| Image credits: “FDP-Parteichef Christian Lindner” by INSM
On November 6, 2024, the German coalition government fractured when Federal Chancellor Olaf Scholz dismissed Finance Minister Christian Lindner. Following Lindner’s dismissal, two other ministers from the Free Democratic Party (FDP) also requested to step down. In his initial response, Chancellor Scholz announced plans to request a vote of confidence in the Bundestag on January 15, 2025. Should this vote fail, as anticipated, early elections are expected to take place in March 2025, although the timeline may shift depending on further negotiations.
Until the confidence vote, Chancellor Scholz intends to operate under a minority government. He emphasized that by year-end, the Bundestag will prioritize voting on critical legislation, including tax policies addressing “cold progression” as of January 1, 2025, and immediate support measures for industry. These measures are likely part of a proposed Tax Development Act, which also encompasses provisions to combat inflation. Due to the coalition’s disbandment, passing legislation will now depend on securing opposition support, which remains uncertain. Conservative opposition leader Friedrich Merz has stated that cooperation on bills will require Scholz to expedite the vote of confidence. The Annual Tax Act 2024, already approved by the Bundestag in October, remains unaffected by the coalition breakdown, though it awaits Bundesrat approval, likely to be addressed in its November 22 session.
THE TAX DEVELOPMENT ACT
The Bundestag had planned to pass the Tax Development Act in mid-October, but internal disagreements within the coalition delayed progress. Currently in committee review, the act aims to introduce tax reforms for 2025 and 2026, focusing on investment incentives and personal income tax adjustments. Notable measures include:
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Reform of Collective Depreciation: Raising the lower value limit to €800 and the upper value limit to €5,000, with a three-year depreciation period.
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Continued Declining Balance Depreciation: This would apply to movable fixed assets acquired or manufactured between 2025 and 2028, with an accelerated rate of up to 2.5 times linear depreciation (up to 25%).
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Special Depreciation for Electric Vehicles: A 40% special depreciation allowance over six years for fully electric and zero-emission vehicles.
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Increased Research Allowance: Expanding the maximum assessment basis to €12 million.
The future of this act remains uncertain and will hinge on achieving a legislative majority.
OTHER ONGOING LEGISLATIVE PROJECTS
The Bundestag’s principle of discontinuity means that in the event of new elections, any pending bills that were not passed will need to be reintroduced in the new parliamentary term. Among these pending tax-related bills:
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Act on Modernization and Bureaucracy Reduction in Electricity and Energy Tax Law: Although slated for a Bundestag vote in October, the session lacked quorum. This law aims to streamline electricity and energy tax laws, with provisions for permanent electricity tax relief for manufacturing companies, potentially benefiting numerous industries.
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Amendment of the Minimum Tax Act: Only a preliminary draft was issued in August, and no further progress is expected until after new elections. The amendment aligns with OECD guidelines for a global minimum tax and seeks to provide clarity and simplifications in administration.
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Second Act on the Financing of Future-Securing Investments: With a preliminary draft from August, this law intends to enhance Germany’s appeal as a financial center, especially for young, innovative firms, through tax benefits like those for hidden reserve transfers and investment in renewable energy.
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Tax Treatment of E-Fuels-Only Vehicles: This draft law, issued in September, proposes tax incentives for vehicles that operate solely on e-fuels, including preferential treatment in income, trade, and motor vehicle taxes.
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DAC 8 Directive Implementation: A draft from October 25 proposes new reporting standards for crypto transactions and updates the Common Reporting Standard (CRS) to cover digital financial products, targeting compliance with the EU’s reporting deadline by the end of 2025.
Given the government’s current instability, these legislative projects may face delays or, depending on new elections, may need to be reintroduced in the next Bundestag session.
