Do I have declare dividends on ETFs that accumulate them?

27 posts in this topic

Hi everyone!

 

I would like to ask you a very simple question: Do I have to pay taxes on dividends that are reinvested automatically into a specific fund/ETF, if I live in Germany?

 

Here it goes 2 examples - REIT and an Equity ETF. As you can see, both of them accumulate dividends as their distribution policy.

 

Since I never actually 'touch' the dividends since they are reinvested automatically, do I have to declare them annually on my tax return? Or should I only declare them when I withdraw the amount from the funds?

 

What if I am investing in these ETFs through a broker in Portugal (where I am originally coming from) and I want to declare that income according to the Portuguese law? Would it be possible to declare income in 2 countries at the same time?

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You live in Germany --> you have to declare your worldwide capital income in your German tax return, in Anlage KAP.

You have no choice about it, no matter in which country you keep those funds.

 

Portugal will charge a 15% source tax, which you also declare in Anlage KAP.

Article 10 of the Germany/Portugal double taxation agreement deals with dividends: http://www.bundesfinanzministerium.de/Content/DE/Standardartikel/Themen/Steuern/Internationales_Steuerrecht/Staatenbezogene_Informationen/Laender_A_Z/Portugal/1982-02-13-Portugal-Abkommen-DBA-Gesetz.pdf?__blob=publicationFile&v=3

 

Yes, you have to declare that reinvested capital income, even if it got automatically reinvested.

 

The first 801€ of capital income are income tax free, capital income above that will be taxed either at your personal tax rate or at 25% Abgeltungsteuer, whichever is lower. The Portuguese source tax you already paid will lower the German tax that you will owe on them.

 

However, if you bought those funds before 1.1.2009 then different rules apply. 

Please read:

 

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Thanks @PandaMunich for the inputs, really amazing info that you shared!

 

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Yes, you have to declare that reinvested capital income, even if it got automatically reinvested.

 

That's the thing - in Portugal, you don't have to declare the dividend if it was automatically reinvested, while the same doesn't happen in Germany (apparently). That is why ETFs that accumulate automatically dividends are so popular in Portugal, while people tend to avoid the ETFs that distribute their dividends.

 

So, we have a situation where a certain type of income has to be declared in Germany, but not in Portugal. How will the Finanztam deal with this situation then?

 

As well, aren't investments in general tax deductible? So, even if I am taxed on my capital gains, wouldn't I end up not paying any tax because I would get that amount back when reinvesting those same capital gains?

 

Moreover (sorry for so many follow up question), if there are no tax benefits, why there is such a thing as ETFs that accumulate dividends automatically? What would be the purpose of such ETFs then?

 

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The first 801€ of capital income are income tax free

 

801 EUR annually for all the asset classes? So, let's say that I invest a total amount of 10.000 EUR and I get a return of 10.801 EUR. Those 801 EUR are tax free right?

 

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The Portuguese source tax you already paid will lower the German tax that you will owe on them.

 

So, no matter what, I will have to declare my income in both countries?

 

Quote

However, if you bought those funds before 1.1.2009 then different rules apply. 

 

 

I didn't start investing yet. :)

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No idea about Portuguese tax law, sorry.

 

But you have to declare your worldwide capital income in Germany:

  • interest
  • dividends, no matter whether they were reinvested or not
  • profit from selling shares/funds
  • ...

If the total income from the above sources exceeds 801€, you will pay income tax on it (up to 25%).

 

You're right, if you sell the funds, these funds would be worth more because of the reinvested dividends, and you would in the end have to tax them twice.

This is why, when you sell a fund that had re-invested dividends (= thesaurierender Fonds) you have to attach copies of the proof that you already paid tax on those dividends, and they are then excluded from that sale profit, see the section "Eine doppelte Besteuerung vermeiden" in this article: http://www.finanztip.de/indexfonds-etf/thesaurierende-fonds/

 

From 2018 the way funds are taxed will change, re-invested dividends will not be taxed any longer, they will just tax an assumed increase of 0.7*base_interest_rate.

In 2016 the base interest rate was 1.1%, it's set once a year by the German Ministry of Finance.

