Preliminary lump-sum tax (“Vorabpauschale”)
The Vorabpauschale is defined by the German tax law (see §18 InvStG). It is considered income received by holders of investment funds and mainly targets a more timely taxation of future investment income. Investment income received by end users with a German tax residency must be taxed according to the German tax laws. The same also applies after the relevant users receive the German Vorabpauschale. However, in this case users would not receive any cash distributions, because the Vorabpauschale can be considered as fictitious income and the users would still need to pay the German taxes due.
It is noteworthy that for Vorabpauschale, users might not have the required liquidity because effectively no money (or income) is transferred to the end user. Tax liability for Vorabpauschale is triggered for end users with an open position in an eligible investment fund, including Exchange-traded funds (ETFs), at the end of the previous year (i.e., 31.12). Resulting tax payments become due after the fictitious receivable of the Vorabpauschale and are levied annually. This process is always triggered in the first quarter of each year for positions held in eligible investment funds of the previous year. This generally occurs in the 2nd half of January.
In general, users without a German tax residency (i.e., tax alien users) are not subject to German withholding and capital gains taxes (except for income distributed by certain German securities). They would still receive a Vorabpauschale as fictitious income according to German tax laws, however German taxes would not apply.
For this reason, tax alien users are excluded from the tax collection process for Vorabpauschale. Consequently, this process is only relevant for German tax resident end users.
What determines the Vorabpauschale?
The magnitude of the fictitious income received by means of the Vorabpauschale follows a complex set of tax rules (see, §18 InvStG for details). In general, if your funds, including ETFs, held by your end users at the end of the previous year have made a profit during the respective year (i.e., underlying prices have increased) and did not sufficiently distribute any received income to the fund holders.
A good example for this is an accumulating investment fund. These funds would not distribute any income during the holding period and respective tax payments could become postponed for a sustained period of time. As a result, those kinds of funds would be subject to a Vorabpauschale, which would be considered taxable income and consequently is (pre-)taxed although no effective sale or cash inflow has happened. Respective tax collections can be considered as a prepayment and need to be subtracted during the calculation of the taxable profit during a future sale transaction.
The amount of the Vorabpauschale also depends on the general interest rate level. Specifically, the base rate, a value announced by the German Ministry of Finance at the beginning of the year. In case, the base rate is null or even negative, as has been the case for a couple of years in the past, the Vorabpauschale would also be null. Accordingly, the full Vorabpauschale process was suspended and the end-users did not have to pay any taxes during those times - even if their fund investments had made a profit in the previous year.
The Vorabpauschale itself is not the tax you have to pay. Instead, it amongst other things determines the value on which the tax is levied. There is no need for the end-user or the client to run the necessary calculations. The actual calculation and taxation is solely carried out by Upvest. Upvest’s clients can track the full collection process via API.
Example Vorabpauschale 2026
In this example, end users hold eligible funds at the end of the calendar year (e.g., December 31st, 2025). They will receive the fictitious Vorabpauschale for the tax year (2025) in the following January (e.g., January 2026). To calculate the magnitude of the Vorabpauschale the German Ministry of Finance has set the base rate at 2.53% for the calendar year 2025.
If an accumulating ETF held by a German tax resident end-user has increased in value during 2025, this user would receive a corresponding Vorabpauschale at the beginning of 2026. In this case, tax payments on the received (fictitious) income would become due and a tax collection process would be triggered by Upvest.
Tax collection processes are always triggered in bulk, i.e., not for single investment funds but for the majority of funds at the same time. To prevent any surprises, Upvest will closely coordinate with its clients in advance of starting the collection process, so that clients can make sure that their Live systems are properly tested and for the Live run.
In the 2nd half of January 2026, Upvest collects the outstanding taxes on behalf of its users via Sell-to-Cover orders. In this case, Upvest sells a portion of the underlying security (equal to the outstanding tax revenue plus a 10% buffer) and uses the net proceeds to cover the taxes due.
The Vorabpauschale is levied against the individual's position at end user level. Depending on the individual’s personal tax situation, the taxes due on Vorabpauschale could be fully compensated for by existing tax exemptions, resulting in a net tax payment of EUR 0.00, resulting in a so-called 'reporting-only case'.