Partial dismantling of the solidarity surcharge

From 2021, the Soli is to be eliminated in full for around 90 % of income taxpayers and partially for a further 6.5 %.

Since 1995, the tax authorities have levied a solidarity surcharge on German taxpayers in addition to income and corporation tax. In the early years, the solidarity surcharge was still 7.5 %, but from 1998 it was reduced to the level of 5.5 % that has applied since then. Taxpayers have thus paid around 325 billion euros in solidarity tax since its introduction. In 2018 alone, the revenue from the solis amounted to around 18.9 billion euros. For 2019, the German government expects solidarity surcharge revenue of around 19.4 billion euros, and around 20 billion euros in 2020.

No wonder, then, that attempts to abolish the Soli are almost as old as the Soli itself - whether via lawsuits and constitutional complaints or in the form of political initiatives by individual parties. So far, however, all attempts have failed for various reasons. This is now changing, as the grand coalition is getting serious about the promise in the coalition agreement to abolish the solidarity surcharge, at least in part.

There have been repeated debates between the coalition partners about the extent of the reduction. The CDU/CSU, as advocates of a complete abolition of the solidarity surcharge, were not able to prevail with their view, but the first step, which the federal government decided on at the end of August in the draft for a "Law on the Reduction of the Solidarity Surcharge," nevertheless turns out to be somewhat more extensive than originally planned. From 2021, the surcharge is to be completely eliminated for around 90 % of wage and income tax payers. A further 6.5 % will receive at least partial relief. The relief is to amount to around EUR 10 billion in 2021.

• Exemption limit: The exemption limit up to which no solidarity surcharge is payable is raised to €16,956 (single assessment) or €33,912 (joint assessment). If the income tax due for the year does not exceed this exemption limit, there is no solidarity surcharge at all. As a result, families with two children up to a gross annual salary of 151,990 euros and single parents up to a gross annual salary of 73,874 euros no longer pay the solidarity surcharge.

• Mitigation Zone: If the standard income tax exceeds the exemption limit, the solidarity surcharge is not immediately levied in full, i.e. at 5.5 %. The mitigation zone thus avoids a jump in the burden and is also significantly expanded by the law. As a result, the majority of the remaining solidarity tax payers will also be relieved, albeit with a diminishing effect as incomes rise.

• Flat rate & corporate income tax: This first step in the dismantling of the solis only includes relief for the standard income tax. For the time being, everything remains as it was for the final withholding tax on investment income and corporate income tax.

Meanwhile, advocates of a complete abolition of the solidarity surcharge received backing from the German Federal Audit Office at the beginning of June: According to the auditors, only partially abolishing the solidarity surcharge would entail considerable constitutional and financial risks, as the Solidarity Pact II, which forms the basis for the solidarity surcharge, expires at the end of 2019. This means there is a real risk that the federal government will be condemned to pay back billions in taxes.

Unsurprisingly, therefore, the Taxpayers' Association has once again blown up a storm and is supporting a new test case at the Nuremberg Fiscal Court directed against the solidarity surcharge for 2020. The basis of the proceedings are the advance payments determined for 2020. Due to the changed conditions following the end of the Solidarity Pact II, it may therefore be worth keeping an eye on the further progress of these proceedings next year.