What are the key business tax measures in the German ‘traffic light’ coalition agreement?

The results of the German federal election in September this year provided the Social Democrat Party with a narrow victory and both the Green party and the Free Democratic Party (the FDP) also made gains compared to the previous federal election. This resulted in the possibility of a so-called ‘traffic light’ coalition in reference to their customary political party colours. In our previous podcast, recorded shortly after the election result, we discussed what this composition of German coalition government could mean for both global tax policy and the domestic German tax landscape.

Since that time, the formal negotiations between these three parties have successfully concluded with the signing of a coalition agreement. This means that the German traffic light coalition has become a reality and Olaf Scholz has been sworn in as the new German Chancellor.

In our follow-up podcast, I was delighted to be joined again by David Issmer, Freshfields’ Head of Public Affairs in Germany, and German tax partners David Beutel, Philipp Redeker and Georg Roderburg to discuss the detail of the key tax policy measures included in the now finalised coalition agreement and whether the predictions made in our previous podcast were correct.

The team highlights that the new German coalition government brings together three political parties that advocated very different tax policy agendas during their respective election campaigns: the Social Democrats and Green party advocated tax increases, whereas the FDP proposed tax cuts. It is discussed how a political compromise appears to have been reached on this area of impasse between the parties and what this means in terms of possible changes to the German tax code, including whether any changes to the headline rates of corporate tax and income tax are expected and whether our prediction that Germany will continue to support the OECD’s “two-pillar” proposals for global tax reform was correct.

The team also explains that the coalition agreement proposes some taxpayer friendly measures, including a new temporary ‘super-depreciation’ for investments in climate protection and digitalisation. However, alongside these proposals, a clear theme in the agreement is a commitment to combat tax evasion, close loopholes and put an end to aggressive tax planning. Proposals to tackle these issues means that some level of changes to the German domestic tax landscape are on the horizon. The team provides further detail on what these changes may entail, including:

• further reform of the German real estate transfer tax (or ‘RETT’) rules;
• adding an ‘interest ceiling’ to the existing interest barrier rules;
• proposals to ensure that payments to non-German recipients are appropriately taxed; and
• the introduction of domestic mandatory tax disclosure and reporting requirements (aka ‘domestic DAC6’).

The proposals in the coalition agreement aimed at modernising and digitalising German tax proceedings and audits are also discussed, with the goal of speeding up tax audits and reducing periods of uncertainty generally viewed as a welcome development for taxpayers.

You can listen to our new podcast here.