Measures to tackle the energy crisis and to combat inflation
At the national level, the Federal government has taken various measures to counteract the rise in living costs associated with the war. Besides adopting a third relief package, this also includes passing the Inflation Compensation Act and the 2022 Annual Tax Act. The 24(!) individual measures are listed below.
Relief package III
On 3.9.2022, the governing coalition agreed on a third package of measures to ensure an affordable energy supply and to bolster incomes in this year.
(1) Electricity price brake to provide relief – The electricity price brake was adopted with the aim of enabling both private households as well as small and medium-sized enterprises to purchase the amount of electricity for their baseline consumption at a reduced price. It is intended that this will be financed out of the income that the State receives from the introduction of an upper limit for the profits of energy companies that produce electricity from sources that are cheaper than gas (see also Section "Emergency package from the EU Commission", below, and compare with the measures in the emergency package from the EU Commission).
(2) Curbing rising grid fees – To stop the announced increase in transmission grid fees, as of 1.1.2023, the grid fees will be subsidised. As in the case of the planned electricity price brake, here too the State intends to finance this by skimming off the earnings of energy companies that have experienced a significant increase in their margins.
(3) CO2 price relief – The increase in the CO2 price of €5 per tonne that was planned for 1.1.2023 will now be postponed to 1.1.2024. Moreover, in order to enable further savings in the transport sector, there is an intention to make commitment appropriations of around €1.5 bn available.
(4) Price curbing model for the heating market – Experts intend to meet to discuss the feasibility of a price curbing model for the heating market in Germany or Europe.
Legal measures beyond tax law
(5) Extension of the short time working allowance – These special regulations will be extended beyond 30.9.2022.
(6) Introduction of social entitlements – Besides expanding the entitlement to the housing benefit, there is also the intention to introduce heating cost and climate components. Furthermore, the introduction of the Bürgergeld [literally: citizen’s income, or basic income support] will replace the entitlement to ‘unemployment benefit II’ and income support.
(7) Funding for public transport – Timely development of a joint concept for an attractively priced successor to the nationwide €9 ticket.
(8) Aid for businesses – For a start, aid for businesses will be extended and expanded. In addition, there are plans to extend the cap on energy tax and electricity tax for energy-intensive companies by another year.
Measures related to tax and social security regulations
(9) Reduction in VAT rates – The reduced VAT rate of 7 percent will continue to apply to food in restaurants. Furthermore, – probably from 1.10.2022 – the VAT rate for gas consumption will likewise be reduced to 7% until the end of March 2024.
(10) Support for employees via an inflation premium – Companies will be able to give each of their employees a one-off payment in the amount of €3,000 that will be exempt from tax and social security contributions.
(11) Home office blanket deduction – This will be extended for an indefinite period of time for the operating costs and work-related expenses deduction.
(12) New upper limit for midi-jobs – For employees in this transitional sector the wage limit will be increased to €2,000.
(13) Energy price lump sum – As of 1.12.2022, pensioners will now also receive a one-off payment of €300 from the German Federal Pension Scheme – previously this amount was paid only to taxpayers with unlimited tax liability. In the absence of payroll tax, the energy price lump sum will be taxable as income so that the amount of the one-off payment will depend on the respective income. All university students and vocational students will receive a one-off payment of €200. It is currently not yet clear to what extent this amount will have to be taxed. It has moreover not yet been determined how the money will be disbursed to them. The fact that the energy price lump sum will be paid irrespective of any other relief measures that are claimed (such as, e.g., housing benefit) is positive for consumers.
(14) Pension contributions – Taxpayers will be able to fully deduct their pension contributions already from 1.1.2023.
(15) Support for children – The Federal government’s plans for relief for children will be detailed in the Inflation Compensation Act.
(16) Reduction of tax bracket creep – In order to counteract bracket creep, the threshold values for 2023 and 2024 in the income tax scale will be adjusted. A more extensive discussion of this is presented below in section "Inflation Compensation Act".
