Germany's Vorabpauschale explained: how ETF advance lump-sum tax works

What the Vorabpauschale is and why it exists

Since Germany's investment tax reform in 2018, every fund is supposed to be taxed on at least a minimum return each year. For distributing ETFs that happens through the dividends they pay out. Accumulating ETFs pay out nothing, so without a special rule the tax office would only collect when you sell, possibly decades later.

The Vorabpauschale closes that gap. It is a deemed income: the law assumes your fund earned at least a low, risk-free style return and taxes that amount in advance. It is not an extra tax but an earlier one, because it is credited against your gain when you sell.

The formula step by step

The calculation has three steps. First you compute the Basisertrag (base return), then you check the cap, and finally you subtract any distributions.

• Basisertrag = fund value at the start of the year × Basiszins × 0.7
• Cap: the Basisertrag cannot exceed the actual increase in value during the year plus distributions. If the fund lost value, there is no Vorabpauschale.
• Vorabpauschale = Basisertrag − distributions paid during the year (never below 0 €)
• For shares bought during the year, the Vorabpauschale is reduced by one twelfth for every full month before the purchase.

Where the Basiszins comes from

The Basiszins is derived from the yield of long-term German federal securities, based on the Deutsche Bundesbank's yield curve on the first trading day of the year, and is published by the Federal Ministry of Finance. The rate for a given year applies to that year's Vorabpauschale, which is then charged at the start of the following year. If the Basiszins is zero or negative, there is no Vorabpauschale.

Recent values:

Partial exemption and saver's allowance

The Teilfreistellung compensates for taxes the fund already pays at company level. For equity funds, meaning ETFs that hold more than 50 % stocks, 30 % of the income is tax-free. This applies to distributions, the Vorabpauschale and capital gains alike. Mixed funds get 15 %, pure bond ETFs get no partial exemption.

Next comes the Sparerpauschbetrag: since 2023, the first 1,000 € of investment income per year is tax-free, or 2,000 € for married couples filing jointly. To have it applied automatically, you file an exemption order (Freistellungsauftrag) with your bank. Anything above that is taxed at the 25 % Abgeltungsteuer (flat withholding tax) plus a 5.5 % solidarity surcharge on that tax, 26.375 % in total, plus church tax if you pay it.

When the tax is charged

The Vorabpauschale for a year counts as received on the first working day of the following year. So the Vorabpauschale for 2025 is charged in early January 2026. Your bank usually takes the tax from your cash account. If there is no cash, banks handle it differently, so it is worth keeping a small balance there at the turn of the year.

As long as your exemption order covers the Vorabpauschale, nothing is deducted. It simply uses up part of your allowance.

Worked example: the Vorabpauschale for 2025

The numbers below are deliberately round and purely hypothetical. Assume you bought 20,000 € of an accumulating equity ETF at the end of 2024. On January 1, 2025 it is worth 20,000 €, and by the end of the year it has grown to 21,600 €, an increase of 1,600 €. There are no distributions. The Basiszins for 2025 is 2.53 %.

• If your saver's allowance is still available, you pay nothing; 247.94 € of the allowance is used up.
• If the ETF had only gained 200 € in 2025, the Vorabpauschale would be capped at 200 €, and 140 € would be taxable.
• If a distributing ETF had paid out 150 €, the Vorabpauschale would be 354.20 € − 150 € = 204.20 €. The distribution itself is taxed as usual.

How it is credited when you sell

Vorabpauschalen you already paid tax on are deducted from your gain when you sell. Suppose that in the example you sell during 2026 for 23,000 €. The gain is 3,000 €. Subtract the 354.20 € already taxed and you get 2,645.80 €. After the 30 % partial exemption, 1,852.06 € is taxable, which is 488.48 € of tax without any allowance. There is no Vorabpauschale for 2026, because you no longer hold the shares at the end of the year.

Together with the 65.39 € from January, that is 553.87 €, practically the same as the 553.88 € you would have paid on the sale without any Vorabpauschale (the one cent comes from rounding). The Vorabpauschale only moves part of the tax forward in time.

Letting an app do the math

One year is easy to calculate by hand. A savings plan over 20 or 30 years, with a new portfolio value every year and monthly contributions, is not. Owlvest Pro estimates the Vorabpauschale for every year of your plan and shows how much tax is due each year and how much remains for the sale. The app fetches the current Basiszins from the Bundesbank automatically.

In Owlvest, tax rate, partial exemption and allowance are preset to the German values (26.375 %, 30 %, 1,000 €) and can be changed, for example if you file jointly or pay church tax.

Summary

The Vorabpauschale sounds complicated but follows a simple formula: value at the start of the year × Basiszins × 0.7, capped by the actual gain, minus distributions. With the partial exemption and the saver's allowance, it often costs nothing at all for smaller portfolios. If you want to see what it means for your own savings plan over the years, Owlvest Pro calculates it for you on your iPhone.

Note: this article is general information, not tax or investment advice.