Three kinds of fund income, and one of them is never paid out

A saver holds units in an accumulating equity ETF worth 30,000 €. He has sold nothing, and the fund has paid out nothing. Yet in January his custodian bank debits withholding tax from his current account. It is not a booking error: what is being taxed is an advance lump sum, an income the statute assumes although not a single euro has flowed.

What the Investment Tax Act counts as income

The Investment Tax Act (InvStG) does not tax the investor in a retail fund according to what the fund itself receives in interest or dividends. What matters is what reaches the investor or is attributed to him as income. The fund itself is taxed separately, as the second module shows.

Section 16(1) InvStG lists exhaustively what that income is. Investment income consists, first, of the fund's distributions, second, of advance lump sums under section 18, and third, of gains from the sale of fund units under section 19. The statute knows no fourth kind.

The Income Tax Act builds on this. Section 20(1) no. 3 EStG assigns investment income under section 16 InvStG to income from capital assets. In principle the same rules therefore apply to it as to interest and dividends, namely the separate tariff and withholding by the bank.

How that tariff, the saver's allowance and the exemption order work is covered by the course on investment income. This course deals with what applies to funds alone: the assumed minimum return, the partial tax exemption and the credit on sale.

The distribution is the simplest of the three kinds. Section 2(11) InvStG defines it as the amount paid or credited to the investor, including the tax withheld on it. What counts is therefore the gross amount, not what lands in the account after the deduction.

The notion of a sale is broad too. Under section 2(13) InvStG it covers not only a sale on the stock exchange but also the return of the units to the fund company, their assignment and a completed winding-up of the fund.

One rule of general tax law expressly does not apply to fund income. Section 16(3) InvStG excludes the partial-income method of section 3 no. 40 EStG and the exemption of section 8b KStG. Relief for fund income runs instead solely through the partial exemption dealt with in the second module.

The advance lump sum: an assumed minimum return

An accumulating fund pays nothing out. It reinvests its income, and the value of the unit rises. Without a special rule the investor would be taxed only on sale, perhaps decades later. The advance lump sum, the Vorabpauschale, brings part of that taxation forward year by year.

Section 18(1) sentence 1 InvStG defines it as a difference. The advance lump sum is the amount by which a calendar year's distributions fall short of the base yield for that same year. If a fund pays out at least as much as the base yield, no advance lump sum arises.

Under sentence 2 the base yield itself is built from two quantities. One takes the unit's redemption price at the start of the calendar year and multiplies it by 70 percent of the base rate. The result is a standardised return that the statute assumes the investor earned in the year.

Sentence 4 provides for units with no redemption price fixed. The stock-exchange or market price then takes its place. This mainly concerns exchange-traded funds, where the investor in practice reckons with the exchange price anyway.

The direction of view matters. The advance lump sum is tied not to the value at the end of the year but to the value at its start. Someone who buys more during the year does not thereby raise the base for the units already held, but acquires new units, for which a reduction rule of their own applies.

The base rate: who works it out and where it is published

The base rate is set neither by the fund nor by the bank. Section 18(4) InvStG derives it from the long-term achievable yield on public bonds. The decisive figure is the rate that the Deutsche Bundesbank computes from yield-curve data for the first trading day of the year.

The Federal Ministry of Finance then publishes that rate in the Federal Tax Gazette. For 2026 it announced the base rate as at 2 January 2026 in a BMF letter dated 13 January 2026. The figure stands in that letter, not in the statute.

This course deliberately does not state the rate. The letter is supplied only as a PDF file, and we do not teach a figure we have not checked on a readable text page. Anyone who wants to calculate takes the value from the letter itself or from the bank's annual tax certificate.

The mechanism is enough for understanding. The base rate follows the level of long-term government bond yields. If that level rises, the base yield rises, and with it the advance lump sum on accumulating funds. In years without a positive return on public bonds it can disappear altogether.

Timing matters just as much. Because the rate refers to the first trading day of a year, it is known at the start of the year for which it applies. The advance lump sum itself, however, falls due only after the year has ended, once the last redemption price is also known.

The cap: no base yield without an increase in value

The advance lump sum is meant to anticipate an increase in value actually achieved, not an invented one. Section 18(1) sentence 3 InvStG therefore caps the base yield at the excess of the last over the first redemption price of the calendar year, plus that year's distributions.

