Massive debt-funded infrastructure investments expected - But will this suffice to regain Germany’s competitive edge?
In 2021, after 16 years under a conservative government, Germany ventured into political change under a coalition of Social Democrats, Greens and Liberals. From the very beginning of this government’s turn, it was apparent that the political intentions of these parties could not be more different - especially with regard to tax policy. In addition, this political change was to be implemented in a challenging geopolitical environment, which was associated with significant financial burdens for the German national budget.
The result was – at best – a standstill in the area of corporate taxation in the years since the government was formed in 2021. Even worse, additional administrative burdens – e.g. from implementation of Pillar 2, CSRD, etc – decreased the competitive edge of German companies and blocked resources. That government collapsed in late autumn 2024 and Germany, with its leading role in the EU, has mostly been in a political standstill since then.
In February 2025, a federal election was held, from which the Conservatives emerged as the strongest force. In order to form a two-party coalition that would exclude the far right, an alliance between the CDU/CSU and SPD was considered to be the only viable option. With the aim to establish a stable government once again, the parties negotiated a framework for the next government. As before, the most pressing topic of the negotiations was probably the financing of the national budget against the background of the strict constitutional-embedded limit on government debt funding of 0,35% of gross domestic product per year.
While this was already eased in March by way of allowing further infrastructure-dedicated debt funding of 500 billion EUR over the period 2025 – 2037 and excluding certain defence spending from the 0,35% debt funding limit, further tax policy measures to re-establish Germany’s competitive edge became acutely necessary.
Source: Diagram based on OECD survey
Evolution or revolution in the area of corporate taxation?
The policy changes foreseen by the new government can definitively be characterized as evolutionary rather than revolutionary. Nevertheless, if implemented properly, they could have a lasting positive impact on businesses.
The major measures include
- Gradual reduction of the corporate income tax rate by one percentage point per year during 2028 – 2032 (reduction of 5 percentage points in total), which should bring down the statutory corporate tax (including trade tax and solidarity surcharge) burden from approx. 30% to approx. 25%;
- Accelerated depreciation on machinery and equipment investments of 30 percent in 2025, 2026 and 2027;
- Germany will adhere to Pillar 2 but will support further (permanent) simplifications of such rules;
- Improvements for German partnerships that elect to be taxed as corporations to make them more attractive and eventually implementation a corporate tax system that is independent of the legal form of the business;
- Simplification through the introduction of a common basis of assessment for corporate income tax within the EU; and
- Reducing tax bureaucracy through simplification and digitalization.
The following planned tax changes could pose challenges:
- Combating tax schemes to reduce the trade tax rate;
- Increase in the minimum trade tax rate from 7% to 9.8% targeting trade tax haven municipalities;
- Continued adherence to Pillar 2 and development of regulations at EU level,
- No abolition of the solidarity surcharge; and
- Support for an EU-wide financial transaction tax.
Opportunities for private equity?
Our initial assessment of the outcome of the negotiations with regard to private equity shows the following:
- The new accelerated depreciation on equipment investments of 30% in 2025, 2026 and 2027 is welcome. The term "upgrading investments" should cover in particular equipment of industrial companies. This depreciation booster could increase the attractiveness of further investments in existing portfolio companies.
- Reducing the statutory tax rate for corporations to 25% is – of course – also a welcome development and should put Germany on a level playing field with many other significant economies as the table shows. However, this relief will only be achieved in the long run.
Source: Diagram based on OECD survey
- The effect of reduced tax bureaucracy by simplified and digitized administration, including potentially a permanent simplification of Pillar 2 rules, should not be underestimated as many companies currently suffer from extremely long administrative process, multiple layers of administrative authorities and non-flexible formalistic laws. However, it remains to be seen to what extent rules and procedures will actually be cut down.
Nevertheless, such corporate tax changes alone, even if properly implemented, may only have a limited effect on the ailing German economy.
However, coupled with the further measures foreseen by the forming government such as:
- Massive spending on infrastructure such as roads, bridges, railways, school and defence under the 500 billion debt package,
- Improving conditions for start-up- and venture capital financing (including state-owned agencies as investors), high-tech and software companies and easing tax rules for management-participation-regimes,
- Further integration of the EU financial markets,
- Further trade deals to be concluded,
- Tax incentives for extending working hours,
- Cutting down energy costs, and
- Cutting down administrative burdens across all legal fields
could boost the economy significantly and make it more resilient, diversified and competitive. Further, the massive infrastructure spending could revive “traditional” industries such as manufacturing, steel, construction and defence.
We will be happy to support you in assessing the individual impact on you and keep you up to date.