The German Bundestag and Bundesrat passed the Coronavirus Tax Assistance Act on 29 June 2020. This legislation implements the first key elements of the government’s stimulus package. For a six-month period from 1 July to 31 December 2020, the standard VAT rate will be cut from 19% to 16%, and the reduced VAT rate will be cut from 7% to 5%. Families with children will receive a bonus benefit payment of €300 per child. The new legislation also introduces wide-ranging tax relief for all businesses, along with a short-term aid programme for small and medium-sized firms.
These measures form part of an unprecedented, comprehensive stimulus package agreed between Germany’s governing parties. The package is worth a total of €130 billion and is designed to ensure that Germany emerges from the crisis with full strength. Its central aims are to give a major boost to the economy and to enhance Germany’s ability to master the challenges of the future. The federal cabinet has prepared a second supplementary budget containing the necessary financing to ensure that the stimulus package is implemented swiftly and decisively.
These are the stimulus package’s top priorities:
1. Boost demand, safeguard jobs and provide targeted stabilisation
This will be achieved through the following measures in particular:
- VAT will be reduced for a six-month period from 1 July to 31 December 2020. The standard VAT rate will be cut from 19% to 16%, and the reduced VAT rate will be cut from 7% to 5%. This will boost spending power and will especially benefit low-income earners who spend most of their income.
- Families with children will receive a one-time bonus benefit payment of €300 per child. The child benefit budget will be topped up to cover the costs of the bonus. These payments will give a targeted stimulus to aggregate demand precisely in those areas where it is most needed. The bonus will not be offset against basic income support for jobseekers (Grundsicherung). However, in the case of households with higher incomes, the bonus will be offset against the tax allowance for children (Kinderfreibetrag).
- To stabilise the income of single parents, the single-parent income tax allowance will be raised to €4,000 per year in 2020 and 2021, more than double the usual amount.
- The government will also guarantee that social security contributions will not exceed 40% until the end of 2021. Costs that exceed this 40% cap will be covered by the federal budget. This will bolster the net incomes of employees while simultaneously providing a reliable framework for employers.
- Simplified access to basic income support for jobseekers (with no means-testing) will be extended until the end of 2020.
- Support for apprentices will ensure that school leavers can start their vocational training and apprentices can properly complete their current training programmes. This measure will include bonus payments for small and medium-sized businesses.
- An assistance programme for the cultural sector will provide financial support for cultural projects and cultural infrastructure in Germany.
- To reinforce the measures that the Länder are taking to stabilise non-profit organisations, the federal government will set up a special loan programme (run by KfW) for 2020 and 2021.
As part of the stimulus package, the German government is launching a comprehensive assistance programme to provide targeted help to small and medium-sized businesses that have been hit especially hard by the Covid-19 crisis:
- A short-term aid programme will provide assistance to small and medium-sized businesses experiencing major revenue shortfalls due to the crisis. This aid will be available to all sectors of the economy but will also take into account the specific conditions affecting the most hard-hit sectors. This applies to event logistics companies, the fairground and amusement sector, nightclubs, travel agencies and many other businesses that are still impacted by ongoing closures. The government plans to earmark a total of €25 billion for this purpose.
This aid programme will also provide eligible businesses with grants to help cover fixed operating costs during the three months from June to August 2020. To be eligible for these grants, businesses must have experienced average year-on-year revenue losses of at least 60% during the two-month period from April to May 2020. Newer businesses will be able to use comparative figures from a later period. Up to 80% of fixed costs will be covered, depending on the amount of revenue that an applicant loses during the three months from June to August, up to a maximum of €150,000 for larger companies, €9,000 for self-employed individuals as well as micro-entities with up to five employees, and €15,000 for micro-entities with up to ten employees.
- Companies of all sizes can continue to apply for liquidity assistance from the KfW Special Programme 2020. Further information on KfW programmes relating to the Covid-19 crisis is available (in German) at corona.kfw.de.
2. Promote investment by businesses and local authorities
City and local governments must have the financial resources necessary to make investments that will safeguard the future viability of their communities and to ensure good living conditions. To this end, the following measures will be taken in particular:
- In the future, the federal and Länder governments will cover up to 75% (up from the current cap of 50%) of the housing costs that local authorities pay for benefit claimants. This increase is permanent.
- Revenue shortfalls for trade tax (Gewerbesteuer), which are expected to total roughly €12 billion in 2020, will be covered 50-50 by the federal and Länder governments (trade tax is the most important direct source of revenue for local authorities).
- The federal and Länder governments will provide financial support for local public transport. To this end, a one-off extra government subsidy of €2.5 billion for public transport will be provided in 2020.
- Starting on 1 January 2021, the federal government will increase its share of the costs for supplementary pension schemes of the GDR from 40% to 50%.
The stimulus package includes the following measures to support the economic recovery of businesses and to create incentives for investment:
- Depreciation allowances for movable assets such as machinery will be improved for a fixed period (the 2020 and 2021 tax years). These accelerated depreciation options will boost incentives for investment.
- Tax options for offsetting losses against the previous year’s profits will be expanded. Loss carrybacks will be increased to a maximum of €5 million (or €10 million in the case of joint assessments) for 2020 and 2021. In addition, it will be possible to apply loss carrybacks to 2019 tax returns.
