Should I invest in overseas mutual funds?
Reinvest income directly with accumulating funds
Expert for banks and stock exchanges As of February 16, 2017
Hendrik Buhrs is an editor in the bank and insurance team. Before joining Finanztip, he reported on economic and consumer issues for the radio programs of the Hessian and later of the West German Broadcasting Corporation. Hendrik studied economics in Münster and Exeter. He gained his first professional experience at Radio Q and on Recklinghausen local radio. He likes to invest the money he has saved in travel.
- Funds can deal with stock dividends and bond interest in two ways: You can either have the income distributed to you or reinvest it (technical term: accumulation).
- Accumulation funds are suitable for investors who want to build up wealth and do not need regular income.
- Withholding tax applies to all income. Often it is withheld directly.
- In the case of foreign reinvesting investment funds, however, investors must themselves declare the income in their tax return.
- From 2018, all types of funds will be taxed on the basis of a flat rate. Investors then have less work to do with their tax returns.
Funds usually invest their money in securities that generate regular income. Dividends are usually paid on stocks and interest on bonds. The profit can either go directly to the Forwarded to investors or put back on become. In the latter case, one also speaks of accumulation. It does not matter whether it is conventional funds or so-called ETFs, with which you can invest cheaply in securities.
What is the difference between distributing and accumulating funds?
Regardless of the securities in which the fund invests, it can be divided into two categories:
Distributing Funds- They distribute their income to the owners of the fund units. Many fund companies do this once a year, but some also do this on a quarterly or monthly basis.
Accumulating Funds- You reinvest the money you have earned. As a result, the value of the fund increases by the income that has accrued.
The reinvestment option comes into play if you want to build up assets over the long term and are not dependent on current income. If, on the other hand, you want to have payments from your financial investments credited to your account on a regular basis, you should opt for a distributing investment fund.
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When is the withholding tax to be paid?
In principle, for owners of accumulating and distributing funds, current income is subject to the withholding tax. However, it depends on when the fund records the income as generated. This results in different times when the tax is due.
In the case of distributing funds, the investor earns his taxable income on the respective payout date. The final withholding tax is withheld immediately. An accumulating fund does not post the income as accrued for tax purposes until the end of the financial year. The tax authorities speak here of "income equivalent to distribution". For funds based in Germany, the tax is deducted from the fund volume. In the case of foreign funds, you have to enter the income in a separate field in the tax return, as we explain in the following chapter.
If you submit an exemption request to your custodian bank, the withholding tax is not automatically paid to the tax office up to the amount of the saver lump sum of 801 euros per year. This applies to distributing and accumulating funds.
What to do if you have overseas accumulation funds
With an accumulation fund that is set up abroad, you have to pay attention to a few special features.
Declare income yourself- Foreign accumulating funds are not obliged to withhold the final withholding tax and pay it to the German tax authorities. The exemption order is therefore not applicable to this investment income. As an investor, you have to state the dividend income, more precisely the so-called distribution-equivalent income, in the KAP annex in your income tax return every year.
They are subject to the withholding tax of 25 percent plus solidarity surcharge and, if applicable, church tax. At the end of the year you will receive an annual tax certificate from your custodian bank, from which you can see what income has accrued and where you have to enter it in the KAP annex.
Also pay attention to withholding tax - In addition to the final withholding tax, which is deducted from savers, the so-called withholding tax is also due on the dividends. It is paid directly to the tax authorities in the country in which the company paying the dividend is located. The fund only receives the net dividend plus any reimbursement entitlement.
For example, with a fund launched in Germany that replicates the Euro Stoxx 50, withholding tax is paid to Belgium because the shares of the Belgian brewer Anheuser Busch are represented in the Euro Stoxx 50. Often the withholding tax can be offset against the final withholding tax. Your online bank or broker will also show you this creditable amount in the annual tax certificate. You should also state the amount in the KAP attachment.
Avoid double taxation- As the owner of accumulating foreign funds, you have to pay attention to another special feature - and that is when you want to sell your fund units. Then the withholding tax is due again. The tax is withheld both on income from the increase in value due to price increases and from reinvested income. The domestic custodian bank pays the final withholding tax to the tax authorities on sale. The custodian bank does this even if you, as the investor, have already stated the accumulated interest and dividend income in your tax return year after year.
