Germany Remains a High-Tax Jurisdiction

Many industrialized nations are responding to international competition among business locations by lowering corporate taxes and improving investment conditions. Germany, on the other hand, remains a high-tax country. For corporations, the total tax burden—comprising corporate income tax, the solidarity surcharge, and trade tax—stands at around 30 percent. Added to this are protracted procedures, numerous reporting requirements, and increasingly complex international tax law.

This influences investment decisions. Companies compare not only labor, energy, and infrastructure costs, but also the tax burden, depreciation rules, and legal certainty. If these conditions are consistently worse than in other locations, new capacity is increasingly being established abroad.

The approved phased reduction in the corporate income tax is therefore a step in the right direction. However, it is not scheduled to take effect until 2028 and will not have its full impact until years later. For companies making investment decisions today, this comes too late. The BDI calls for tax cuts to be brought forward and supplemented by further structural reforms.

Income Tax Is Also Corporate Tax

In the tax policy debate, it is often overlooked that many small and medium-sized enterprises (SMEs) and family-run businesses do not pay corporate income tax. In the case of partnerships, the partners pay tax on the business profits through income tax. For them, income tax is therefore not merely a personal tax, but the primary corporate tax.

Tax relief for small and medium incomes is a step in the right direction. However, financing this relief through a stricter “wealth tax” remains problematic. Calculations by the German Economic Institute show that an estimated 70 percent of the additional burden would fall on business activities.

For affected co-owners, the combined burden of income tax and the solidarity surcharge could rise to just under 50 percent. This weakens the accumulation of equity and reserves, particularly for those companies that frequently finance investments from retained earnings. Anyone who wants to strengthen industrial small and medium-sized enterprises must not impose additional burdens on business income.

Finally Achieve Neutrality Regarding Legal Form

The optional model and the retained earnings tax break were actually intended to ensure tax fairness between partnerships and corporations. In practice, however, both instruments fall short of this goal.

Less than one percent of partnerships use the option model. Lock-up periods, requirements regarding special business assets, and tax risks make the switch to corporate taxation unattractive for many companies. The tax incentive for retained earnings is also too complicated and often not economically advantageous.

Policymakers must therefore fundamentally overhaul both instruments. Companies should be able to use retained earnings more easily and under more attractive conditions for investments, transformation, and equity buildup. Taxation must not depend on whether an industrial company is historically organized as a corporation or a partnership.

Targeted Support for Investment and Innovation

Accelerated depreciation is an effective tool for bringing forward investments. Declining-balance depreciation should therefore not be limited to a temporary period. Over the entire useful life of an investment, this generally results in no permanent loss of revenue for the government—the tax relief is merely shifted to the beginning of the investment period.

The research tax credit is also an important tool. It is available to companies regardless of size or legal form and strengthens research and development in Germany. To make it more attractive by international standards, the program should be expanded and the application process significantly simplified.

Reduce Tax Bureaucracy and Digitize Procedures

A competitive tax policy is not just about tax rates. Duplicate reporting requirements, complicated documentation rules, and lengthy refund and exemption procedures place a burden on businesses. Overlaps arise particularly in European and international tax law—for example, between the global minimum tax, add-back taxation, and other reporting requirements.

The European Tax Omnibus Act offers an opportunity to eliminate such duplicate regulations. Germany should ambitiously support this initiative and refrain from imposing additional national restrictions. At the same time, the federal and state governments must fully digitize tax procedures. Companies should only have to submit data once; tax authorities can then process it seamlessly without a change in medium. This eases the burden on both sides.

What the Federal Government Must Do Now

The key demands:

• Bring forward corporate tax cuts: The agreed-upon cuts must not take effect only starting in 2028. Germany needs a visible signal of tax relief for investments in the short term.
• Completely abolish the solidarity surcharge: The solidarity surcharge continues to burden businesses and exacerbates the already high overall tax burden, particularly for partnerships.
• Treat partnerships on an equal footing: The option model and retained earnings tax relief must be fundamentally simplified and made practical. Higher taxation of business income would send the wrong signal.
• Promote investment and research: Declining-balance depreciation should be made permanent, the research tax credit should be expanded, and its application process should be simplified.
• Simplify and digitize tax law: Duplicate reporting and filing requirements must be eliminated, international regulations must be better coordinated, and tax procedures must be fully digitized.

Tax policy is location policy. Germany needs a tax system that does not hinder investment but rather enables it. Only tangible tax relief and simple rules can transform individual reform measures into a credible signal of a new beginning for sustainable growth.