ETF tax in Germany — Vorabpauschale and Teilfreistellung explained

Investment income in Germany is taxed at a flat 25% rather than at your income tax rate. On top of that sits the solidarity surcharge at 5.5% of the tax itself — not of the income — which brings the effective rate to 26.38%. Church members pay an additional levy of around 9% of the tax, computed slightly differently and partially deductible.

This single rate applies to dividends, to realised gains, and to the advance charge described below. Unlike the Dutch system it keys off things that actually happened, and unlike the Belgian one it does not care how often you trade.

Before the flat rate is applied, a portion of a fund's return is exempted outright according to what the fund holds. An equity fund — one holding at least 51% shares — has 30% of its return exempted. A mixed fund gets 15%, and a bond fund gets 0%, meaning nothing.

This exists to compensate for tax the fund itself has already paid at the company level, and it is worth more than it first appears: it cuts the effective rate on an equity fund from 26.38% to roughly 18.46%. It is also the single strongest argument for checking what a fund actually holds before buying it, because the difference between an equity classification and a mixed one is a permanent difference in what you keep.

An accumulating fund pays nothing out, so without intervention a German investor could hold one for decades and owe nothing until selling. The Vorabpauschale closes that gap by charging a small amount each year on a return the fund has not distributed — and crediting everything you have paid against the bill when you eventually sell. It moves tax forward in time; it does not add to the lifetime total.

The amount is built in three steps. First a notional return: 70% of the year's base rate, which for 2026 is 2.25%, giving 1.575% of the value at the start of the year. Second, and crucially, the assessment is capped at the fund's actual gain over that year — so a flat or falling year produces nothing at all rather than a smaller charge. Third, the partial exemption and then the allowance are applied to what remains.

For an equity ETF in an ordinary year that works out at about 0.29% of the holding before the allowance. Set against the allowance, most ordinary portfolios pay nothing for years.

Every taxpayer has an annual allowance against all investment income of €1,000, or €2,000 for a jointly assessed couple. It applies across dividends, realised gains and the advance charge together, not per account, and you allocate it to each broker by filing an exemption order with them.

Because the advance charge on an equity fund is small, the allowance covers it entirely up to a portfolio of roughly €90,703 at the 2026 base rate — assuming nothing else is consuming it. Below that the Vorabpauschale costs literally nothing, which is worth knowing before reorganising a portfolio to avoid it.

Forgetting to file the exemption order is the most common and most avoidable mistake here: without it the broker withholds tax it did not need to, and recovering it means claiming it back on your return.

Does the Vorabpauschale mean accumulating funds are worse in Germany?

No, and removing that difference is exactly why it exists. A distributing fund is taxed on its payouts as they arrive; an accumulating one is taxed on the advance charge instead, both at the same rate after the same partial exemption, and the advance is credited against the eventual sale. The choice comes back to ordinary considerations — whether you want the cash, and what your broker charges to reinvest it.

What happens if the fund loses money that year?

Nothing is charged. The advance assessment is the lesser of the notional return and the fund's actual gain, floored at zero, so a flat or down year produces no Vorabpauschale at all. The deferral you keep is repaid when you sell, because the untaxed gain is still there in the sale calculation — but in the year itself there is no bill.

Do I need to do anything, or does my broker handle it?

A German broker handles it: it calculates the charge, takes it from your cash balance in January, and reports it. A foreign broker generally does not, which leaves the calculation and the declaration to you on your annual return. The one thing every investor should do actively is file an exemption order with each broker so the allowance is applied at source rather than reclaimed later.