Government draft of the Tax Reform Act

The Tax Reform Act, which was briefly referred to as the Second Annual Tax Act 2024, primarily implements the first points of the growth initiative in tax law and adjusts the tax-free allowances and rate benchmarks for income tax.

Actually, there should only be one annual tax law each year, in which the legislator bundles the majority of tax law changes. This year, the federal government has even decided to introduce three annual tax acts, even if only one of them is officially allowed to be called that: After the Growth Opportunities Act, which was an inofficial annual tax law for 2023 but was not passed until spring 2024, and the draft for the official 2024 annual tax law, the Federal Ministry of Finance published the draft bill for a "Second Annual Tax Act 2024" in July.

The German government passed this Second Annual Tax Act 2024 as a government draft just two weeks later and renamed it the "Act on the Further Development of Tax Law and the Adjustment of Income Tax Rates" - or "Tax Further Development Act" for short. The bill was also supplemented by the first points from the governing coalition's growth initiative. Here is an overview of the main changes contained in the government draft of the Tax Reform Act:

• Degressive depreciation: The declining balance method of depreciation, which has been possible again since April 1, 2024, will be extended until 2028 and the depreciation rate will be increased to two and a half times the straight-line depreciation rate from 2025.

• Pool amortization: A reform of collective item depreciation will see the introduction of pool depreciation in 2025. In future, it will no longer be necessary to choose between collective item and immediate depreciation for assets up to a value of EUR 800, as these are generally immediately depreciable as low-value assets. Above a value of EUR 800 and up to a value of EUR 5,000 (previously EUR 1,000), a collective item can be formed, which must be written back over three years (previously five years).

• Basic allowance: The basic tax-free allowance is increased every year in order to exempt the minimum subsistence level from tax. The Federal Government determines the need for adjustment every two years in the minimum subsistence level report. An increase of 300 euros to 12,084 euros is planned for 2025. In 2026, the increase will then be 252 euros to 12,336 euros. Because the standard requirement has risen more than forecast, there is still a need for subsequent adjustment of the basic and child allowance for 2024, which will be regulated by a separate law ("Act on the Tax Exemption of the Minimum Subsistence Level 2024") so that the change can also be taken into account in income tax for December 2024 if the Tax Reform Act is delayed. The basic tax-free allowance will be increased by EUR 180 to EUR 11,784 in 2024.

• Child allowance: Along with the basic tax-free allowance, the child tax-free allowance will also be increased - retroactively for 2024 with a separate law. The retroactive increase for 2024 is 228 euros to 6,612 euros. For 2025, an increase of 60 euros to 6,672 euros is planned and in 2026, the tax-free amount will rise by a further 156 euros to 6,828 euros.

  

• Child support: Child benefit will also be increased along with the child allowance, although there will be no retrospective adjustment for 2024. In 2025, child benefit is set to increase by 5 euros per child to 255 euros. From 2026, child benefit will then be automatically adjusted in line with the percentage increase in the child allowance. For 2026, this means an increase of a further 4 euros to 259 euros.

• Cold progression: With the exception of the "wealth tax", the basic values of the tax rate and the exemption limit for the solidarity surcharge will also be increased in 2025 and 2026 in order to avoid cold progression.

• Income tax classes: In the coalition agreement, the traffic light coalition stipulated that income tax classes III and V should be replaced by the factor method of tax class IV in order to distribute the income tax burden more fairly in marriage or civil partnerships. This changeover is now planned for 2030, although the government has already announced in the growth initiative that it will examine a significantly earlier changeover. According to preliminary plans, a factor is to be determined for all spouses and civil partners with tax class combination III/V as of September 30, 2029 based on the wage tax certificate for 2028, which will then apply from 2030. In addition, a variant for couples with a single earner will be added to the factor procedure and simplified significantly.

• Tax legislation: The reporting obligation for cross-border tax arrangements is also to be extended to certain national arrangements under strict conditions. A first attempt at this new reporting obligation failed with the Growth Opportunities Act, which is why implementation is questionable this time too. The Federal Ministry of Finance is to determine the date of application at least one year in advance.

• Non-profit law: Several improvements are planned in non-profit law. From 2025, for example, the obligation for tax-privileged corporations to use funds promptly is to be abolished, which means that a statement of use of funds is no longer necessary. From the day it comes into force, it will be clarified that tax-privileged corporations may also take a position on day-to-day political issues without jeopardizing their non-profit status. However, the statement must be made for a specific reason and be subordinate to the tax-privileged purpose. In addition, a regulation on photovoltaic systems for non-profit organizations was included, according to which these will be classified as tax-privileged special-purpose enterprises from 2025.

• Research allowance: The maximum assessment basis increases by EUR 2 million to EUR 12 million for eligible expenses incurred from 2025 onwards. As a result, the maximum allowance per year is EUR 3 million or even EUR 4.2 million for small and medium-sized enterprises (SMEs).