For details of the new taxation rules, please see the last section of the above article and this blog entry with examples: http://www.finanztip.de/blog/etf-investmentsteuergesetz/

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4 minutes ago, PandaMunich said:

This is why, when you sell a fund that had re-invested dividends (= thesaurierender Fonds) you have to attach copies of the proof that you already paid tax on those dividends, and they are then excluded from that sale profit, see the section "Eine doppelte Besteuerung vermeiden" in this article: http://www.finanztip.de/indexfonds-etf/thesaurierende-fonds/

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Thanks for the prompt reply, @PandaMunich. :) In this case, I would still have to pay taxes on the capital gains, right? (e.g, if the stock value went from 1000 to 1500, excluding dividend reinvestment, I would still be taxed on those 500 EUR increase).

 

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From 2018 the way funds are taxed will change, re-invested dividends will not be taxed any longer, they will just tax an assumed increase in worth of 0.7*base_interest_rate. In 2016 the base interest rate was 1.1%, it's set once a year by the German Ministry of Finance.

 

 

It means that, from 2018, re-invested dividends will be taxed at around 1.8%. So, If I earn 100 EUR in dividends, I would be taxed 1.8 EUR at the end of the year. Would that be correct?

 

Would I still need to use an ETF that reinvest dividends automatically? What if I would reinvest manually the dividends generated by an ETF that distributes automatically, would that still count as being 'reinvested'?

 

Since this is a new 'law/ amendment', how likely is this to be changed? Do such laws, regarding dividends and capital gains, change often in Germany?

 

Once more, thanks for the help provided so far!

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No, you didn't understand.

 

For the taxation in 2017, the value of that fund is irrelevant.

Important is the amount of dividends in 2017. If your fund had 1,801€ in dividends then - if you had no other capital income - you would pay tax:

25% * (1,801€ - 801€) = 250€ in income tax

 

Starting with 2018, the value of the fund at the start of the year is relevant, and the amount of re-invested dividends irrelevant.

Let's say the value of your fund on 1. January 2018 is 10,000€.

They will then assume a theoretical gain (called Vorabpauschale) of:

value_fund_at_start_of_year * 0.7 * base_interest rate

= 10,000€ * 0.7 * 1.1% (if the base interest rate will also be 1.1% in 2018)

= 10,000€ * 0.7 * 0.01

= 77€

If you had no other capital income, then those 77€ assumed capital gain will not be taxed at all, since it's less than the tax-free amount of 801€.

Re-invested dividends will no longer be taxed at the end of each year starting with 2018. This has the advantage that you no longer have to present the proof that these dividends had already been taxed when you sell your fund, since under the new rules there is no longer the risk that the re-invested dividends are taxed twice. The only taxation that took place during the preceding years, the Vorabpauschale, the Finanzamt knows about and will automatically take into account if you did end up paying tax on those Vorabpauschalen, i.e. if they exceded your 801€ tax-free amount.

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Thanks, @PandaMunich, now I think that it's clearer to me. :)

 

Last question - the average Steuerberater knows how to deal with this type of things? Or do you recommend me to look for someone specialized in the field?

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Just to clarify my understanding, the new taxation from 2018 onwards applies to all funds whether they accumulate or distribute, correct?

For funds that distribute, the tax on dividends would already be automatically retained by the custodian bank and the amount paid would be deducted from the Vorabpauschale?

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So if I want to start to invest *now*, what kind of ETFs should I invest now? (I prefer to have less bureaucratic work than profit)

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1 hour ago, galv said:

So if I want to start to invest *now*, what kind of ETFs should I invest now? (I prefer to have less bureaucratic work than profit)

To give a bit more of context to my question I was looking into this link https://www.justetf.com/de/news/etf/steuereinfach-in-etfs-investieren.html

The article is from 2014, are the 'green' ETFs still 'green' now? And as of 2018? I was planning to buy ETFs for long term investment.

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@PandaMunich

what happens to capital gains after 2018?

 

For example: 

i buy the fund on the 31st Dec 2017 (value 10,000 euros)

on the 1st Jan 2018 the value is 10,000 euros

on the 1st Jan 2019 the value is 11,000 euros

on the 1st Jan 2025 the value is 20,000 euros and i sell for that amount.

 

i understand i have to pay 77 eur on taxes over 2018 (payed on 2019)... and with the Vorabpauschalen i end not paying anything...

i understand i have to pay 85 eur on taxes over 2019 (payed over 2020) and with the Vorabpauschalen i end not paying anything...