The consequence is simple. If the unit lost value over the year, there is no excess, and the base yield falls to nil. No advance lump sum arises in a loss year, however high the base rate for that year turned out to be.

If the unit rose only slightly, the cap bites in part. What is then taken is not the arithmetical base yield but only the smaller increase in value together with the distributions. Only when the unit rose by more than the standardised return does the full base yield remain.

Distributions appear twice in the calculation, and for a reason. They raise the cap, because a distributing fund lowers its value precisely by paying out. And they are then deducted from the base yield, because they are already taxed as a kind of income in their own right.

• Step 1: redemption price at the start of the year times 70 percent of the base rate gives the arithmetical base yield.
• Step 2: last minus first redemption price of the year, plus distributions, gives the cap.
• Step 3: the smaller of the two amounts is the relevant base yield.
• Step 4: base yield minus the year's distributions gives the advance lump sum, never less than nil.

For the typical savings plan on a broadly diversified equity ETF this means: in good market years the full base yield is taken, in weak years a smaller amount or nothing. The advance lump sum therefore differs from year to year, even when the portfolio barely changes.

Year of purchase and date of receipt

Someone who buys units only during a year should not be taxed on a minimum return for the whole year. Section 18(2) InvStG therefore reduces the advance lump sum in the year of purchase by one twelfth for each full month preceding the month of purchase.

The month of purchase itself does not count as a full preceding month. Buying on the first or on the last day of a month is treated alike. All that matters is how many whole calendar months lie before the month of purchase.

Subsection 3 governs the timing of taxation. The advance lump sum is deemed received on the first working day of the following calendar year. For tax purposes, the advance lump sum for one year therefore belongs to the next year, because only then is it treated as received.

This has practical effects. The saver's allowance and an exemption order work for the year in which the receipt falls. Someone who used up his exemption volume in the old year has the new year's amount available in January, and the advance lump sum is often the first income to draw on it.

Someone who sells the units during the year for which an advance lump sum would be computed no longer holds them on the first working day of the following year. The increase in value for that year is then captured in full in the sale gain, and no advance lump sum arises for the units sold.

How the bank gets hold of the money

With a distribution, the bank simply withholds the tax from the amount paid out. With the advance lump sum, however, nothing flows from which it could withhold. The Income Tax Act solves the problem with a duty on the investor and a right for the bank.

Section 44(1) sentence 4 no. 4 EStG determines who withholds. For the advance lump sum it is the domestic credit, financial services or securities institution that holds or manages the fund units in custody, which as a rule means the investor's custodian bank.

Section 44(1b) EStG declares sentences 7 to 11 of subsection 1 applicable accordingly to the advance lump sum. Under them, the investor must place the missing amount at the bank's disposal where no income paid out covers the tax.

The bank may collect that shortfall from an account the investor keeps with it in his own name. It needs no consent to do so. This is exactly what the saver from the opening experiences: the debit in January is provided for by statute.

The bank may also use an agreed overdraft facility for this, to the extent it has not already been drawn. That applies, however, only as long as the investor has not objected before the income is received. Anyone who wants to keep the credit line free must therefore act in good time.

If the bank finds neither a balance nor a usable credit line, it reports the case to its own tax office. The missing withholding tax is then reclaimed from the investor by his residence tax office in the assessment. The tax is not lost; it is simply collected by another route.

Anyone who keeps the account with a pure custody bank with no cash balance should therefore ensure sufficient cover at the start of the year. An exemption order that covers the advance lump sum prevents the debit from the outset, because then no tax arises that would have to be collected.

Where no advance lump sum arises

Not every fund unit triggers the advance lump sum. Section 16(2) InvStG removes units held in certified retirement-provision or basic-pension contracts from all investment income. Taxation there bites only in the payout phase, under the rules for such contracts.

In three further cases only the advance lump sum drops away: units in occupational pension schemes under the Occupational Pensions Act, units held by insurers for certain insurance contracts, and units held by health and long-term care insurers to secure ageing reserves.

None of these exceptions applies to the private saver with an ordinary securities account. His accumulating fund triggers an advance lump sum in every year with a positive base rate and a rising price, even if he sees the units as long-term retirement saving.

Moving abroad is no way out either. Section 19(3) InvStG treats the end of unlimited tax liability, under certain conditions, like a sale of the units. The details of that rule, which turns on the size of the holding, go beyond the scope of this course.