- The deadline for paying import VAT will be pushed back from the 16th to the 26th of the following month. This will provide businesses with additional liquidity.
- Corporation tax legislation will be updated and will include, for example, an option that allows non-corporate entities to be treated as corporations for tax purposes. This will enhance the competitiveness of businesses.
3. Invest in a future-friendly Germany
The stimulus package also includes a comprehensive set of measures to invest in Germany’s future. These measures – totalling €50 billion – aim to accelerate the country’s modernisation and to ensure that Germany emerges from the crisis with renewed strength. A wide range of measures will be taken in areas that are crucial for future growth and sustainability.
To promote sustainable mobility, the package contains numerous measures that are targeted towards the transformation of Germany’s transport systems. The aim here is to facilitate the structural transformation of the automotive industry and to help build future-proof value chains. Planned actions include:
- The federal government will double its contribution – from €3,000 to €6,000 – to the “eco-bonus” that consumers receive when they purchase an electric vehicle with a list price of up to €40,000. This “innovation premium” will be granted for a temporary period up to 31 December 2021.
- The government will invest an additional €2.5 billion in the expansion of state-of-the-art, safe charging infrastructure and in R&D funding for electric mobility and battery cell production.
- A bonus programme in 2020 and 2021 will provide €1 billion in funding to promote forward-looking investment by manufacturers and suppliers in the automotive industry.
- From 2021 onwards, carbon emissions will play a greater role in determining motor vehicle tax rates, with clean cars subject to lower rates than high-emission cars.
- A temporary vehicle fleet replacement programme will be put in place to promote electric mobility. The programme will target vehicles used by social services in urban traffic as well as commercial vehicles used by small and medium-sized firms.
- The federal government will invest in a programme to modernise the country’s fleets of buses and heavy goods vehicles. The aim here is to promote the use of vehicles that run on power other than fossil fuels. A temporary increase in funding for electric buses and the necessary charging infrastructure will be provided in 2020 and 2021.
- To promote the use of cleaner heavy goods vehicles, the federal government is calling for an EU-wide HGV replacement programme that will provide grants for the replacement of older, higher-emission vehicles (i.e. compliance with Euro 3 to Euro 5 emissions standards) with new vehicles that comply with Euro VI standards.
- The federal government will provide the railway company Deutsche Bahn with €5 billion in additional equity. This means that, despite the revenue losses caused by the Covid-19 pandemic, Deutsche Bahn will be able to make key investments in the modernisation, expansion and electrification of rail networks and the overall railway system.
The energy transition and compliance with climate targets are two of the greatest challenges facing society in coming decades. Planned measures in this area include:
- The federal government is launching an ambitious investment package to promote hydrogen technology. The aims here include laying the groundwork for new export technologies and making headway towards carbon neutrality in HGV traffic.
- The federal government will provide a grant to reduce the surcharge levied on electricity consumers to 6.5 cents/kWh in 2021 and to 6.0 cents/kWh in 2022.
- The cap on solar power expansion will be revoked and the target for expanding offshore wind power will be raised.
- Funding for the CO2 building renovation programme will be raised to €2.5 billion in 2020 and 2021, an increase of €1 billion.
Investments will also be targeted towards the promotion of digital innovation in both the private sector and public administration:
- Planned investments in artificial intelligence (AI) for the period up to 2025 will be increased from €3 billion to €5 billion. This will support the development of a competitive European AI network.
- The federal government will provide funding to suitable consortia for the construction of at least two quantum computers.
- Five billion euros will be allocated to Germany’s new state-owned mobile infrastructure company for the purpose of building a nationwide 5G network by 2025.
- To fulfil its objective of becoming a leading global supplier of future communication technologies such as 6G, the federal government will invest in measures to test new network technologies.
- Funding will be provided for automation in public administrations. A central aim here is to increase the online availability of administrative services.
Making Germany more future-proof also means adopting measures to provide better protection against pandemics:
- The federal government intends to adopt a “public health services pact”. This will include support to build and upgrade the technological and digital capacities of local health authorities and to strengthen their ability to recruit staff.
- The federal government will launch a programme to future-proof hospitals, which will provide funding for necessary investments by hospitals.
- The federal government contributes funding to the CEPI alliance (Coalition for Epidemic Preparedness Innovations) and is also providing funding for German efforts to develop a Covid-19 vaccine. The objective here is to ensure that an effective and safe vaccine is made available as quickly as possible, and that such a vaccine can also be manufactured in Germany.
The stimulus package also places a high priority on education and research, two fields that have major significance for Germany’s future:
- The German government will expedite its investment programme to expand all-day schools and all-day childcare. Länder that draw down investment funding in 2020 and 2021 will receive matching additional funds in the programme’s subsequent years.
- An additional €1 billion in funding is being provided for measures (to be carried out in 2020 and 2021) to increase the capacity of kindergartens, childcare centres and crèches, to expand and renovate existing facilities, and to build new facilities.
- The tax allowance for research will be increased. The maximum permissible amount used to determine the allowance will be doubled to €4 million per company. This amount will apply retroactively from 1 January 2020 to the end of 2025.
- In the area of applied research, co-financing requirements will be reduced for companies that have been especially hard hit financially by the Covid-19 crisis.