Taxation of Foreign Funds in Germany: What Investors Need to Know

A foreign mutual fund is an investment fund that was set up under the law of another country. Typical examples are funds or ETFs from Luxembourg, Ireland or Switzerland, which can also be regularly traded on the stock exchange and are therefore publicly accessible to the general public. These funds are attractive for German investors because they offer access to international markets and often enable broad diversification with manageable investment sums.

A foreign special investment fund is not open to every investor but is often only available to so-called institutional investors. These shares are not traded on the stock exchange. In practice, we often encounter them as venture capital funds or hedge funds. Such investment vehicles are often based in the Cayman Islands, Malta or the USA and are set up as a master-feeder structure. Such investment vehicles are also often used for investments in the crypto sector. Whether such a special investment fund exists must be checked on the basis of a number of different criteria according to the respective fund prospectus and the fund's investment regulations.

The Investment Tax Reform Act (Investmentsteuerreformgesetz, InvStRefG) has fundamentally simplified the taxation of investment funds. Since 2018, it no longer matters whether a fund was set up in Germany or abroad. All funds are taxed according to the same principle.

Key points of the reform:

• Domestic dividends in the fund are subject to 15 percent corporation tax - regardless of the fund's domicile.
• Investors must pay flat-rate withholding tax (25 percent plus solidarity surcharge and, where applicable, church tax) on their income from fund shares.
• Partial exemptions apply for certain types of funds (e.g. equity funds, mixed funds): For equity funds, 30 percent of income is tax-free, for mixed funds 15 percent.

In the case of distributing funds, income is paid out directly to investors and is subject to withholding tax. In the case of accumulating funds, the income is reinvested in the fund. Nevertheless, a so-called advance lump sum applies: even without actual distribution, notional income is taxed annually.

If fund units are held in a foreign custody account, the foreign custodian bank does not pay German withholding tax. Investors must declare the income in their tax return and pay the tax themselves. The advance lump sum must also be calculated manually according to a fixed formula.

If a foreign fund does not report tax data to the German authorities, a flat-rate and often disadvantageous taxation may apply. This may result in tax disadvantages for the investor. The fund prospectus should be used to check whether and to what extent a partial exemption on income may apply.

From 2025, exit taxation will also be extended to investment fund units. Anyone moving abroad with substantial fund units or transferring units free of charge must expect to be taxed on unrealized capital gains in the future. This increases tax complexity and requires foresighted planning.

• Check whether your foreign fund is reportable for tax purposes. Funds that are not subject to reporting may be subject to flat-rate and often higher taxes.
• Particular caution is required for unlisted investment vehicles. First of all, it is necessary to check whether an investment fund within the meaning of the InvStG exists at all and, in a second step, whether it is a special investment fund.
• If possible, hold listed fund units (mutual funds) in a domestic deposit account in order to take advantage of the automatic payment of withholding tax and minimize the effort involved in filing your tax return.
• If you are planning to move away from Germany, you should check at an early stage, especially in the case of special investment funds, whether your share of the fund assets is more than 1 percent or your total exposure to the fund in question is more than EUR 500,000. This threshold is quickly exceeded, particularly in the case of the aforementioned special investment funds.