German Coalition Unveils Joint Tax Policy

by Ulrika Lomas, Tax-News.com, Brussels

27 October 2009

Following weeks of intense negotiations and speculation, Germany’s newly elected parties, the Christian Democratic Union (CDU) and the Free Democratic Party (FDP), have finally unveiled details of their coalition agreement, containing a raft of initiatives designed to reduce the tax burden on both individuals and businesses by billions of euros.

Under the terms of the new coalition agreement, businesses, workers, heirs, and families with children will benefit from proposed tax reductions amounting to around EUR24bn over the course of the next four years.

Determined to reduce the effects of fiscal drift, or “kalte progression”, and to alleviate the burden borne by low- and middle-income earners, the government aims to begin reform of the country’s income tax from January 1 next year.

In accordance with FDP policy, from January 1, 2011, a graduated system of income tax tariffs will be introduced, although the precise details, such as the number of rates, are yet to be finalised.

In an attempt to provide support for German businesses during the economic crisis, the government plans to introduce emergency tax relief measures from as early as January 1, 2010. Initiatives include plans to raise the current interest limit from EUR1m to EUR3m.

Other key proposals, outlined in the agreement, include plans to increase the annual child-free allowance from next year, and to introduce a new graduated tariff in the country’s inheritance tax, to benefit close relatives.

Presenting the new agreement in Berlin, Angela Merkel announced that the coalition parties had remained true to their pledge not to increase taxes or contributions, in a bid to pursue a path of growth, and to reduce the burden for individuals. Although Merkel confirmed that taxes would not rise, she did not, however, rule out future increases in social contributions.

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