Understanding the pre-determined tax basis (Vorabpauschale)

In January 2026, the pre-determined tax basis (Vorabpauschale) for investment funds is once again likely to come as a surprise for many investors – even though it has been an integral part of investment taxes in Germany since 2018.

It is calculated using the base interest rate, which has, in the past, often been a negative number. As a result, the pre-determined tax basis only came into effect again at the start of 2024, levied on taxes for the previous year, 2023.

But what is the pre-determined tax basis, and how does it work? This article explains what you need to know.

When is a pre-determined tax basis payable on funds?

The pre-determined tax basis is applied when your shares have risen in value, even if you have not received a payout. That means that even investment income that has been reinvested within the fund will be subject to tax.

Although this regulation applies above all to reinvestment funds, the pre-determined tax basis also applies to funds that pay dividends if the dividends are lower than the pre-determined tax basis as calculated. This ensures that returns are not deferred and remain untaxed for many years until you sell your shares.

How the pre-determined tax basis is calculated

The pre-determined tax basis is calculated as notional income and applies to all types of investment funds, regardless of their risk profile or actual expected returns. This notional income is calculated using the base interest rate and the value of your shares at the beginning of the year. The base interest rate is set each year by the Federal Ministry of Finance and is based on long-term returns achieved by federal government bonds.

Important: the pre-determined tax basis does not represent the actual taxes owed. Instead, as notional income, it is used to calculate the flat rate withholding tax. Capital gains tax of 25 percent plus the solidarity surcharge and, where applicable, church tax is then levied on the calculated pre-determined tax basis.

Is the pre-determined tax basis offset when shares are sold?

If you sell your shares at a profit, the pre-determined tax basis you have already paid is offset against any profit you make by selling the shares when calculating the tax you owe. This means that the amount you have already paid in tax through the pre-determined tax basis is taken into account. Once you sell your shares, this amount is then deducted from the taxes you owe on the profits from the sale. So, there is no double taxation.

If you sell your shares at a loss, however, the amount of tax paid on the pre-determined tax basis is not reimbursed. This means that even if the funds lose value after you have paid the pre-determined tax basis, and in fact even if you register a loss, you do not get back any of the tax you have already paid. This also applies if you hold on to your shares: You could, for example, be required to pay the pre-determined tax basis in one year when your shares are doing well. Even if the shares lose value in subsequent years, you will not be reimbursed for the taxes you have already paid.

Using an exemption order (Freistellungsauftrag)

Take the pre-determined tax basis into account when deciding where to apply your exemption order. If the pre-determined tax basis is covered by the exemption order, you will not have to pay taxes on notional income. You only have to pay taxes if your investment income exceeds the saver’s allowance amount (Sparer-Pauschbetrag).

Using an exemption order, you can instruct your bank to credit investment income up to the amount of the saver’s allowance, which is currently a maximum of 1,000 euros per year. No withholding tax will be charged on this allowance.

Non-assessment certificate (Nichtveranlagungsbescheinigung) for investment income

If you are not eligible to pay income tax due to low earnings, you are not usually subject to withholding tax and can apply for a non-assessment certificate with the tax office. The current basic tax allowance (Grundfreibetrag) is set at 12,348 euros per year (in addition to the itemised deduction allowance of 36 euros).

If you send this certificate to your bank, they are allowed to pay you all interest and other capital income – including the notional income from the pre-determined tax basis – in full, without any tax deductions. The non-assessment certificate is particularly useful if you have already exceeded the saver’s allowance amount.

You can find an application form for a non-assessment certificate, usually valid for three years, at your local tax office or on the German tax authority’s website.