Tax Tip: Beware of advance lump sums

At the beginning of the new year, many investors notice mysterious debits to their clearing account. In most cases, the intended use is nebulous, for example "effects". At best, the abbreviated name of an exchange-traded fund (ETF) or other investment fund is given.

This is known as the advance lump sum. In the case of accumulating funds or funds with very low distributions, investors must pay tax on a notional minimum return on the first working day of the new calendar year - this year it was on 2 January. The advance lump sum, i.e. the notional taxable income, is 70 per cent of the base rate for the past year 2024, multiplied by the value of the fund units at the beginning of the past year. At the beginning of 2024, the base rate was set at 2.29%, meaning that the advance lump sum accruing to investors on 2 January 2025 amounts to 1.603% of the value of the fund units at the beginning of 2024

However, anyone trying to calculate the advance lump sums applied by the bank for the various fund units will often come up against their limits. For funds that are not purely accumulating, the advance lump sum is reduced by distributions during 2024. In addition, the advance lump sum is capped at an actual increase in the value of the fund units during 2024, i.e. zero for fund units with losses. In addition, the advance lump sum is only recognised pro rata temporis if fund units are purchased during the year 2024. Investors who have fund units in a custody account at a foreign bank and have to calculate the advance lump sum themselves as part of their income tax return are therefore not to be envied if the bank does not provide them with so-called German tax reporting.

But investors who have fund units in a custody account at a German bank also have four fundamental things to bear in mind: Firstly, to avoid expensive account overdrafts or unpleasant reports to the tax office, there should always be sufficient funds in the clearing account at the beginning of January to pay the expected capital gains tax on the advance lump sum. Secondly, the exemption order amounts to EUR 1,000 or EUR 2,000 for jointly assessed taxpayers and should also be utilised. If the bank has already deducted capital gains tax on the basis of advance lump sums, the exemption order can still be issued (pro rata) throughout the year if it is not required at another bank. The bank will then credit the tax again retrospectively. Thirdly, children also have an exemption order of 1,000 euros, which should be used in this sense. And fourthly, if exemption orders have not been divided up adequately or if there are offsettable losses at other banks, it is worth offsetting them in the 2025 tax return (completing the KAP annex).

The author is a lawyer and tax consultant.