On May 6, Friedrich Merz became German Chancellor after forming a coalition with the Social Democratic Party (SPD) and the Christian Social Union (CSU). Among the measures proposed by Germany's new government, significant tax reforms have already been introduced, aiming to boost the economy by easing the tax burden on businesses.
Reduction of tax burden
Firstly, the government proposes reducing corporate tax to 25%. This measure aims to retain existing businesses and attract new investors to the country. Additionally, the reforms suggest tax exemptions for overtime and pensioner income, designed to incentivize individuals to work longer and address current demographic challenges.
Federal reform
Secondly, the coalition will maintain the Schuldenbremse (debt brake mechanism), initially implemented during Angela Merkel's government. Under this framework, the federal government's structural deficit is capped at 0.35% of GDP. While federal states cannot incur new structural debts, some modifications to these rules are being introduced.
The tax reform will now allow for the indefinite financing of defense expenditures exceeding 1% of GDP. Furthermore, a special fund of €500 billion will be established for infrastructure and energy transition investments, intended to serve for the next 10 years. Fiscal rules will also be flexibilized to permit increased borrowing in exceptional circumstances.
Conclusions
This reform signals a shift in German economic policy, aiming to balance fiscal control with critical investments in the country's future and addressing current challenges. However, certain decisions, particularly the modifications to the Schuldenbremse, have drawn criticism regarding their potential impact on long-term fiscal sustainability.
With the new Chancellor's appointment, Germany's tax and legal landscape for multinationals and investment funds is likely to evolve. If you seek up-to-date and compliant management of your tax obligations in Germany, or across other global markets, we invite you to contact us.
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