German corporate income tax rate is being reduced – so check whether you need to take action!

Part 2 – of the contributions to the measures of the immediate investment programme

After more than two years without economic growth, Germany is set to become more attractive to investors again. This goal is being pursued with the immediate investment programme (Investitionssofortprogramm) adopted in mid-July 2025 (BGBl. 2025 I no. 161 of 18 July 2025). For an overview of the measures that have been implemented, see our article, which can be accessed via the following link: INSERT LINK.

This article will focus on the gradual reduction in corporation tax from the current 15% to 10% by 2032, starting on 1 January 2028.

The mechanism of the gradual reduction

Pursuant to Sec. 23 para. 1 of the German Corporate Income Tax Act (Körperschaftsteuer, “KStG”), the German Corporate Income Tax rate will gradually reduce from 15% to 10%, starting on 1 January 2028 and concluding in 2032. This will result in the following German Corporate Income Tax rates in the coming years:

The economic relief for companies will actually amount to 5.275% from 2032 onwards, as the German Corporate Income Tax will also reduce the resulting burden from the solidarity surcharge accordingly.

Additionally, the corresponding reduction in the capital gains tax rate (Sec. 34a para. 1 sent. 1 of the German Income Tax Act (Einkommensteuergesetz, “EStG”) ensures that partnerships and corporations are treated equally for tax purposes (see BT-Drucksache 21/516, p. 2).

Keep an eye on deferred taxes

This change affects the measurement of deferred taxes recognised in the balance sheet, which must be remeasured in future annual financial statements (for most companies, this will be the first time as at 31 December this year). Deferred taxes must generally be measured at the applicable individual tax rates at the time of reversal (Sec. 274 para. 2 sent. 1 of the German Commercial Code and IAS 12 46 ff.). However, the gradual reduction in corporation tax rates makes it difficult to determine the applicable rate, necessitating a potentially contentious forecast.

Deferred tax assets on loss carry-forwards pose particular difficulties, as they may only be recognised under commercial law if utilisation is probable within five years. Longer periods are permitted for accounting purposes under IFRS. This assessment is further complicated by the temporary enhancement of the deductibility of loss carry-forwards for income and corporation tax until the end of 2027. In the year of offsetting, a base amount of €1 million remains fully deductible, with any loss carry-forward in excess of this amount being offset against profits at a rate of 70% (rather than 60%).

It should be noted that the newly introduced declining-balance depreciation method for movable fixed assets (see INSERT LINK for details of the so-called investment booster) and electric vehicles will, in many cases, lead to higher deferred tax liabilities.

Implementation issues relating to the gradual reduction in German corporate income tax rates

The reduction in corporation tax is welcome, given that Germany currently has the third-highest nominal tax rates, behind only Malta and Portugal (see study by the Bavarian Industry Association, p. 7). However, reducing the corporation tax rate requires further legislative adjustments, for example to the capital gains tax procedure or the tax deduction for persons with limited tax liability. These consequential changes have not yet been implemented as part of the immediate investment programme but will be addressed in a later legislative procedure. We will, of course, keep you notified of developments!

There are also a number of other practical challenges companies face. Current tax reporting tools and ERP software systems are not currently capable of calculating deferred taxes separately. Therefore, it is advisable to check with the relevant provider as soon as possible to find out when the necessary adjustments will be made, if at all.

Companies whose financial year ends on 30 June 2025 should consult their auditor to establish whether a corresponding disclosure in the notes is required, even if a revaluation of deferred taxes is not yet necessary based on the balance sheet.

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The above information is for informational purposes only and does not constitute legal or tax advice.