German election: what do the coalition developments mean for global and domestic tax policy?

The German federal election on 26 September 2021 marked the beginning of the end of Angela Merkel’s time as German Chancellor. However, the outcome of the election is still unclear, with no single party yet able to claim leadership of the Bundestag – although negotiations have now begun between the Social Democrats, the Green Party and the Liberals which could result in the so-called ‘traffic light’ coalition (in reference to their customary political party colours).

In our latest podcast, I was delighted to be joined by David Issmer, Freshfields’ Head of Public Affairs in Germany, and German tax partners David Beutel, Philipp Redeker and Georg Roderburg to discuss the German election results and what the ‘traffic light’ coalition might mean for both global tax policy and the domestic German tax landscape as well as the potential implications for businesses with presence in Germany.

It is anticipated that the coalition negotiations could take many weeks, even months, to reach a conclusion – the aim of wrapping up the negotiations and voting in a new Chancellor before the end of December this year seems ambitious. This lengthy coalition forming process is common in mainland Europe, whereas other jurisdictions are not accustomed to this type of process – for example, in the UK, the 2010 Conservative/Liberal Democrat coalition government was formed in under a week.

The proposed German ‘traffic light’ coalition brings together three very different political parties: the Social Democrats are a traditionally left-wing party whereas the Free Democratic Party (the FDP) is a liberal political party (hence are also referred to as the Liberals) that traditionally advocates low taxes and economic freedom. The Green Party is a relatively young party that, as would be expected, is primarily committed to protecting the environment and the climate.

So far it seems that the exploratory discussions between these three parties have been quite congenial. However, the mood is expected to change once they move to detailed discussions on some of the more thorny issues, including how to fund various proposed large scale projects, including domestic infrastructure expansion and measures to combat climate change. This particular point has raised concerns that significant changes in German fiscal policy could be on the horizon, with consequential potential risks for businesses with a presence in Germany.

Starting with an international outlook, an initial question is whether the possible permutations of the German coalition government could impact on global tax policy – in particular the proposals currently being put forward at both the OECD and EU level. The team considers whether the new German coalition government will continue to support these wide-ranging proposals for global tax reform, including the introduction of a global minimum corporate tax rate.

The possible impact on the tax landscape for inbound investment is also considered with the team discussing whether Germany could move to either introduce more competitive corporate tax rates to attract investment or, to the contrary, increase corporate taxes to help fund the large scale projects referenced above. An alternative to tax rate changes is modifications to the tax base, including proposals to encourage investment into green infrastructure and equally discourage activities that are contrary to climate change objectives. This is expected to be a key area of focus for the coalition discussions.

It has also been suggested that a new German wealth tax could be introduced as a means of helping to balance the books. The team discusses the likelihood of this happening as well as possible changes to other taxes, including inheritance tax and gift tax, to support this aim.

The team at Freshfields will continue to monitor the coalition discussions closely as they progress over the coming weeks and will provide updates on any significant developments.

Our podcast is available here.

For the latest developments on global tax reform proposals see our dedicated web-pages on the OECD two-pillar proposals and the EU BT 21 proposals.