What changes will the new legislative period bring to tax law?

What changes will the new bring legislative period to tax law?

On March 8, 2025, German political parties CDU/CSU and SPD presented the results of their preliminary coalition talks en route to a new government in Germany and recommended that the party leaders enter into coalition negotiations. They have published their preliminary results in a discussion paper publicly available.

The preliminary results only lay the groundwork for the coalition negotiations between the conservative CDU/CSU and the center-left SPD and do not yet contain any binding commitments. Nevertheless, the paper already allows initial conclusions to be drawn regarding potential changes in tax law for both corporations and private households that are likely to come during the tenure of the next government. 

We have summarized the findings below: 

Income tax

Income tax reform: The potential next government plans to reform the German income tax law, however their action plan is still very coarse. Apart from a few points already discussed in detail (see below), the preliminary results do not yet contain any details. In its election program, the CDU/CSU had announced far-reaching reform plans regarding income tax. Their plans included an increase of the tax-free allowance as well as increasing the income limit from which onwards the highest tax rate applies, as well as generally abolishing the solidarity surcharge. The SPD, in its election program also called for a tax relief that would benefit around 95% of income taxpayers. The plans of the SPD, however, included an increased taxation of the highest incomes and assets of HNWIs. It remains to be seen what a possible compromise between the parties in the coalition negotiations will look like.                        

As result of their preliminary coalition talks, the parties involved were able to reach an agreement on a few specific plans for an income tax reform. These are: 

• An increase in the commuter allowance.
• Tax-free compensation for overtime: If an employee works overtime in addition to their full working hours, the coalition parties plan to reform the Income Tax Act so that overtime pay is tax-free in the future. This should apply to overtime exceeding 40 weekly working hours (or even lower if lower weekly working hours are agreed on by a collective bargaining agreement [Tarifvertrag]).

• Employer bonuses for extending working hours: If employers pay their part-time employees a bonus for extending their working hours, this is to be tax-privileged in future. The preliminary results do not yet specify what this benefit should look like in detail.

• Tax benefits for continuing to work after retirement age: According to the plans of the potential new government, employees who voluntarily continue to work after they reach retirement age are to be rewarded. To this end, a salary paid to these persons of up to EUR 2,000.00 per month should be tax-free.
   

Corporate income tax

Corporate income tax reform: The potential coalition partners' also plan to reform Germany’s corporate income tax, however at this early stage their plans are also still quite general. The parties state that they will "embark on a corporate tax reform in the coming legislative period". What such a corporate tax reform will include is now subject of coalition negotiations between the parties. The outcome is eagerly awaited, as the potential coalition parties' plans for a corporate income tax reform as set out in their election programs were quite different: The CDU/CSU had called for a reduction in the corporate tax burden to a maximum of 25%, the complete abolition of the solidarity surcharge, and improved rules for depreciation and tax losses carried forward. The SPD, on the other hand, had plans for a corporate tax relief for companies ‘not through across-the-board tax cuts for everyone, but with targeted incentives for investment in Germany’. To this end, its election manifesto included a proposal for a tax credit, under which certain investments would be eligible for a tax refund of 10% of the investment.

Value added tax

With regard to VAT law, the discussion paper contains the specific proposal to permanently reduce the VAT on food in restaurants to seven per cent.

Other taxes

The discussion paper comments on two other specific tax reform proposals:

• Reduction of Electricity Tax to the European minimum: The coalition partners advocate for a far-reaching reduction of the electricity tax. Currently, the tax burden is 2.05 ct per kWh. Farming, forestry and manufacturing businesses already benefit from tax relief options. A reduction to the minimum permissible under European law would mean that the electricity tax for private households would be only 0.1 ct per kWh and for companies on-ly 0.05 ct per kWh.
• Agricultural diesel reimbursement: This relief for agricultural and forestry businesses, granted under Section 57 German Energy Tax Law, was limited by the previous government and is planned to be fully reinstated.
   

Outlook

The discussion paper already specifically addresses some tax reform proposals. However, the negotiating partners remain vague on the ‘major’ proposals of a potential future government, in particular reforms of income and corporate income tax law. Nevertheless, the inclusion in the exploratory paper shows that the potential coalition partners attach great importance to further developing tax law.

Other topics, such as possible changes to inheritance and gift tax and the possible reintroduction of a wealth tax, have not yet been addressed. The positions of the parties on these issues are particularly far apart, so these points are certain to be hotly debated in the upcoming coalition negotiations.

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