German Election #9: Corporate tax plans in the coalition agreement of the new German federal government

While the SPD's election manifesto focused primarily on using tax incentives to boost corporate investment, the CDU/CSU's declared goal was to substantially reduce the income tax burden on German companies (at least those organised as corporations). The coalition agreement now combines both approaches: the ‘investment booster’ for the years 2025-2027 and, subsequently, from 2028 onwards, the gradual reduction of corporation tax from the current 15% to 10% in 2032.

To encourage investment, the coalition agreement adopts the SPD’s proposal to reintroduce degressive depreciation for equipment investments (“degressive AfA für Ausrüstungsinvestitionen). Companies will be able to deduct 30% of an asset’s remaining book value each year, but only for assets acquired or produced between 2025 and 2027. The most recent law allowing 20% degressive depreciation for movable assets expired on 31 December 2024. Degressive depreciation leads to higher deductions during the early years of an asset’s useful life, providing a present-value advantage for taxpayers with sufficient tax base. The planned gradual reduction in corporation tax from 2028 onward could further incentivise businesses to bring forward investments, taking advantage of the current higher tax rate. While degressive depreciation can stimulate investment to some extent, it remains to be seen whether this measure will be effective enough to address the current sluggish growth.

It remains unclear which assets will actually qualify as equipment investments, as  the term is not defined in current German tax law. In any case, movable tangible assets (eg machinery, operating equipment) are likely to be covered. It would also make sense to give preferential treatment to investments in digital assets, such as software, furthermore, it should make no difference whether new or used assets are purchased.

The corporate income tax cut was a key tax policy point for the CDU/CSU and represents the most significant corporate tax measure in the coalition agreement. Corporate income tax is to be reduced by one percentage point each year from 2028 until it reaches 10% in 2032. According to reports, this tax cut was a particularly controversial point of discussion in the coalition negotiations. The CDU/CSU has now prevailed in the home stretch. According to the coalition agreement, the aim is to combine the legislative procedures for the investment booster and the corporation tax cut; this could in principle be part of a package of measures that could already be passed in 2025. However, despite the explicit link to the stimulus package in the coalition agreement, the SPD continues to view the reduction in corporation tax critically. Due to the general financing reservation, the budget situation and the budget negotiations still ahead (expected to take place from May 2025 until at least late summer), it is uncertain whether the tax cut will actually be presented and passed together with the investment booster or at a later date. This could potentially be one of the first points of contention in the new coalition.

An income tax cut for small and medium incomes (and therefore more for private individuals than for businesses) is also on the cards from the middle of the legislative period.

The new coalition has promised an expansion of taxation regardless of legal form for businesses. This is to be achieved through ‘significant improvements’ to the retained earnings tax relief (Section 34a of the Income Tax Act – "Thesaurierungsbegünstigung”), which allows lower taxation of retained earnings of certain partnerships, and the election for certain partnerships to be subjected to corporation instead of income taxation (check-the-box election under sec. 1a Corporate Income Tax Act). The coalition also plans to examine, starting in 2027, whether all newly established businesses, regardless of their legal form, can opt to be taxed as a corporation on their commercial income. These plans are intended to make the desired reduction in corporation tax available to small and medium-sized enterprises (SMEs), which are often structured as partnerships or sole proprietorships.

Both the retained earnings relief as well as the ‘check the box’ election are currently of little or no practical significance. There is generally no real need for such regimes for larger businesses which are typically structured as corporations or corporate groups. For SMEs, the current options are often too complex to be considered more often in practice. Due to the need for restrictions to prevent undesired status improvements or abuse and the frequently required fictions, comparable regulations will always be fundamentally complex. It is therefore not surprising that the coalition agreement is silent on what the desired improvements to the relevant tax framework might look like in concrete terms.

The coalition agreement contains specific reform proposals in the area of trade tax, the second major German business tax next to corporate income tax, the rates of which can in principle be determined by the municipalities: The increase of the minimum trade tax rate from 7% to 9.8% and the prevention of ‘nominal relocations to trade tax havens’ by taking ‘all available administrative measures’.

The increase in the minimum trade tax rate from 7% to 9.8% is likely intended to counteract further tax rate competition in this area. However, there has been a recent trend towards increasing trade tax rates, particularly in smaller municipalities with formerly lower rates, e.g. due to the de facto pressure resulting from municipal financial equalisation rules. In any case, there has been no sign of a race to the bottom recently. Currently, only about ten municipalities with more than 10,000 inhabitants are likely to be affected, with Leverkusen being the largest and most economically significant city with a current assessment tax rate of 8.75%.

