Vorabpauschale: how it is calculated

Basics7 min read · updated 1 September 2026 · 4 sources

The Vorabpauschale (advance lump-sum taxation) ensures that accumulating funds in Germany cost a little tax every year, even though they distribute nothing. It is an advance payment on the later capital gain: whatever you pay tax on today through the Vorabpauschale, the tax office deducts again when you sell. For 2026, the base rate is 3.20%.

How to calculate the Vorabpauschale: the formula

The Vorabpauschale is the basic income minus distributions during the year, but at most the actual increase in value plus distributions. If the fund fell during the year, there is no Vorabpauschale. The rules are set out in § 18 of the InvStG (2016) (Investment Tax Act). The law derives the base rate from the long-term return achievable on public bonds; for 2026, the BMF (2026) (Federal Ministry of Finance) set it at 3.20%.

The idea behind it: a fund should be taxed at least as if it had distributed a risk-free rate of interest, but only if it actually earned something during the year. The factor 0.7 is a flat-rate way of not applying the full interest rate.

Example for 2026

Key rules

• Timing: the Vorabpauschale for 2026 is deemed received on the first working day of 2027; the bank then collects the tax from the settlement account.
• Year of purchase: it falls by one twelfth for each full month before the purchase. If you buy in March, you pay ten twelfths.
• Distributing funds: distributions are deducted. If the fund distributes more than the basic income, no Vorabpauschale arises.
• On sale, all Vorabpauschale amounts already taxed are deducted from the gain. Nothing is taxed twice.
• Partial exemption applies here too: 30% for equity funds, 15% for mixed funds, 60 or 80% for real estate funds.
• Negative or very low base rate: if the base rate is not positive, no Vorabpauschale arises. That was the case in 2021 and 2022.

What happens when you sell

The Vorabpauschale is not an additional tax but an advance payment. On sale, the gain is reduced by all the Vorabpauschale amounts already applied. Over the whole holding period, you therefore pay the same tax, just earlier.

The base rate in recent years

For advanced readers: what the Vorabpauschale costs in economic terms

Because the Vorabpauschale is credited on sale, its only drawback lies in the interest effect: the tax is paid earlier and can no longer keep growing inside the fund. The theory of tax planning shows how valuable tax deferral is: Constantinides (1983) derives that it pays to realise losses immediately and gains as late as possible. The deferred tax amount keeps working in the meantime. The Vorabpauschale shrinks precisely this advantage of accumulating funds, but does not remove it entirely, because it is usually well below the actual return.

In years with a high base rate and a weak stock market, the cap applies: then at most the actual increase in value is applied. A fund that falls during the year never triggers a Vorabpauschale. When interest rates rise, the annual tax burden therefore grows mainly in good stock market years.

This matters for the choice between accumulating and distributing funds: distributions are taxable in full (after the partial exemption), the Vorabpauschale only up to the capped basic income. If you have not yet used up your saver's allowance, you pay nothing on either. In that case, convenience and planning matter more (see accumulating or distributing). Research on allocating assets across accounts with different tax treatment (Dammon et al. 2004) also shows that tax-inefficient income belongs in tax-advantaged accounts wherever possible.

Common misconceptions

• “The Vorabpauschale is a new tax.” No, it merely brings forward part of the tax on the later capital gain. If you wait until you sell, it is credited in full.
• “It is charged on the entire portfolio value.” Only 70% of the base rate is applied to the value at the start of the year, i.e. 2.24% of the value in 2026, and for equity funds only 70% of that is taxable.
• “I pay even in a year with losses.” No. If the fund fell during the year, there is no Vorabpauschale, however high the base rate.
• “The saver's allowance does not apply.” It does: the Vorabpauschale is ordinary investment income and is offset against your exemption order (Freistellungsauftrag). For many savers, it therefore remains tax-free.
• “Savings plans are hit twice.” The twelfths rule applies to each purchase lot in the year of purchase. The monthly purchases of a year therefore count only pro rata.

If you save for many years, it is best to see the Vorabpauschale as a running instalment on a tax that would be due anyway. It reduces your return only through the interest effect, and at typical base rates that effect is small compared with fund costs or the choice of the right index.

How Portfolio Lab calculates it

The Backtest calculates the Vorabpauschale year by year using the official base rate (stored for 2018 to 2026, and for earlier years with an approximation if you wish): per unit, the price at the start of the year × base rate × 0.7, at most the increase in value during the year, reduced in the year of purchase for each purchase lot by one twelfth for each full month before the month of purchase. The tax is due in the following year, with partial exemption, saver's allowance and loss offset pots; on sale, the Vorabpauschale amounts applied reduce the gain. All funds are treated as accumulating funds, because the prices reinvest distributions. More in the tax methodology.

This article explains a method; it is not investment or tax advice. Worked examples are simplified and rounded. All terms in the glossary.