Tax advantages of accumulating and distributing funds across Europe

Choosing between accumulating or distributing funds is among the first choices investors in Europe make. The appropriate option may reduce your (tax) costs and increase your returns.

This post explains how to understand which dividend distribution policy leads to lower taxes using examples of specific countries.

My previous post on the topic explains that the choice boils down to 4 factors: tax treatment, tax bureaucracy, transaction costs, and availability of funds. Your choice of distribution policy is a trade-off between those factors.

This post focuses on the tax treatment aspect. 

To make things simpler, I will focus on a single investment pattern. I will discover which distribution policy (i.e., accumulating vs. distributing) leads to lower taxes when reinvesting dividends (i.e., no selling or withdrawing) over a long period. A different example could lead to different results. But if you understand this example, you should be able to figure out any other.

I found five different scenarios of tax treatment when it comes to comparing the tax costs of accumulating and distributing funds. To know which distribution policy is more favorable, you only have to identify which scenario of tax treatment your fiscal residence has.

The five scenarios of tax treatment are the Portugal case, the UK case, the Ireland case, the Germany case, the Netherlands case. Each scenario has the name of one country that has those characteristics. Multiple countries may contain the characteristics of any scenario.

The Portugal case

This scenario is for countries that have capital gains and dividends taxes. It is the simplest scenario.

capital gains tax is a tax paid on the profits of the sale of your investments. For example, if you buy a share for €100 and sell it for €300, your profit is €200. If the capital gains tax rate is 25%, you will pay €50 (25% of €200) in taxes.

dividend tax is a tax paid on the dividends you receive from your investments. For example, if you receive a dividend of €30 and the dividend tax rate is 25%, you will pay €7.5 in taxes (25% of €30).

In these countries, accumulating funds have lower taxes because they fully reinvest dividends without triggering dividend taxes. These dividends are converted into capital gains which are only taxable at the end of the investment period. This delays taxes which leads to higher investment returns because more money is compounding.

Some of the countries that fit this scenario are Portugal, Belgium, Spain, Italy, France, Slovenia.

Most countries in Europe fall under this scenario.

The UK case

This scenario is for countries with a capital gains tax, a dividend tax, and a deemed tax for dividends.

deemed tax is a tax on something that didn’t happen, but it is taxed as if it had happened. The deemed tax for dividends taxes the dividends that accumulating funds reinvest within the fund as if they had been distributed to you.

The goal of a deemed tax is to prevent accumulating funds from causing lower taxes, as explained in “the Portugal case”.

The implementation of deemed taxes varies according to the country, so you have to understand the details to see which type of fund causes lower taxes.

For example, the UK’s deemed tax on dividends taxes all “accumulating fund dividends” at the same tax rate as “normal dividends”. Therefore, in the UK, accumulating and distributing funds have the same tax costs.

Austria also has a deemed tax on dividends. But Austria only taxes 60% of the reinvested dividends of accumulating funds while it taxes 100% of the dividends of distributing funds. Therefore, in Austria, accumulating funds lead to lower taxes.

Some of the countries that fit this scenario are the UK, Austria, Switzerland.

This scenario is the second most common in Europe.

The Ireland case

This scenario is for countries with a capital gains tax, a dividend tax, and a deemed tax for capital gains.

deemed tax for capital gains is a tax paid on profits of your investment even if you haven’t sold them (i.e., the profits are unrealized).

Ireland has a deemed tax on capital gains – called deemed disposal – where your profits are taxed every eight years. The deemed disposal tax affects accumulating and distributing funds similarly. But accumulating funds still pay lower taxes because dividends are reinvested without paying the dividend tax. The difference between accumulating and distributing funds is not as large as in “the Portugal case”, but it is still meaningful.

Ireland is the only country that fits this scenario.

The Germany case

This scenario is for countries with a capital gains tax, a dividend tax, a pre-payment tax, and a tax-free allowance for investments.

pre-payment tax is an annual tax calculated based on a portion of your fund’s unrealized capital gains. Payments to this tax may deduct your capital gains when you sell your shares, so you don’t get taxed twice. With this tax, you are sort of doing pre-payments of your capital gains tax while you hold shares of the fund.

