It’s Time For A Major Overhaul of Corporate Taxes

Nine changes are necessary to achieve this argues Johanna Hey and Matthias Hiller.

Less than two months after Friedrich Merz’s election as Chancellor, an immediate tax-based investment program was passed, followed later by the Business Location Promotion Act. The federal government thus created investment incentives and improved financing options; corporate tax will be reduced from 2028. These were necessary steps, but the need for reform of corporate taxation is not yet exhausted.

The problems facing Germany as a business location run deep. Companies suffer from bureaucracy and regulation, high costs, and international competition. At the same time, they are expected to invest, create jobs, generate innovations, and thus provide the foundation for our prosperity and our social security systems.

For this, they need a tax system that is competitive, simple, and predictable. Recommendations are offered in the final report of the “Simplified Corporate Tax” commission, initiated by the Federal Ministry of Finance in 2024. The important thing now is to set priorities.

First, investments need to be better treated for tax purposes. To this end, expenditures for digitalization, artificial intelligence, automation, and cybersecurity should be immediately tax-deductible. Declining-balance depreciation could also be made a standard practice.

Secondly, a tax system that taxes profits must also adequately account for losses. Entrepreneurial risk would be more realistically reflected through longer loss carryback periods, less restrictive minimum taxation, and improved loss utilization options for startups, restructuring, and transformation processes.

Thirdly, it is important to reduce the burden of tax considerations on the choice of legal form. The corporate tax option should be simplified, and the preferential tax treatment for retained earnings in partnerships should be revised.

Fourth, the tax law governing corporate reorganizations must be simplified. Companies must be able to restructure, merge, and react to changing markets without being thwarted by tax-related holding periods and documentation requirements. Modernizing group taxation is also part of this process.

Fifth, internationally active companies need greater legal certainty. Controlled foreign company (CFC) rules, anti-hybrid rules, global minimum taxes, and exit taxes form a regulatory web that is almost impossible to understand. Of course, abuse must be prevented, but competitiveness is also at stake. In the context of the EU Tax Omnibus, Germany should use the opportunity to demand further simplifications in the Council.

Seventh, Germany needs a unified digital tax administration so that companies no longer have to report the same data multiple times. The once-only principle, standardized interfaces, and reliable processing times must be implemented as quickly as possible.

Eighthly, tax audits must be completed more quickly, because risk-oriented audits, early partial financial statements and faster binding information create legal certainty.

And ninthly, the trade tax must be reformed. Additions to taxable income burden companies regardless of their profitability. Furthermore, double taxation of foreign activities must be eliminated and the tax bases for income taxes must be standardized.

Behind these nine points lies a fundamental principle. Economic policy seems to be increasingly leaning towards extremes: the extensive withdrawal of the state on the one hand, and ever-increasing state regulation on the other. Both are the wrong path. The social market economy needs neither a weak nor an omnipresent state; it needs a state that sets and enforces clear rules – and within those rules enables economic freedom.

This also applies to corporate taxation. We must once again strive to create a tax system that keeps pace with international economic and technological developments. Such a tax system supports innovation and a willingness to take risks. It enables companies to adapt, grow, and compete in global markets. In doing so, it secures the long-term revenue of our public sector.

German companies still have the potential to be at the forefront of international competition. It is the task of policymakers to create a tax system that doesn’t stifle this potential, but rather unleashes it. That would send an important signal of a new beginning for a modern and reform-minded Germany.

The authors: Johanna Hey is the director of the Institute for Tax Law at the University of Cologne .
Matthias Hiller is a member of the Finance Committee for the CDU/CSU parliamentary group in the Bundestag.