The after-tax result is decisive for the success of the investment. Even though taxation is usually handled independently by domestic custodians, private investors should be aware of the main features of the taxation of investment funds:
- The taxation of the investor basically follows the inflow principle - whenever the investor receives money from the fund, taxation occurs. Such an inflow occurs in case of distributions from the fund or in case of redemption or sale of the fund shares.
- To ensure taxation of the investor in the case of reinvesting funds, the so-called pre-determined Flat Rate Tax must also be taxed. The pre-determined Flat Rate Tax assumes a fictional inflow of income, which is intended to ensure a minimum annual taxation over the holding period. The amount of the pre-determined Flat Rate Tax is based on a risk-free interest rate that is reset annually. In order to avoid double taxation for the investor, the advance pre-determined Flat Rate Tax is deducted from the capital gain upon actual disposal.
- Funds must pay taxes on certain domestic income - e.g., dividends from German stocks or rental income and capital gains from German real estate - at a rate of 15 percent from the fund assets.
- Investors are granted the so-called partial exemption as compensation for taxation at the fund level. This exempts a portion of the investor's income (distributions, pre-determined Flat Rate Tax and capital gains) from taxation. The amount of the tax-exempt portion depends on the type of fund.
- Due to legal changes in the taxation of investment funds, investors who purchased units before 2018 or even before 2009 must observe additional regulations.