Global Tax Alert | 14 February 2018

Germany’s Government–Coalition Agreement includes list of planned tax legislative proposals for 2017–2021

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Executive summary

On 7 February 2018, the leadership of both the German Christian Democratic Parties and the Social Democratic Party agreed to form a new government, with Ms. Merkel as the Chancellor, for the legislative period 2017–2021. In Germany, the multi-party government is based on a coalition agreement, which is in essence a politically binding work plan for the future government. The 180-page strong document also includes a small summary of planned tax legislation projects. As with most political agreements, the coalition agreement neither provides for technical details, nor for any certainty as to when and how the agreed on objectives will be achieved, and the agreement calls for a mid-term evaluation of the work plan, including the addition of new measures. The Coalition and the Coalition Agreement must still be approved by the members of the Social Democratic Party (voting runs between 20 February and 2 March 2018) and a convention of the Christian Democratic Parties scheduled on 26 February 2018. Whereas it is expected that the convention of the Christian Democratic Parties will approve the agreement, some uncertainty remains concerning the approval of the Social Democratic Party members. In the event of a failed approval, Chancellor Merkel could either try to form a conservative minority government or pave the way for new elections.

Detailed discussion

Business taxation measures and policies

The coalition agreement contains the following business taxation measures and policies:

  • A commitment to support a Common Consolidated Corporate Tax Base (CCCTB) including minimum tax rates. The Government will seek to form a French/German initiative concerning steps for a formation of a joint economic zone, which shall also include proposals for uniform company and bankruptcy laws. The initiative should also be seen as a reaction to increased international business location competition as a consequence of the United States tax reform.
  • A commitment to fight tax evasion, tax avoidance, unfair tax competition and money laundering.
  • Introduction of measures for appropriate taxation of the digital economy, including equitable taxation of large digital enterprises (the agreement lists four US multinationals as examples).
  • Full implementation of the European Union’s (EU) Anti-Tax Avoidance Directive (ATAD and ATAD2), which includes in particular an adaption of the German controlled foreign company legislation, added rules governing hybrid structures, and amendments to the German interest limitation framework.
  • Adoption of tax incentives for research and development (R&D) activities, in particular for small- and medium-sized enterprises, which are based on personnel and project cost (Note: the entire budget tableau foresees 2018–2021 financial support for R&D activities of €2b and only a portion of that will be apportioned to tax incentives).
  • Review of whether the tax administration’s useful life tables need to be adapted to incentivize the acquisition of innovative “digital economy product investments.”
  • Introduction of certain benefits for start-up investments, such as temporary relief from monthly value added tax (VAT) filings, and a review concerning the potential introduction of other tax incentives to foster private investment in start-up enterprises.
  • The close-out of certain opportunities to avoid the Real Estate Transfer Tax in share deal transactions. According to the agreement, the expected increase in tax revenue “can” be used by the States to lower their individual Real Estate Transfer Tax rates.

Taxation of individuals

Most remarkably, the Coalition Agreement includes, inter alia, the following:

  • Repeal of the 25% flat tax system on interest income (which would result in the taxation of interest income at ordinary progressive tax rates).
  • Incremental repeal of the so-called Solidarity Surcharge (a surcharge of 5.5% on the income tax – no repeal of the surcharge is apparently considered for corporate income tax purposes).
  • Introduction of certain incentives for electric vehicle use (business use and employee benefit taxation of electric vehicle use).

Indirect taxation

VAT changes and other items under the coalition agreement include:

  • Combatting VAT evasion in internet commerce transactions: Providers of internet market platforms shall be made liable for lost VAT revenue, if providers do not curtail transactions of non-VAT compliant market participants.
  • Facilitating the collection of import VAT to improve the competiveness of German harbor, airport and other logistic enterprises.
  • At the EU level, support for the application of the reduced VAT rate for commercially traded objects of art, e-books, e-papers and other digital information media, including an ongoing defense of the reduced VAT rate for printed media.
  • Support for the introduction of a Financial Transaction Tax in the EU context.

Other measures

The agreement also includes a number of other identified topics, such as:

  • A commitment to general bureaucratic reduction measures, including the harmonization of commercial and tax law provisions, and the objective to accelerate the business tax audit process.
  • A basket of tax incentives to further the investment in residential real estate in the low- to mid-priced rental market.
  • A commitment to increase the capacity of the Central Tax Office in Bonn, a branch of the German tax authorities, which currently handles many aspects of nonresident taxation (such as withholding tax exemption and refunds).

For additional information with respect to this Alert, please contact the following:

Ernst & Young GmbH, Germany
  • Christian Ehlermann
  • Katja Nakhai
Ernst & Young LLP, German Tax Desk, New York
  • Tobias Appl
  • Thomas Eckhardt
  • Markus Schweizer
  • Nicolai Huschke
  • Valeska Schierle
  • Ivo Schmohl

EYG no. 00845-181Gbl