In Germany, this tax (i.e., Vorabpauschale) has the following attributes:

  • The dividends you receive, reduce the taxable amount. In practice, usually distributing funds don’t pay the pre-payment tax;
  • The maximum taxable amount is the total unrealized capital gains for that fiscal year. Therefore, you don’t pre-pay taxes in years with unrealized losses;
  • The maximum taxable amount is the total capital gains of a competing risk-free investment. In 2019, this risk-free investment had a growth rate of 0.52%. This growth rate is significantly lower than the growth rates of equity investments (in good years). Therefore, this pre-payment tax is often lower than if the dividends had been distributed and triggered dividend taxes.

That is all you need to know about Germany’s pre-payment tax for this article. A detailed explanation of how to calculate it is out of the scope of this article, but I will write one soon.

When considering the pre-payment tax, dividend tax, and capital gains tax, both distribution policies lead to a similar amount of taxes. The main difference is that accumulating funds observe tax deferral: because of the pre-payment tax, accumulating funds pay lower taxes during the holding period but pay higher taxes upon sale. This tax deferral may lead to slightly higher returns because more money can compound.

With a tax-free allowance for investments, you only pay taxes when your gains exceed that allowance. For example, if the tax-free allowance is €700 and your total gains (dividends + capital gains + pre-payment taxable amount) for a year were €500, then you don’t pay taxes. If the tax-free allowance is €700 and your total gains were €1000, you pay taxes just for €300 of your gains.

The unused tax-free allowance of a fiscal year is not available in a different fiscal year. Therefore, you should use as much of this allowance as possible because these gains are tax-free.

In Germany, the fastest way to consume this allowance is to invest in distributing funds. Because these funds distribute dividends, they lead to a higher amount of potential taxable gains, which will be tax-free because of the allowance. After the allowance is consumed, you should consider accumulating funds because they enjoy tax-deferral provided by the pre-payment tax.

Germany is the only country that fits this scenario.

The Netherlands case

This scenario is for countries with a wealth tax. A wealth tax is a tax on the total value of all your assets (e.g., investments, property, savings) at a specific date. If your assets are worth €1,500,000 on December 31st and the wealth tax rate is 0.3%, you would pay €4,500 in taxes.

A wealth tax applies to all assets equally (e.g., investments, cash, property). With a wealth tax, both distribution policies would cause the same amount of taxes.

The Netherlands, where the wealth tax replaces all investment taxes (e.g., capital gains, dividends), fits perfectly into this scenario.

Some countries (e.g., Spain) only introduce wealth taxes after some threshold of wealth. Therefore, they would be a hybrid between this and other scenarios.

Some of the countries that fit this scenario are the Netherlands, Spain (after a threshold), Norway (after a threshold).


Please remember the following aspects of these scenarios:

  • I only considered an example of an investment with reinvested dividends. A different example may behave differently. But you can use what you just learned to extrapolate how the other examples would work;
  • Taxes change all the time. For example, Germany’s ETF taxation changed in 2018. You should regularly check whether the same assumptions still hold.

How to find out which distribution policy is better for your fiscal residence?

The scenarios I described cover all the alternatives I found. Therefore, to find out what applies to your specific country, you can take the following steps:

  • Check the details of the following taxes for your own country: dividend tax, capital gains tax, deemed tax, tax allowance, pre-payment tax. Some of these may not exist in your country
  • Read all the scenarios I explained before;
  • Find the scenarios which are the most similar to your tax situation. You should go from most to least restrictive cases. You can do that by following the order outlined below:
    • The Germany case – only present in Germany;
    • The Ireland case – only present in Ireland;
    • The Netherlands case – few countries in Europe charge a wealth tax. And only the Netherlands relies on the wealth tax as a replacement for capital gains/dividends tax.;
    • The UK case – few countries in Europe charge deemed taxes. This scenario is the second most common.;
    • The Portugal case – if your case does not fit any of the others, it can only fit here. This scenario is the most common.;
  • Check which distribution policy is better for the selected scenario according to what I explained before

“Official sources” won’t tell you “invest in distributing/accumulating funds because they lead to lower taxes”. You need to understand how the different taxes work so you can deduce which dividend distribution policy is better for you.

You can learn more about taxes in my “Guide to taxes for index investors”. This guide is an in-depth video where you will learn about the fundamentals of taxes so you easily find about the specific details for your specific case.

Here is what Andreas V. from Slovakia had to say about one of the materials that is the basis for that guide:

“Your site was the go-to source for making the basis of my investment research. I’m all new to this, and it helped enormously, especially for my psychological well-being and self-confidence, knowing the unknowns and having a plan or a checklist to get the necessary information when starting.” – Andreas V. (Slovakia)

That guide is one of the add-on materials of my book “Introduction in index funds and ETFs”.

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