If you invest in ETFs and investment funds, you often pay considerably less tax in Germany than on interest or individual shares. The reason is the partial exemption (Teilfreistellung). It is set out in the Investment Tax Act and has applied since 2018. Here is how it works and what the advance lump sum has to do with it.
Why does the partial exemption exist?
Since the 2018 investment tax reform, funds pay tax themselves on certain income, mainly 15 % corporation tax on German dividends and rents from German property. So that this income is not taxed twice, a flat share of fund income is tax-free for the investor. The flat rate applies regardless of whether the fund actually holds German shares.
The rates for private investors
§ 20 InvStG sets the following partial exemptions for private investors:
1. Equity funds (at least 51 % equities): 30 % tax-free
2. Mixed funds (at least 25 % equities): 15 % tax-free
3. Real estate funds (at least 51 % property): 60 % tax-free
4. Real estate funds with at least 51 % foreign property: 80 % tax-free
Bond ETFs, money market funds, commodity ETFs and other funds get no partial exemption. The category of a fund is stated in its investment terms, and your bank classifies it accordingly.
Partial exemption applies to all fund income
The exemption applies to distributions, to gains from selling fund units and to the advance lump sum. It also works the other way round: losses from funds only count at 70 % (for equity funds).
Worked example: €10,000 gain
Suppose you sell fund units with a gain of €10,000 and your €1,000 saver's allowance is still unused. With an equity ETF, €7,000 is taxable, €6,000 after the allowance, and the tax is €1,582.50. With a mixed fund it is €1,978.13, with a real estate fund €791.25 and with a foreign real estate fund €263.75. A bond ETF without partial exemption costs €2,373.75, exactly as much as €10,000 of interest.
The 2026 advance lump sum
Accumulating funds do not distribute anything. To ensure that a minimum amount is still taxed each year, there is the advance lump sum under § 18 InvStG. It is calculated as follows:
1. Base return = redemption price at the start of the year × base rate × 70 %
2. The base return is capped at the gain in value during the year plus distributions. If the price falls, there is no advance lump sum.
3. Distributions are deducted.
4. Partial exemption is applied to the remainder.
For 2026 the base rate is 3.20 %. An equity ETF worth €50,000 on 1 January 2026 gives an advance lump sum of €1,120, of which €784 is taxable. If the saver's allowance is used up, the bank debits about €206.78 on the first working day of 2027. Keep some cash in the settlement account for this. The advance lump sum paid is deducted from the gain when you later sell, so it is a prepayment, not an extra tax.
What does this mean for investing?
For long-term investors, partial exemption makes equity ETFs attractive from a tax point of view. With the same pre-tax return, more is left after tax than with interest products. The ETF savings plan calculator shows how much this adds up over decades, and the compound interest calculator shows the compounding effect before tax. Tax alone should never be the main reason for an investment decision, though.
Check with the calculator
In the capital gains tax calculator you choose the fund type and see how much of your fund income stays tax-free. If you enter the value of accumulating funds at the start of the year, the calculator also estimates the advance lump sum for 2026. All figures are non-binding and not investment or tax advice.