Germany plans for tax reform

Germany’s new coalition government comprised of the CDU/CSU and SPD recently presented its coalition agreement, including details of proposed tax reform in the country.  

Following endorsement by SPD members, Friedrich Merz was elected Chancellor on 6th May and no time has been wasted as he seeks to outline potential changes to tax in Europe’s largest economy.  

While the agreement covers a wide range of economic and social reforms, its tax policy proposals stand out as the clearest signal of intent to boost business investment and restore Germany’s competitive edge. 

Reducing tax burden 

At the heart of the coalition’s economic agenda is a commitment to reducing the tax burden on businesses. 

The government plans to lower the corporate tax rate by one percentage point, implemented in five annual steps starting January 1, 2028. 

The coalition also promises improvements to Germany’s “option model”, allowing partnerships to be taxed like corporations, and enhanced tax benefits for retained earnings.  

These measures aim to offer legal form-neutral taxation, helping small and medium-sized businesses better compete with large corporations. 

In addition, a 30% special depreciation allowance for equipment investments will apply from 2025 to 2027, providing strong incentives for capital expenditure and modernisation in the short term. 

Support for business through tax relief 

To ease the operational cost burden, the coalition proposes a reduction in the electricity tax by at least five cents per kilowatt hour. This is particularly important for manufacturing and energy-intensive sectors. 

In the catering industry, a uniform VAT rate of 7% is planned, offering ongoing relief after temporary COVID-era reductions. 

The coalition also supports simplifying the tax system more broadly, aiming to reduce bureaucracy and compliance costs. Though not yet detailed, this could include digitalisation of tax processes and streamlined reporting obligations. 

Other economic priorities 

While tax reform takes centre stage, the coalition agreement also addresses labour market flexibility, faster immigration pathways for skilled workers, digital infrastructure expansion, climate-neutral energy, and housing support. 

It proposes cutting red tape for company formation and scrapping the national supply chain law in favour of simpler EU rules. 

However, most of these measures remain subject to funding availability, which casts some uncertainty over the scale and speed of implementation. 

Outlook 

While ambitious, the entire agreement is subject to available funding. For now, businesses should prepare for regulatory easing, digital acceleration, and tax changes on the horizon.