Value Column von Hans Peter Schupp

8 JANUARY 2024

Advance lump sum taxation

The German tax law is based on the inflow principle. I.e., if I sell something at a higher price than I have originally paid, I have to pay tax on the profit once I receive it. This naturally annoys a government, especially if it is in financial difficulties, that taxable profits accrue during its reign but a successor government receives this tax. This is why the so-called advance lump sum taxation was introduced for funds in 2018. According to this regulation fund investors are asked to pay tax even though they have not currently realized any profits and therefore have not received a cash inflow. Nevertheless, they must pay this tax as an advance lump sum from other liquidity in accordance with Section 18 InvStG.

Theoretical return is simply determined

The state simply determines a theoretical return, the so-called base yield. This is calculated by multiplying the redemption price of the investment unit at the beginning of the calendar year by 70 percent of the base interest rate published by the Deutsche Bundesbank. If this amount is not distributed as a dividend, the balance between the basic income amount minus the distributed amount must be taxed as an advance lump sum, regardless of whether this return has actually been realized in the fund, whether there is a legally valid financial statement or whether the investor has received it. The basic return may not exceed the fund performance and is offset against the actual realized gain on disposal. The whole matter can serve as a good example of the quote from German Chancellor Olaf Scholz: „We have overdone it with bureaucracy“.

So far, this regulation has not played a role. „Due to the negative prime rate, no advance lump sum will be levied for 2022,“ stated the BMF letter dated January 7, 2022. However, it is an issue for income from 2023, as the advance lump sum for 2023 is now 2.55%, as stated in the BMF letter dated January 4, 2023.

Whether there is an inflow or not – the tax is simply debited from the account

What does it mean for investors? A tax will be due at the beginning of 2024, i.e. these days, for fund investments, regardless of whether they have received an inflow or not. The amount will simply be deducted from their account.

It is pointless to criticize the legislation, but it is certainly our duty to provide information about it. With our Contrarian Value Euroland fund, unlike accumulating funds, we have the option of paying dividends and have had many internal discussions about the fund’s distribution policy. We deliberately did not follow the common practice of distributing the advance lump sum in 2023, which means that there is no tax payment for the investor. This is because it was foreseeable that we would be distributing at the expense of the assets in the fund. This would not have been in line with Section 58 AktG – appropriation of net income.

Distribution in January

We have therefore chosen to follow a different route for Fidecum: We distribute the taxable amount of 25 percent of the advance lump sum in January so that our investors can offset the tax deduction from their account with this distribution.

Translation for convenience only!

The author: Hans Peter Schupp is a board member of FIDECUM AG and portfolio manager of the Contrarian Value Euroland fund.