An overview of investment tax
A new Investment Tax Act came into force on 1 January 2018. The core idea behind the reform is twofold: to align with European legal requirements by taxing domestic and foreign investment funds uniformly, and to simplify the taxation of investment funds — and therefore of ETFs as well. The rules apply regardless of whether funds are bought directly by the investor or acquired by an asset manager on a client's behalf.
Equal treatment of foreign and domestic funds
If you have previously prepared your own tax return and held a physically replicating, accumulating ETF set up abroad, you'll know the problem: the fund's income had to be declared every year in your tax return — yet it was taxed a second time when you sold the fund. Only once you had explicitly proven that the fund income had already been taxed could the double taxation be reversed by the tax office. This complicated procedure is now unnecessary, because from now on the legislator taxes domestic and foreign funds equally. The differences in taxation between distributing and accumulating funds are also becoming significantly smaller.
The removal of the option to deduct withholding taxes
With foreign investments, there was an additional complication until now: withholding taxes had to be paid on them, which the investor could — under certain circumstances and with considerable effort — reclaim from the tax office. In future, by contrast, a flat 15% corporation tax (on German dividends) or withholding tax (on foreign income) will in most cases be levied at fund level, and the investor cannot reclaim it.
The tax authorities offset this tax increase by no longer applying the flat-rate withholding tax — which the investor still has to bear — to the full gain in future. Instead, a partial exemption is being introduced (30% for equity funds¹, 0% for bond funds), which reduces the flat-rate withholding tax accordingly.
More even taxation across the holding period
The legislator tackled a further point with the reform: until now, it made a difference for tax purposes whether a fund distributed income (taxed immediately) or accumulated it (in some cases taxed only when the fund was sold). This unequal treatment has now been at least partly remedied by the introduction of an advance lump sum (Vorabpauschale). In plain terms: even if a fund distributes no income, tax will now become due every year (in the amount of the flat-rate withholding tax plus any church tax on the notional advance lump sum, reduced by the partial exemption). If the fund is later sold at a profit, these taxes already paid are automatically taken into account, so that in future the tax burden falls more evenly across the holding period. If the fund is sold at a loss, the losses are entered in the loss carry-forward pool — which already exists today — and can be offset against gains in subsequent years. The good news: the advance lump sum is currently very low, because it is based on the interest rate level. At present it amounts to 0.64% p.a., on which the flat-rate withholding tax then becomes due after deducting the partial exemption of 30% for equity funds or 15% for bond funds. The allowances already familiar today — €801 for singles and €1,602 for married couples — are taken into account here, and losses from previous years can be offset.
The transition from the (very) old regime to the new one
As part of the reform, for legacy holdings acquired before the flat-rate withholding tax came into force on 1 January 2009, the legislator limited the tax exemption on price gains that would otherwise apply to gains realised up to 31 December 2017. At the turn of the year, these holdings were notionally sold and reacquired as of 1 January 2018. The new law therefore applies to future gains and distributions — after an allowance of €100,000 — while the old gains remain tax-free. This special case is not relevant for quirion, since none of our securities were acquired before 2009. What is interesting, however, is that tax laws change regularly, and the next change is already on the horizon in the current coalition negotiations between the CDU/CSU and the SPD: it looks as though the flat-rate withholding tax will be abolished again over the coming years and there will be a return to a procedure similar to the rules that applied before 2009.
Simplification for quirion and for our clients
Even if it doesn't seem that way — what with corporation tax, partial exemptions, advance lump sums and other tax-related tongue-twisters — the new law makes things simpler for both quirion and its clients. For quirion, the extensive alignment of the various funds has the advantage that we can concentrate on the quality of a fund and its suitability for our investment concept. Tax considerations become less relevant. For our investors, the double taxation that previously loomed with foreign accumulating funds no longer applies. quirion automatically calculates the taxes and remits them to the tax office, so — just as before — our clients don't have to worry about a thing here. And even if tax legislation should change again over the coming years, quirion will keep an eye on these developments for its clients and factor them into its investment decisions at an early stage.
Conclusion: For you, the investment tax reform is less a reason to enter the capital market. Trust in the scientific, Nobel Prize-winning evidence that identifies the long-term nature of an investment as the criterion for its success. So you can take pleasure in the fact that, since this year, quirion manages the first €10,000 you invest completely free of charge². Only above that does the investor pay the usual flat fee of 0.48% p.a. The only requirement: the investor must be a new client.
¹ There are also rules for further asset classes, which are not currently relevant to quirion's asset management.
² Note: Since 1 July 2020, you can invest the first €10,000 free of charge for one year in the Digital package. Above that, the management fee of just 0.48% p.a. applies in the Digital package.
