Germany’s Coalition Agreement and Tax Law – A Document to Fiscal Pragmatism

In the area of tax policy, the designated coalition is focusing on a strategy of selective change while maintaining fiscal stability. The agreement neither provides for a major reform of the tax structure nor calls for drastic interventions in the existing system. The goal is to provide targeted relief, tax investment incentives for companies, and a moderate digitalization of the administration. It is noteworthy that some of the planned changes are not scheduled for implementation until two to three years from now, and that all measures are subject to the “availability of funding”.

Income Tax: Relief with a Delay, Selective Adjustments

Income tax relief for small and medium incomes is planned for the middle of the legislative period. However, the agreement provides no details regarding either the rate structure or the volume of relief.

The solidarity surcharge remains unchanged. The unsuccessful constitutional complaint against it (decision by the German Federal Constitutional Court on March 26, 2025) has likely contributed to this outcome.

Further individual measures include:

• Overtime exceeding collectively agreed full-time hours is to be exempt from taxation.
• Collectively agreed weekly working hours of 34 hours or more will be considered full-time; otherwise, 40 hours apply.
• Employer bonuses for extending part-time work to full-time positions will be tax-privileged.
• Employees who continue working voluntarily after reaching the statutory retirement age are to receive up to EUR 2,000 per month, tax-free.
• The commuting allowance will be increased to EUR 0.38 per kilometer, starting from the first kilometer, effective January 1, 2026.

Corporate Income Tax: Long-Term Perspective Instead of Immediate Impetus

A key element of the agreement is the planned gradual reduction of the corporate income tax rate from 15% to 10%, starting in 2028 and continuing in annual steps until 2032. Given the relatively high level of corporate taxation in Germany (approximately 30%) compared to other countries, this step is to be welcomed. However, the full effect of the planned relief will not be felt during the current legislative period.

Municipal business tax: increase in minimum assessment rate

For the first time, the nationwide minimum assessment rate for municipal business tax will be increased—from 200% to 280%. The effective minimum rate will thus rise to approximately 9.8%. This measure aims to “effectively counteract the artificial relocation of companies to low-tax municipalities.”

Legal Form Issues: Further Convergence Toward Legal Form-Neutral Taxation?

The coalition also plans to examine whether, starting in 2027, the commercial income of newly established companies could fall within the scope of corporate income tax regardless of their legal form.

At the same time, legal form-neutral taxation is to be improved:

• The option model (Section 1a of the German Corporate Income Tax Act – KStG) and the tax relief for retained earnings (Section 34a of the German Income Tax Act – EStG) are to be made more practical.
• Both instruments—extremely complex and fraught with uncertainty—affect partnerships. A simplification would be highly relevant. The paper does not contain any details in this regard.

Investment Incentives: Tax Tailwind for the Transformation

The coalition announces several tax measures to promote investment and structural transformation:

• Declining balance depreciation of 30% on equipment investments, limited to the years 2025 to 2027 ("investment booster").
• Establishment of a German transformation fund: private and state investments are to be pooled, with a federal contribution of at least EUR 10 billion. The goal is to leverage total fund volume to at least EUR 100 billion using private capital and guarantees.
• Tax incentives for electromobility, particularly via special depreciation for electric vehicles and adjustments to company car regulations (incentives apply up to a gross vehicle price of EUR 100,000).

Digitization & Bureaucracy Reduction: Simplification of Tax Procedures

• The tax administration is to become more modern, digital, and efficient. Measures include:
• Introduction of self-assessment for corporations and partnerships.
• Expansion of pre-filled and automated tax returns; digital filing will gradually become mandatory.
• Systematic development of artificial intelligence usage in tax administration.
• Future tax legislation will give greater attention to digitalization and simplification.

Additional measures to reduce bureaucracy:

• Examination of an “assumption of approval” rule (automatic approval if deadlines are missed), unless prohibited by specific legislation.
• Conversion of import VAT to an offsetting model.
• A two-year moratorium on new statistical obligations.
• Reduction of written form requirements, particularly in labor law.
• Promotion of typifications, lump-sum regulations, and standardization of tax obligations.
• Pensioners and employees are to be relieved of tax declaration obligations wherever possible.

International Tax Policy and Regulation

Global minimum taxation (Pillar 2) will remain in place. At the same time, international efforts to simplify the minimum tax regime on a permanent basis are supported. There should be no competitive disadvantages at the EU level. The introduction of a financial transaction tax at the European level is still supported; however, the agreement does not specify its form.

Uncooperative states are to be consistently included in the EU “blacklist”. The coalition also plans to extend telephone surveillance powers in cases of serious tax evasion.

Housing: Living and Letting

The coalition plans tax incentives for home ownership ("Starthilfe Wohneigentum") and new construction, as well as for cooperative housing models. The reactivated public housing benefit will be supplemented by investment grants.

Regarding the rental market, the agreement states: "To make renting more attractive again, the following applies: landlords offering property at a favorable rent will receive tax benefits." Specifics remain unclear, but the principle suggests potential tax relief for rents below local market averages.

Energy, Agriculture, Environment

Electricity prices are to be reduced by at least EUR 0.05 per kWh, primarily by lowering electricity tax to the European minimum and reducing levies and grid fees.

In agriculture: Reintroduction of the full agricultural diesel rebate. Introduction of a tax risk compensation reserve for farmers and foresters.

Non-Profit Sector and Volunteering: Focus on Simplification and Recognition

The coalition agreement provides specific tax relief and simplifications for non-profit organizations, associations, and volunteers:

• The allowance for exercise instructors (Section 3 No. 26 EStG) will increase from EUR 3,000 to EUR 3,300.
• The allowance for voluntary work (Section 3 No. 26a EStG) will increase from EUR 840 to EUR 960.
• The catalog of charitable purposes (Section 52 AO) will be updated to reflect modern societal developments.
• Simplification of regulations regarding non-profit status, associations, and donations, aiming to reduce administrative and legal burdens.
• The exemption limit for commercial activities of non-profits will increase from EUR 45,000 to EUR 50,000.
• Non-profits with income up to EUR 100,000 will no longer be required to use funds promptly.
• The obligation to perform “sphere accounting” will be waived for income under EUR 50,000.
• These measures aim to support volunteer work and civic engagement by offering greater tax flexibility and reducing bureaucracy.

Other Tax-Relevant Topics

• Permanent reduction of VAT on restaurant food to 7% from January 1, 2026.
• Further increases in tobacco tax beyond 2026.
• Reversal of the most recent increase in the air traffic tax.
• Advocacy for a uniform tonnage tax for maritime shipping across the EU.
• Tax incentives for the cultural sector, including the film and games industries.
• Closer integration of maintenance law with tax law.
• Adaptation of the tax framework for multi-utility companies (Querverbund) to ensure continued provision of municipal public services.
• Measures to make trade union membership more attractive from a tax perspective.
• Promotion of employee share ownership through tax incentives.

Conclusion: Planning Security with Limited Creative Drive

The coalition agreement includes a wide range of tax-related measures. However, no far-reaching structural reform is planned. The focus lies on stability, targeted relief, investment incentives, and administrative modernization.

Whether the proposed measures will be implemented in their current form remains to be seen—especially as they are all contingent on funding. Taxpayers, companies, and organizations should monitor developments closely and assess potential impacts on their specific situations early on.

We will continue to track the implementation of the agreement and are happy to assist with assessing the tax implications of individual measures.