Tax Reform Act comes into force on January 1, 2025

Compared to the original draft by the old federal government from July 2024, the adopted law is a significantly slimmed-down version. Due to the government crisis, many of the originally planned measures were deleted (you can find the original draft here). The Finance Committee’s recommended resolution from December 18, 2024 focuses primarily on reducing income tax rates and increasing child benefit.

Compensation for progressive taxation

The Tax Reform Act aims to mitigate the effects of progressive taxation. According to the German government, the aim is to prevent taxpayers from paying more tax due to inflation, even though their purchasing power has not increased accordingly. Without this compensation, taxpayers would have less available in real terms despite higher incomes.

Reduction in income tax rates

The adjustments to income tax rates (Art. 32 (6) sentence 1, 32a (1), 39b (2) sentence 7 EStG) pursue two central objectives: Firstly, the constitutionally required exemption of the minimum level of subsistence is ensured. Secondly, the aim is to prevent a progression-related additional burden due to higher income taxation, particularly for small and medium-sized incomes.

The changes in detail for the assessment periods 2024 to 2026:

The regulations for increasing the tax-free child allowance for the 2025 and 2026 assessment periods provided for in the government draft remain unchanged. Based on the findings of the 15th Minimum Subsistence Income Report and the 6th Tax Progression Report, the personal allowance for 2025 will now be increased by EUR 312 (instead of the originally planned EUR 300). In 2026, the personal allowance will be increased by a further EUR 252.

In addition, the rate benchmarks – with the exception of the value for the so-called “wealth tax” – will be shifted to the right by 2.6 percent for 2025.

The adjustments to the exemption limits for solidarity surcharge for the assessment periods from 2025 and 2026 remain unchanged. The exemption limit increases from EUR 18,130 to EUR 19,950 for the 2025 assessment period and to EUR 20,350 for the 2026 assessment periods

Increase in child benefit

In addition, child benefit will increase by EUR 5 in future (Art. 66 (1) and (3) EStG, Art. 6 (1) and (2) BKKG). Accordingly, from January 1, 2025, child benefit will now amount to EUR 255 per month instead of EUR 250.

From 2026, child benefit will be regularly adjusted to the percentage development of child allowances for the first time. Despite this automatic adjustment, the exact amount of the monthly child benefit remains explicitly set out in Art. 66 (1) EStG. As of January 1, 2026, child benefit will be increased by a further EUR 4, meaning that parents will receive EUR 259 per month per child in future, instead of EUR 255 applicable for 2025.

Measures that were not implemented

The following measures originally contained in the draft bill will no longer be implemented by the Tax Reform Act, as there was no majority for them in parliament:

1. Simplifications for low-value assets and compound items (Art. 6 (2a) EStG)
2. Extension of the declining balance depreciation for movable fixed assets
3. This was supposed to apply to assets acquired or manufactured after December 31, 2024 and before January 1, 2029. (Art. 7 (2) EStG)
4.  Introduction of a factor method instead of tax classes 3 and 5 (Art. 38b, 39 (4), 39a (1), 39b (2), 39e (1°), 39g EStG)
5. Abolition of the obligation to use funds promptly for tax-privileged corporations (Art. 55 (1) no. 5 AO)
6. Regulations on the political activities of tax-privileged corporations (Art. 58 No. 11 AO)
7. Addition of photovoltaic systems to the definition of self-supply facilities (Art. 68 no. 2 lit. b AO)
8. Introduction of a notification obligation for domestic tax structures (Art. 138l, 138m, 138n AO)
9. Increase in the maximum assessment basis amount for the research allowance (Art. 3 (5) FZulG)