Taxation & Business Location Germany 2026–2031: Growth Booster, High-Tax Country and the Limits of Fiscal Sustainability

Initial situation & findings

The German economy has recently barely moved forward: gross domestic product rose by only 0.3 percent in 2025 on a calendar-adjusted basis, following two weak preceding years. On locational costs, Germany is falling behind – according to the Federal Ministry of Finance, both the nominal corporate tax burden and the tax-and-contribution burden on the factor labour are high by international comparison. The statutory profit burden on corporations was around 30 percent in 2024, placing it in the top EU range. In addition, the tax-and-contribution ratio reached a record value of 41.9 percent in 2025 according to the national accounts, driven above all by increased social contributions. The tax-and-contribution wedge for single earners with an average income stood at 47.9 percent in 2024, EU-wide only behind Belgium. At the same time, companies are increasingly warning about relocations; according to a DIHK survey, around one third of energy-intensive firms are considering such steps. The finding is therefore: structurally high burden combined with weak momentum – policymakers are responding in 2025/26 with tax relief and energy cost subsidies.

How it came about: the road to the Growth Booster

For years, the associations have been calling for a reduction of the profit burden to a more competitive level of about 25 percent. While many OECD states have cut their corporate taxes since 2008, the effective burden in Germany rose slightly due to higher trade tax multipliers. In an EU-wide study, Germany ranked 26th out of 27 in terms of the effective corporate tax burden. Against this backdrop, the new coalition launched one of its first major projects: the Bundestag adopted the tax-based investment fast-track programme on 26 June 2025, and the Bundesrat approved it on 11 July 2025. In addition, in March 2025 the debt brake was loosened through a constitutional amendment, and a special fund for infrastructure and climate neutrality of €500 billion over twelve years was created. Thus, for the first time, policymakers combined tax relief, a credit-financed investment offensive and energy cost aid into an overall package to strengthen Germany as a business location. At the same time, critics spoke of fiscal policy with limited targeting accuracy and high revenue losses.

Central drivers and mechanisms

The core of the programme is the reintroduction and expansion of declining-balance depreciation of up to 30 percent for movable assets acquired between 1 July 2025 and 31 December 2027, capped at three times the straight-line depreciation. Economically, this acts as an interest-free tax credit: the tax burden falls in the early years, liquidity rises, and investments refinance themselves more quickly. The second lever is the reduction of the corporate income tax rate from 2028 by one percentage point annually, from 15 to 10 percent, so that the overall burden from 2032 will amount to just under 25 instead of the current just under 30 percent. For partnerships, the retention tax rate will gradually fall to 25 percent from 2028 in order to establish legal-form neutrality. The German Council of Economic Experts emphasises that depreciation allowances tend to address domestic investment, while rate cuts favour the choice of location itself. Economist Veronika Grimm therefore argued for giving priority to the rate cuts and implementing them earlier. In addition, electric company cars are supported with 75 percent immediate depreciation in the year of acquisition, and the assessment base for the research allowance is raised from 10 to 12 million euros.

Ongoing and planned measures

In addition to the immediate investment programme, further measures came into force at the turn of the year; the Tax Amendment Act 2025 passed the Bundesrat on 19 December 2025. For venture capital, the maximum amount for the roll-over of hidden reserves under Section 6b EStG was raised from 500,000 to 2 million euros. In the energy sector, the electricity tax for around 600,000 companies in the manufacturing sector as well as farmers and foresters will remain permanently at the EU minimum level of 0.05 ct/kWh from 2026. A new industrial electricity price will cap costs for energy-intensive operations at around 5 ct/kWh from January 2026, with a total budget of 3.8 billion euros for 2026–2028 and EU state-aid approval from April 2026. Transmission network charges will fall through a subsidy of 6.5 billion euros, and the gas storage levy will be abolished. The further development of the debt brake remains open: a government commission was to present a reform proposal in the first quarter of 2026, and the Bundesbank has presented a three-stage plan. In addition, the abolition of the solidarity surcharge and a reform of the exit taxation are being discussed, while an SPD initiative to tighten inheritance tax is meeting with criticism from business.

Economic impact: costs, benefits and the public purse

The federal government puts the shortfall in revenue at around 46 billion euros over four years, with the full effect of the rate cut only taking hold from 2032. A study commissioned by the Stiftung Familienunternehmen shows that a corporate income tax cut of five percentage points still costs around 17 billion euros annually ten years after it takes effect, even when all growth effects are included – around 80 percent of the shortfall remains permanent. The thesis of self-financing is thus refuted for the standard case; what matters is whether the incentives trigger additional investment rather than mere windfall effects. The Bundesbank expects the expansionary fiscal course to noticeably support growth from 2026, with a cumulative GDP effect from defence and infrastructure spending of 1.3 percentage points by 2028. At the same time, the deficit ratio will rise to 4.8 percent by 2028 and the debt ratio from 62 to 68 percent. The 2026 federal budget provides for expenditure of just under 525 billion euros and net borrowing of around 98 billion euros in the core budget – including special funds, around 180 billion euros. The German Council of Economic Experts warns that the additionality of the special fund in 2025/26 is low and that over the medium term only around half of the resources are likely to be spent additionally in a growth-effective manner.

International classification and tax competition

At a nominal 29.9 percent, Germany has the second-highest corporate burden in the EU, where the average is 21.1 percent and in the OECD area 23.6 percent. Even after the planned reduction to around 25 percent, Germany would thus remain above the EU average. In terms of the top tax rate for partnerships, Germany, at 47.5 percent, is in the top EU quartile, while eight member states levy higher and 18 lower rates. Tax-based research funding remains behind the offerings of other countries for larger projects, and limited loss-offset options prolong the recovery after loss phases. Internationally, the trend is mixed: according to OECD data, in 2023, for the first time since 2015, more states increased their corporate taxes than reduced them, partly in favour of targeted investment incentives. While the global minimum taxation of 15 percent limits pure rate competition to the downside, it increases compliance costs through new reporting and anti-abuse rules. According to the National Regulatory Control Council, bureaucratic costs for companies have risen by around 14 billion euros since 2011 – a locational disadvantage alongside the mere level of the tax rate.

