What you should know about taxes on funds

Ongoing costs of a mutual fund reduce investor returns. But: How are these costs actually assessed for tax purposes?

Investors should be careful when completing the KAP annex to the tax return.

FInvestors know: ongoing fund costs reduce the investor’s return. A cost factor are often portfolio commissions that are charged to funds. This is remuneration that banks or brokers receive from the fund company for maintaining customer relationships. The commission is usually based on the value of the fund units held in the portfolio. This is why this is also known as the so-called continuity commission.

Portfolio commissions are partly passed on to the fund investors. In the opinion of the Federal Ministry of Finance, this payment should be treated like fund income for tax purposes. As a result, it is subject to the withholding tax and the solidarity surcharge for the investor. In this case, the tax rate is a uniform 25 percent. The burden of the 25 percent withholding tax should usually be an advantage for the investor. Because then the usually higher personal tax rate does not apply.

A new legal situation for fund taxation has been in effect since the beginning of 2018, which also affects portfolio commissions. Achieved fund income can now be partially tax-free (so-called partial exemption). Distributions from an equity fund are 30 percent tax-free for private investors. Equity funds are funds that are more than 50 percent continuously invested in stocks. In the case of mixed funds (at least 25 percent in shares), the partial exemption is 15 percent. The tax authorities have now made it clear that the partial exemption also applies to portfolio commissions that have been reimbursed. The partial exemption rate that applies at the time of payment is decisive.

Investors should check whether the partial exemption for tax withholding has been taken into account when the portfolio commission is paid out by the bank. If this is not the case, a partial tax refund can be obtained by declaring it in the tax return in Appendix KAP. If no withholding tax was withheld at all, the payment must be declared in the KAP-INV annex.

The author is a tax advisor at KPMG in Frankfurt.