If you have had the fund for many years, this can lead to high tax deductions on sale. And also on the profits that you have already taxed. To avoid this, you as the investor must reclaim these excessive deductions in the tax return for the year of sale and prove that you have already taken the current income into account in previous years. In this case, to be on the safe side, you should keep your annual tax certificates and KAP attachments for a longer period of time.
Taxation will change from 2018
In July 2016, the Federal Council passed a reform of the Investment Tax Act, which will come into force in 2018. Accordingly, the taxation system for investment funds is fundamentally changing. The taxation of all types of funds is approaching: In future, a lump-sum increase in value will serve as the assessment basis for the withholding tax (so-called advance lump sum). You can find detailed information on the new taxation and calculation examples in our detailed article on the Investment Tax Reform Act.
The advance lump sum is obtained by multiplying the value of the fund share at the beginning of the year by the risk-free minimum interest rate, the so-called base interest rate. A flat fee of 30 percent is deducted from this. The base rate is published once a year by the Ministry of Finance and is currently 1.1 percent. If the actual increase in value of the fund in one year is less than the flat rate, this increase in value is used as the assessment basis.
In the case of distributing funds, the dividend actually paid is taken into account and reduces the flat rate. In the case of accumulating funds, only the flat rate applies - it completely replaces the previous "distribution-equivalent income". Private investors are not entitled to a refund of withholding tax. Depending on the type of fund, only part of the flat rate is used as the assessment basis (partial exemption). In the case of pure equity funds, the partial exemption is 30 percent. You can find an example calculation in our blog article.
It will be easier for those who own accumulating foreign funds in the future: it is no longer necessary to separately read the distribution-equivalent income including the withholding tax credit from the annual tax certificate of the bank, to transfer it to the tax return and to transfer all documents up to the sale of the fund as proof of correct taxation to keep. Instead, the flat rate withholding tax is due and paid by the custodian bank directly from the clearing account belonging to the custody account. If it does not exceed 801 euros, however, the tax exemption applies. In the event of a sale, all taxed lump sums are offset against the sales proceeds. Investors do not need to keep any additional documents for this.
Special case of ETFs
The aim of exchange-traded index funds (ETFs) is to show the performance of existing indices, for example the German Dax stock index. Some ETFs buy almost all of the stocks that are in the index. These are so-called physically replicating ETFs. Other ETF providers have the index development guaranteed by a bank; they buy in the performance via an exchange transaction. These are synthetic ETFs. You can read exactly how the two types of ETF differ in the ETFs guide.
So far, synthetic-accumulating ETFs have had a tax advantage over physical-accumulating index funds. Because no distribution-equivalent income was shown in the synthetic index copy, investors did not have to pay any taxes in between and thus did not have to worry about tax documentation.
With the amendment to the Investment Tax Act, the legislature wants to eliminate this inequality. From 2018, investors in synthetic-accumulating ETFs will also have to pay annual withholding tax. The assessment basis is a flat rate based on the increase in value of the fund and the base rate of the Federal Ministry of Finance. As with physical ETFs, a so-called partial exemption is likely to apply. Accordingly, only 70 percent of the lump sums and the sales proceeds would be taxed. You can find an example of the current and future taxation of equity ETFs in our blog post.
More on this in the securities account guide
- With the right securities account, you pay little for buying and selling equity funds (ETFs).
- Finanztip recommendations: Among the cheap and versatile custody accounts did the best: ING, Comdirect and Consorsbank and DKB. The cheapest providers are: Smartbroker, Scalable Capital (Free Broker) and Trade Republic.
To the advisor
Sara Zinnecker was editor for investment topics until June 2020. Sara had previously written about investments and retirement provision for the Handelsblatt. She completed her traineeship at the Georg von Holtzbrinck School for Business Journalists.
Dr. Manuel Kayl
Manuel Kayl was responsible for investment topics at Finanztip. The doctor of physics worked as an investment strategist and risk manager at the Dutch insurance company a.s.r. after doing research at the Geneva research center Cern as well as at Nikhef and the University of Amsterdam. He left Finanztip on August 31, 2016.
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