Energy as a location cost factor

Following the crisis peaks of 2022/23, electricity prices have eased: according to the BDEW, the average new-contract price for small to medium-sized industrial enterprises in 2026 is around 16.0 ct/kWh, a decline of 1.6 ct/kWh. The main drivers of relief are grid fees, which have fallen by about 15 percent, supported by the federal subsidy of 6.5 billion euros. Nevertheless, the level remains high internationally – on average, according to Eurostat, German industry paid between 16 and 23 ct/kWh in 2025, well above the EU average. The new industrial electricity price lowers costs to around 5 ct/kWh for approximately 2,000 energy-intensive enterprises, but is limited until the end of 2028 and tied to reinvestment requirements. Smaller enterprises often fall through the cracks due to a lack of energy intensity and are dependent on the general reduction in grid fees and electricity tax. Overall, the federal government estimates the energy cost relief in 2026 at more than 10 billion euros per year, with the federal government budgeting around 29.5 billion euros for stabilization. Structurally, the problem persists: rising grid expansion costs and system costs are likely to keep end prices stable to slightly rising over the medium term, so that energy remains a central competitive factor.

Distributional and second-round effects

Rate reductions and expanded depreciation allowances primarily benefit companies with profits and investment capacity; many small businesses with low profits derive little benefit from them. Taxable profits are highly concentrated: 413 multinational companies headquartered in Germany alone generated around 100 billion euros in profit domestically in 2021. Fiscally, the booster particularly burdens the states and municipalities, whose trade tax and share tax revenues decline; the federal government pledged a temporary compensation. According to Destatis, the municipal level recorded a record deficit in 2025, which further narrows local investment scope. Second-round effects have a positive impact if accelerated depreciation actually stimulates equipment investment, productivity, and employment – here ifo analyses show particularly favourable effects. A growing debt service, on the other hand, has a negative impact, constraining future budgets, as does the risk of the special fund being used for consumption rather than investment. Decisive for the location effect is therefore less the amount of relief than its targeting and the credible reduction of the deficits.

Key measures in the field of Taxation & Location – parameters and fiscal magnitude

Scenarios

Options for action

1. Bring forward and make permanent the corporate tax cutSince rate cuts, according to the German Council of Economic Experts (SVR) and Grimm, have a stronger effect on location decisions than depreciation allowances, the reduction to 25 percent should take place earlier and in a predictable manner. This improves the signaling effect in international comparison and increases additional investment, instead of merely supporting the liquidity of existing investors.
2. Reform loss offsetting and depreciation rulesRestrictions on loss carryforwards and carrybacks should be dismantled and the declining-balance depreciation made permanent, as limited offsetting puts Germany at a disadvantage in the EU comparison. This particularly strengthens young and crisis-affected companies, which elsewhere regain liquidity more quickly.
3. Reduce bureaucracy and reporting obligationsBureaucracy costs, which have risen by around 14 billion euros since 2011, reduce competitiveness regardless of the tax rate. A noticeable reduction in reporting, documentation, and anti-abuse requirements frees up resources for operating business and is cost-neutral.
4. Deploy special funds strictly for investment and as additional spendingOnly investment expenditure generates a high growth effect and dampens the rise in the debt ratio. A verifiable additionality quota well above 50 percent prevents loans from filling existing budget gaps instead of creating new capacity.
5. Structurally reduce energy grid costsSubsidies and caps such as the industrial electricity price alleviate symptoms but expire in 2028. Faster approvals, efficient grid expansion, and sufficient power plant capacity are needed to reduce end prices permanently and retain energy-intensive industry.

Key risks

• Fiscal SustainabilityThe debt ratio rises to 68 percent by 2028 and, according to the Bundesbank, could tend toward 90 percent by 2040 without reform; growing debt service narrows future scope.
• Shortfalls for states and municipalitiesDeclining trade tax and revenue-share income hits a municipal level that recorded a record deficit in 2025, and weakens local investment.
• Windfall effects instead of additional investmentIf additional investment fails to materialize, the relief measures cost around 17 billion euros annually on a permanent basis, without triggering the hoped-for productivity boost.
• Consumptive use of the special fundsIf the capital is not deployed additionally and for investment, debt rises without a corresponding growth effect – a core risk named by the SVR.
• Energy price volatility and expiring aidRising grid fees and the expiry of the industrial electricity price at the end of 2028 could raise costs again and fuel relocations.
• International tax and location competitionEven after the cut, Germany remains above the EU average; aggressive incentives from other countries and geopolitical uncertainty can draw investment away.

Outlook

Over five years, the policy field of Tax & Location points, for the first time in a long while, in a fundamentally correct direction: the gradual reduction to around 25 percent, declining-balance depreciation, and energy cost aid improve the framework conditions and, according to the Bundesbank, support growth of up to 1.3 percent in 2027. The benefit remains limited, however, as long as Germany lies above the EU average and bureaucracy as well as structurally high energy costs persist. Three levers are decisive: the pace and precision of the tax relief, the consistently investment-oriented and additional use of the 500-billion-euro special fund, and a credible reduction of the deficit ratio rising to 4.8 percent. If the combination of relief, structural reform, and fiscal discipline succeeds, the impulse turns into lasting location strength; if windfall effects and consumptive spending predominate, permanent revenue losses with only weak growth loom. The balance is therefore cautiously positive, but highly dependent on implementation.