German Economy Under Pressure: Trump’s Tax Policy as a Competitive Disadvantage

International tax cooperation faces a test: On the first day of his second term, Trump made it clear that the U.S. will not participate in the global minimum tax. Furthermore, U.S. countermeasures could put German companies at a disadvantage.

Among other things, Trump cites Section 891 of the U.S. Internal Revenue Code, which allows the U.S. to double tax rates for citizens and companies from countries that impose extraterritorial or discriminatory taxes on American firms. A study on this matter is to be completed by April 1, 2025.

In addition, with H.R. 591, Republicans are proposing a tool for targeted retaliatory measures, namely special tax rates on U.S. income from “wealthy” investors and companies (permanent establishments, dividends, interest, licenses) from countries that impose discriminatory taxes (5 percentage points over four years, up to a maximum of 20 percentage points above the original tax rate). Countries could avoid the penalty tax by eliminating discriminatory taxes on U.S. companies. The proposal must still go through the legislative process (House of Representatives and Senate).

These regulations would have an immediate impact on numerous European companies operating in the U.S., in part because the EU is implementing the minimum tax through its directive. German companies would thus face a clear competitive disadvantage—simply because they comply with international agreements.

Minimum Tax Without the U.S.: A Threat to Germany as a Business Location

The EU is likely to stick to the minimum tax despite the U.S. rejection. But economists warn: A minimum tax without the U.S. could become a massive locational disadvantage and cause distortions of competition at the expense of European companies. Specifically, this means:

• Disproportionately high costs and bureaucratic hurdles for companies, coupled with significant tax uncertainties that delay urgently needed restructuring and
• the threat of additional tax burdens resulting from business activities in the U.S.

Furthermore, German companies are at a disadvantage when it comes to representing their interests: Decisions on the minimum tax are made through the OECD in Paris, while the U.S. can adjust its tax policy independently.

A Strategy for the German Economy Is Needed

In light of these developments, an economic policy strategy is urgently needed to protect the competitiveness of the German economy. At the national and European levels, it must be recognized that a unilateral implementation of the minimum tax would place European companies at a massive disadvantage. The following are necessary:

• A competitive tax system at the national and European levels, and
• a critical evaluation of the implementation of Pillar 2 of the minimum tax.

Conclusion: Tax Risks for German Companies Are Growing

The U.S. decision not to participate in the global minimum tax exacerbates the locational disadvantages for Germany. Added to this are expected countermeasures that could place European companies at a massive tax disadvantage. Policymakers in Germany and the EU must develop solutions to minimize the tax burden on European companies. Otherwise, there is a risk of a significant competitive disadvantage with far-reaching consequences for Germany as a business location. The BDI has already taken action on this matter and reached out to decision-makers in Brussels and Berlin.