. 11 StBerG.