The impact of the 2025 election on tax

After the split of the traffic-light coalition, new elections were brought forth to 23 February 2025. The premature dissolution of the Bundestag is having a considerable impact on current legislative processes. At most, a majority in the Bundestag is to be expected for individual measures. In principle, it is unlikely that any significant bills on tax matters will be passed in the coming months.

The Growth Opportunities Act (Wachstumschancengesetz) was passed after a strong political tussle at the start of the year. It includes a slight increase in the restriction of offsetting losses, restricted to four years, from 60 to 70 percent in the context of minimum tax on corporation loss carry-forwards. Declining tax depreciation was also reintroduced until the end of 2024 and numerous measures in income tax and corporate tax implemented. Adjustments to the interest deduction ceiling rule, necessary from the European point of view, had already been made beforehand in the Secondary Market Credit Fostering Act (Kreditzweitmarktförderungsgesetz). 

On 22 November 2024 the Bundesrat, the upper house, finally approved the Annual Tax Act for 2024, which also includes many changes to corporate tax and reorganisation tax legislation. We reported on this in our last issue of Corporate tax advisory in practice [Link einfügen]. The Bundesrat has also passed the Act on Tax Exemption of the Subsistence Level 2024 (Gesetz zur steuerlichen Freistellung des Existenzminimums 2024), which increases the personal allowance and child allowance retrospectively for 2024. Both laws have now entered into force.

In the middle of the year, the coalition government, as it then was, agreed on a draft budget for 2025 and a growth initiative. In this way the federal government wanted to provide more stimulus to the economy. The tax measures associated with this included improving the conditions for depreciation, expanding research allowances and preventing bracket creep. The Tax Development Act (Steuerfortentwicklungsgesetz) was intended to implement the tax policy aspects of the federal government’s growth initiative. But this no longer seems realistic in light of the federal government’s lack of a majority in parliament.

On 27 November 2024, the federal government surprisingly adopted a draft bill for a Second Financing for the Future Act and introduced it in the Bundestag. The bill is to implement further measures from the growth initiative. However, obtaining a political majority in the Bundestag on this bill is very uncertain.

The collapse of the traffic-light coalition and the Bundestag election in February 2025 entail significant uncertainty and delay with implementing tax reforms and legislative plans far beyond the new constitution of the Bundestag. Clarification will only come once a new coalition has been formed and a new coalition agreement has been signed. Businesses and taxpayers should get ready for potential changes in the political agenda. These may well impact existing plans as well as bring new tax measures. The effects of these depend to a crucial extent on the results of the election and the coalition that then forms.

As always, we’ll continue to keep you up to date with the current developments in corporate tax in the new year.

Current advisory news in brief

Blocked period for qualifying exchange of shares: In a “qualifying exchange of shares” under Section 21 of the Reorganisation Tax Act (Umwandlungssteuergesetz), if the contributed shares are sold prematurely under Section 22(2) sentence 5 of the Reorganisation Tax Act, contribution gain II will not be taxed if the transferor has disposed of the received shares in the receiving company before the detrimental event. Lower Saxony Fiscal Court decided in its judgment on 02/09/2024 (13 K 185/23; under appeal: BFH X R 26/24) that a previous disposal within the meaning of the exception is only given if the hidden reserves of the previously received shares are disclosed during the disposal. This condition has now been clarified by the Annual Tax Act 2024 which just entered into force so blocked periods cannot be shortened by using the “double contribution model”.  

Free use of company assets: In its judgment on 1 October 2024, the Federal Fiscal Court (Bundesfinanzhof) decided that the mere possibility of the shareholder of a corporation being able to use one of the corporation’s assets privately (in this case a residential property) does not result in and of itself in a hidden profit distribution. In the Federal Fiscal Court’s view, a hidden distribution of profits can be assumed, however, if the company let its shareholder use an asset at no cost or at a reduced cost for private purposes. 

Operational expenditure related to a solar panel installation: Münster Fiscal Court decided in a ruling on 21 October 2024 (1 V 1757/24 E) that subsequent operational expenditure related to the taxable income of previous years from running a solar panel installation that was tax-free since 2022 is deductible.