11.04.2025Future government publishes draft coalition agreement that includes broad tax policy goals
High-level agenda includes reducing corporate income tax rates by 1% annually starting from 2028 over a five-year period, ongoing support for Pillar Two
The upcoming coalition between Germany’s center-right Christian Democratic Union (CDU), its sister party—the Christian Social Union (CSU), and the center-left Social Democratic Party (SPD) published its draft coalition agreement on 9 April 2025, which will be the basis for the next government. After almost four weeks of negotiations, the three parties agreed to form a new government that aims to spur economic growth, with Friedrich Merz being the designated new chancellor replacing outgoing chancellor Olaf Scholz from the SPD.
As a result of the German snap elections on 23 February 2025, the governing “traffic light coalition” between the SPD, the Free Democratic Party (FDP) and the Green Party lost its majority in the German parliament. The CDU/CSU won the elections with 28.5%, over the Alternative for Germany (AfD) with 20.8%, and the SPD with 16.4%. Shortly after the elections, the CDU/CSU and SPD agreed to enter into coalition discussions.
The 146-page draft coalition agreement sets out the future government’s policy goals, including those relating to tax policy, and how it intends to achieve these objectives.
The draft coalition agreement outlines the measures that the future government, consisting of the three parties, proposes to take. Although there are few details on concrete tax measures, the draft agreement offers some insight into what can be expected and some specific measures. Under the headline, “Budget, Finances and Taxes,” the draft agreement highlights that growth and cohesion are the guidelines of the government’s budget and finance policy, with aims to strengthen Germany’s competitiveness and to guarantee the exterior, interior, and social safety of its citizens. The draft agreement does not specifically mention any major tax reform projects—the focus will be on growth, investment, digitization, and debureaucratization of the tax system and measures to combat tax evasion and harmful tax practices.
The draft coalition agreement has still to be confirmed by the three parties, although the content is not expected to change. The CDU will hold a party convention, which is likely going to take place at the end of April to approve the agreement. For the CSU, the party leadership is expected to approve the agreement. The SPD will hold a referendum of party members that is intended to close on 29 April 2025. After these approvals, the lower house of parliament—in which the coalition partners have a 328 of 630 vote majority—can elect Friedrich Merz as chancellor and confirm the government.
Key tax policy statements
The most significant tax policy statements for businesses in the draft coalition agreement are as follows:
- An “investment booster” in the form of a 30% declining balance depreciation would be introduced for eligible equipment investments for the years 2025 to 2027.
- The federal corporate income tax (CIT) rate of 15% would be reduced by 1% annually during the 5-year period from 2028 to 2023 to, eventually, 10%.
- The introduction of the “investment booster” and the reduction of the CIT rate would be part of the same legislative package.
- The option for partnerships to be taxed as corporate entities would be improved. It would also be analyzed in more detail if it may be possible that for newly set-up companies, starting from 2027, income from business activities would be subject to CIT rules irrespective of the legal entity form.
- The 5.5% solidarity surcharge for high-income tax earners and for corporate entities would not be abolished.
- The minimum trade tax multiplier, which is applied at a municipal level, would be increased from 200% to 280%, raising the minimum trade tax rate from 7% to 9.8%. Fictitious relocations to “trade tax havens” would face increased scrutiny by the tax authorities.
- The draft agreement mentions the commitment of the coalition partners to the Pillar Two global minimum taxation rules for large companies, with the incoming government supporting the work for a permanent simplification of such rules. At the same time, the draft agreement mentions that the consequences for the global tax architecture resulting from international divergences are being monitored and that the new government would provide support at a European level so that the global minimum taxation rules do not result in disadvantages for German companies in regard to international competition.
- A financial transaction tax at a European level would be supported by the new government.
- The VAT rate in the restaurant business would be permanently reduced to 7% starting from 1 January 2026.
- The electricity tax would be reduced to the European minimum amount and transmission network charges would be reduced in order to lower electricity prices by at least five cents per kilowatt-hour.
- The draft agreement highlights that combating tax evasion and effective tax enforcement are essential for securing revenues and ensuring the government's ability to act. Additional legislative measures in this regard would be examined, in particular the area of existing cash register requirements. In order to effectively combat tax havens, the draft agreement also mentions the consistent inclusion of uncooperative tax jurisdictions in the EU list of noncooperative jurisdictions for tax purposes.
- The possibilities for telephone surveillance in serious cases of organized tax evasion would be expanded. Further measures to prevent any unjustified tax benefits related to certain dividend taxation schemes (e.g., "cum-cum transactions") would be examined. Finally, to strengthen evidence-based policy advice, it is intended to transform empirical based tax research into effective structures in cooperation with the federal states.
- Tax simplification through standardization, simplifications, and flat-rate taxation would be strengthened in order to improve compliance with and acceptance of the tax system by the taxpayers. Simplification and digitization in all tax-related legislation would be improved; the tax administration should be strengthened through greater digitization and artificial intelligence. At the same time, digital filings of tax returns would become gradually mandatory. Pre-filled and automated tax returns would be gradually expanded for simple tax cases. The aim is also to gradually convert tax returns/tax assessments for corporations and partnerships to a self-assessment process.
- Air transport-related fees and levies would be reduced, and the air transportation tax would be abolished.
- Introduction of additional incentives to boost electromobility (e-mobility) would include: an increase in the price limit for electric company cars to EUR 100,000, a special depreciation allowance for electric vehicles, an exemption from vehicle tax for electric vehicles until 2035, and an exemption for zero-emissions trucks from tolls beyond 2026.
It is expected that the SPD co-chair, Lars Klingbeil, will become the next finance minister.
Deloitte Germany’s comments
From a tax policy perspective, the draft coalition agreement does not include any major tax reform plans or other major tax proposals, as hoped for by the business community. The announcement of the reduction of the CIT rates starting from 2028 certainly is a welcome development; however, other proposals for a simplification of the CIT system (as described in a 2024 report of an expert commission introduced by the former government) are not mentioned in the draft agreement. It remains to be seen if the statement provided by the coalition parties that the draft agreement is not conclusive and that other tax measures might be agreed and implemented “on the go” will result in additional tax simplification measures.
The long-discussed (and eagerly awaited) proposal for a major overhaul and simplification of the real estate transfer tax (RETT) rules is also not mentioned in the draft coalition agreement.
As a result of the planned decrease of the federal CIT rates starting from 2028 to, ultimately, 10% in 2032, along with a possible increase in the municipal minimum trade tax rate, the importance of the trade tax will likely increase if the average trade tax rate of (approximately) 14% increases and eventually surpasses the federal CIT rate.
A coalition agreement is a policy document, rather than draft law. While taxpayers should not rely on the statements in such an agreement, they should take the announcements into consideration and monitor future developments closely.
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