The coalition agreement leaves open what administrative measures are to be taken against ‘nominal relocations to municipalities with low trade tax rates’. Under current trade tax law, a business must already maintain a permanent establishment, such as an office, in the low-tax municipality from which the day-to-day business is conducted. This issue has also been a frequent focus of tax audits in the past, and it is possible and common practice to request evidence regarding the actual place of management. The introduction of rigid formal substance or documentation requirements would not be a practicable measure in this respect. The economic requirements are too diverse; for example, asset-managing companies (such as financial holdings) often only require minimal personnel and material resources to perform their intended functions. The statement in the coalition agreement may turn out to be nothing more than a legal policy statement intended to call for (even) stricter controls by the authorities in this area.

The statements made by the future coalition government on the global minimum tax (Pillar 2) are somewhat contradictory at first glance: the heading of the relevant section refers to the ‘suspension of the global minimum tax’, but it is then made clear that the coalition parties remain committed to the global minimum tax for large corporations and wish to support efforts at international level to simplify the minimum tax on a permanent basis. The coalition agreement therefore does not pick up on demands of the conservative finance ministers of several Länder, who had previously advocated a temporary suspension of the minimum tax. However, as the Pillar 2 rules have been agreed at OECD level and harmonised within the EU by Directive 2022/2523, substantive adjustments can only be made at such international or European level, respectively.

The statements in the coalition agreement essentially address two developments:

• US President Trump announced in an executive order on the first day of his second term that the United States would not implement the ‘Global Tax Deal’ and would take ‘retaliatory measures’ against countries that impose ‘discriminatory or extraterritorial taxes’ on US companies. This, in particular, applies to the Undertaxed Payment Rule under the Pillar 2 rules, which could in principle allow increased taxes to be imposed on domestic (e.g. German) subsidiaries of US headed groups if and to the extent that the US, as the jurisdiction of the parent company, does not implement a regime comparable to Pillar 2 and the effective tax rate is below 15%. There are now various legislative proposals on this in the US Congress, namely (i) the ‘Defending American Jobs and Investment Act’ of 21 January 2025 (introduction of a new 26 IRC § 899, which provides for an increase in tax rates and treaty overrides in relation to relevant countries) and (ii) the ‘Unfair Tax Prevention Act’ to extend the US BEAT regime (Base Erosion and Anti-abuse Tax). However, there is also discussion as to whether ‘retaliatory taxes’ could already be imposed by executive order of the US president on the basis of current US tax law (26 IRC § 891). The Undertaxed Payment Rule is currently suspended in relation to the US (due to the nominal tax rate of more than 20% applicable there) until 2025 (for fiscal years ending in calendar years) due to the corresponding temporary safe harbour. It is unclear what will happen then. According to reports, discussions with the US delegation at the OECD are continuing despite the presidential order. One possibility would be the permanent implementation of the safe harbour or recognition of the US GILTI rules as equivalent to Pillar 2 (possibly coupled with a switch in the rules from a global to a ‘per country’ approach).
• Initial experience with Pillar 2 has shown that the additional requirements for determining the relevant tax base, for reporting and compliance place a significant burden on affected companies – often disproportionate to the additional tax revenue generated. In this regard, it would indeed be appreciated if Germany could explore possibilities for significant simplification in this area with its international partners, particularly at the OECD level.

In terms of procedure, there is to be a gradual transition to self-assessment for corporations and partnerships. This would mean that in future, tax returns would be equivalent to a tax assessment notice (as already is the case currently with VAT, for example), which would then be audited by the tax authorities, largely automatically. In addition, the coalition agreement provides for a gradual obligation to submit tax returns digitally.

The coalition agreement also mentions the following aspects of corporate taxation:

• Solidarity surcharge: The solidarity surcharge is to remain in its current form; the SPD prevailed in the negotiations on this point. This falls short of the demands made by the business community.
• Research allowance: The subsidy rate and the assessment basis for the tax research allowance are to be significantly increased. 
• Conversion of import VAT to the clearing model: Germany is currently one of the few European countries to apply the so-called deferral model, which can result in liquidity disadvantages in case that the payment and refund dates for import VAT are aligned. The clearing model avoids such liquidity disadvantages by generally allowing the tax liability and refund to be offset against each other.
• Electricity tax: The electricity tax is to be reduced to the European minimum level as quickly as possible (reduction of at least five cents/kWh). In addition, special relief for energy-intensive companies is to be introduced within the framework of state aid law. 
• Uniform corporate tax base: The coalition has declared its support for a uniform corporate tax base within the EU; however, the project is unlikely to gain traction in the short to medium term.
• Financial transaction tax: Finally, the introduction of a financial transaction tax at European level is also to be supported.