This article was featured as Topic of the Week in the newsletter for Week 5 of 2025.

Taxes are a key determinant of business location. Companies operating in Germany and providing apprenticeships and jobs are increasingly disadvantaged in international competition due to heavier tax and bureaucratic burdens. While tax conditions have improved in countries like the USA or Austria, Germany has exhibited substantial reform needs for a long time.

From an economic perspective, corporate profit tax should be reduced from the current level of approximately 30% to a globally competitive 25%. The tax burden on businesses, on average, is 23.6% across OECD countries and only 21.1% within the EU.

What Needs to Happen?

The first step would be the complete abolition of the solidarity surcharge (Soli). The current Soli income of roughly €12 billion is mainly borne by companies through income and corporate tax. Eliminating this surcharge would significantly relieve the German economy and close a fairness gap.

Furthermore, the corporation tax rate should be gradually reduced to 10%. Additionally, allowing trade tax to be credited within corporate tax would be a positive element. Income tax, which is the main tax for revenues of partnerships, sole proprietorships, and self-employed individuals, needs a tariff adjustment. Along with reducing the tax rate on retained profits from the current 28.25% to 25%, this would considerably reduce the burden on partnerships. A more consistent crediting of trade tax would also be an important factor.

Ultimately, trade tax should be replaced by an alternative municipal tax system, including a municipal business tax equipped with a levy rate for municipalities.

More Liquidity Through Depreciation Reform

Improved tax depreciation has a particularly positive impact on investments and employment, according to a study by the ifo Institute. There are several mechanisms to leverage here: The declining balance depreciation for wear and tear (AfA), expiring at the end of 2025, should be permanently reinstated. The value limit for so-called low-value assets (currently €800) should be significantly raised to at least €5,000. In the medium term, simplifying the AfA tables maintained by the Federal Ministry of Finance by replacing them with easier methods would be essential. Gains should be taxed as rigorously as losses are considered in tax assessments; hence, existing restrictions on carry-forward or carry-back options for losses must be completely removed.

Foreign Investments Secure Domestic Jobs

German businesses, from large companies to SMEs, naturally operate and invest abroad. However, the German tax code often obstructs activities in foreign markets. For instance, Germany's exit taxation should be reformed. The goal of this tax regime is to levy taxes on the increase in value of shares in corporations (hidden reserves) created in Germany in case shareholders relocate. It would be better to only tax hidden reserves when they definitively leave the country, posing a potential risk of permanent tax revenue loss.

Moreover, several recently introduced tax burdens overlap, leading to double taxation of corporate profits. An example of such overlaps includes anti-abuse regulations derived from the international BEPS process (“Base Erosion and Profit Shifting”) and newly introduced minimum taxation rules.

Do Not Relent in Reducing Bureaucracy

Another burden: German tax law entails numerous reporting, notification, and documentation requirements for businesses. Substantially reducing these requirements would free up time and resources for core business operations. The EU's regulatory obligations, such as various directives on administrative collaboration among member states or the aforementioned anti-abuse regulations, should primarily aim at creating a harmonised European legal framework.

The goal must be to meet EU countries' needs for mutual assistance in taxation and ensure secure administrative cooperation between their national tax authorities. To this end, the German government should actively engage in Brussels, working with the new EU Commission to evaluate all EU directives and reduce bureaucratic burdens to a practical level.

Furthermore, national tax collection processes must be significantly decluttered. Good examples include the requirements for electronic cash register systems and the documentation and retention obligations stipulated in the "Principles for the Proper Keeping and Retention of Books, Records, and Documents in Electronic Form" (GoBD). Moreover, there are numerous ways to enhance legal and planning certainty for businesses, such as speeding up binding decisions from tax authorities or conducting tax audits more quickly. The increasing use of IT technologies and risk management systems should simplify processes for tax authorities as well as businesses.

A competitive tax system is one of the most crucial aspects of favourable economic conditions and thus a prerequisite for future growth. That growth, in turn, is the secure foundation for state tax revenues.