 

but what about the capital gains?

i have still have to pay 28% over my 10,000 capital gains? ( this is 3,500 * 28% - Vorabpauschalen )

or because of this new taxation, I had been paying over the years and I don't have to pay taxes twice?

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Sorry, but I have difficulty understanding your post, especially your use of on/over.

 

Let's first assume that your personal income tax rate is above 25%, since if it were below 25%, you would only pay that lower flexible personal income tax rate, and not the fixed flat rate Abgeltungsteuer of 25% on your capital income.

 

Let's further assume the Vorabpauschale is always 77€ (it won't be) and that in all these years you had already used up your tax-free Sparer-Freibetrag of 801€ with other capital income, e.g. interest income that you had received - if the Sparer-Freibetrag hadn't already been used up, you wouldn't have paid any Vorabpauschale.

 

Anyway, once you sell the fund, you will have to tax the profit you made with the Abgeltungsteuer of 25% (remember, we assumed your personal income tax rate is higher than 25%, so this is a good deal), plus 5.5% Solidaritätszuschlag on that Abgeltungsteuer.

Assuming (different from the years before!) that this is your only capital income in 2025, you will not have used up your 801€ tax-free Sparer-Freibetrag yet.

 

Let's put this together, in 2025 you will owe:

profit * 0.25 * 1.055 - 801€ - sum_of_all_Vorabpauschalen

= (20,000€ - 10,000€) * 0.25 * 1.055 - 801€ - 7 * 77€

= 1,297.50€ in income+solidarity tax

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Hi all,

 

Interesting discussion. Especially thanks to PandaMunich for the clarifications. I would appreciate if you could help me with a concern of my own. Im interested in 2 etfs tracking the same index, one accumulating and the other distributing. As I want to invest for the long haul, the accumulating one is more attractive. However the distributing one has much lower fees. If I go for the accumulating one and reinvest the dividends myself, which option would be more tax efficient. Lets completely ignore trading fees as I have an option of trading at low fees and piggybacking the dividends on the usual investments wouldnt cost extra. Would I pay more tax this way. Thanks

 

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there is an answer for NOW and one for -starting-Jan.1st-2018-   :-)

At least from January 1st onwards, it does not make much of a difference anymore, because accumulating investment funds and ETFs will be taxed, too.

 

Cheerio

 

I am a professional independent insurance broker, financial adviser, and authorised advertiser. Contact me.
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Thanks for the explanations on the new tax rules starting 2018. I have also read some other articles, but have trouble understanding the new tax rules. Although I have read it is supposed to simplify the rules, it is just complicating in my opinion. I read some articles but still have questions:

 

1. Am I right to understand that I will now have to pay advance taxes (Vorabpauschale) on unrealized gains (i.e., even though the capital gains are only on paper)?

 

2. What happens if I sell it for less than or same amount that I bought them for, even though there were years in between when I had unrealized gains? All the example calculations I have seen online is when the value increases over time, but if there is a black swan event like in 2008, and if I have been forced to sell them during that time, that would mean I have paid advance taxes on gains which I never realised? For example, the value of holding on 1 Jan 2018 is 10k, the value of holding on 1 Jan 2019 is 11k (so I pay €77 as advance tax for 2018) and then the next month the market falls and on 1 Feb 2019 my holding is back at 10k again, and I happen to sell it at that price to cut further losses. So I would have ended up paying €77 for 0 realized gain?

 

3. How will this affect my holding outside Germany? Till now I did not have to worry about them since I did not realise any capital gains (i.e., never sold them). But the new rule of paying advance tax on unrealised gains will now make it complicated for all expats who have holdings in their home country. And how about the classification of the different investments (e.g., pension funds which only partially invests in Equity)? What would be the advice to consolidate for simplifying this?

 

P.S : I found this article helpful for those trying to understand more http://www.finanztip.de/indexfonds-etf/investmentsteuerreformgesetz/

 

 

 

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  1. Yes.
     
  2. Going by the section "Besteuerung bei Verlusten" in that article, you don't get back the tax you paid, but instead "get" a loss that you carry forward, i.e. that you get to use in a future year.
     
  3. All your funds, worldwide, will fall under these new rules. Regarding the different fund types (the ones the German Finanzamt defines, which may not appear valid classifications to you), please see the table "Teilfreistellung" and the examples in this article: https://www.finanzwesir.com/blog/besteuerung-fonds-etf-2018
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