Inflation Compensation Act
On 14.9.2022, the Federal Cabinet approved a rightward shift in the income tax scale for 2023 and 2024 to compensate for the bracket creep – this measure had already been announced in its Relief package III – and the respective governmental draft of the Inflation Compensation Act of 8.9.2022 was thus introduced into the legislative process. The Act includes, in particular, the following measures:
(17) Top marginal tax rate – For the assessment year 2023, the top marginal tax rate of 42% will be payable on taxable incomes above €61,972 (previously €58,597) for those who are separately assessed for tax, although another increase in this threshold value is planned for 2024. For those who are jointly assessed, the taxable income will go up respectively from €117,194 to €123,944. At the same time, the threshold value for the ‘tax on the rich’ (at a rate of 45%) will however be maintained.
(18) Raising the basic personal tax allowance – As of 1.1.2023, the basic personal tax allowance for those who are separately assessed for tax will go up from €10,347 to €10,632 and for those who are jointly assessed from €20,694 to €21,264. In addition, the maximum amount of maintenance will correspondingly be retroactively adjusted as of the assessment year 2022.
(19) Child tax allowance – Firstly, the German government sees the need for a retroactive adjustment for a retrospective increase in the child tax allowance for 2022. Secondly, an increase in the child allowance for 2023 and 2024 is planned pursuant to the result that is expected from the 14th report on minimum subsistence levels.
(20) Child benefit adjustments – Child benefit will likewise be correspondingly increased. From 2023, for the first, second and third child this will be, in each case, €237 per month and for the fourth child and each additional child this will be €250 per month. Up to now, child benefit for the first and second child has been €219, for the third child €225 and for each additional child €250 per month.
2022 German Annual Tax Act
The governmental draft of the 2022 Annual Tax Act, which was approved by the Federal Cabinet on 14.9.2022, includes the following provisions:
(21) Modernisation of the deduction of expenses for business or professional activities carried out at home from 2023 (Section 4(5) sentence 1 no. 6b of the German Income Tax Act-draft) – The previous maximum amount of €1,250 for the use of a workroom at home will be turned into a yearly flat rate in the same amount (annual lump sum). If no other workspace for business and professional activities is available on a permanent basis then the expenses for the entire business and professional activities may be deducted in the amount of the annual lump sum. As a result, the taxation procedure can be substantially simplified and bureaucracy reduced because the individual expenses will no longer have to be determined and verified. Furthermore, if the workroom also constitutes the focus of the entire business and professional activities then instead of the annual lump sum – as previously – the actual expenses may be deducted.
(22) Home office blanket deduction – Besides the extension of the home office blanket deduction for an indefinite period (in this respect see under (11) above), there are plans to raise the annual maximum amount to €1,000. This will be granted irrespective of the definition of the type of workroom at home.
(23) Support for specific photovoltaic systems from 2023 (Section 3 no. 72 of the German Income Tax Act-draft) – An income tax exemption will be introduced for these and, in relation to the tax-exempted systems, the advisory powers of German Income Tax Assistance Associations (Lohnsteuerhilfevereinen) will be expanded. Moreover, for specific photovoltaic systems a VAT zero rate with input tax deduction for the supply and installation will be introduced.
(24) Increase in straight-line depreciation for buildings – The straight-line depreciation rate for residential buildings completed after 31.12.2023 will go up to 3% (previously 2%). However, from 2023, the possibility to opt to apply depreciation at the standard depreciation rate on the basis of an actual useful life that can be substantiated will be eliminated.
In order to tackle high energy prices, the EU Commission put forward a proposal for an EU Emergency Regulation. In addition, the EU is aiming for a swift implementation of the global minimum tax.
‘Emergency package’ from the EU Commission
The key points in the proposal concern the following announcements:
(1) The introduction of a cap on the revenues of electricity producers with low marginal costs, such as those that use renewables, nuclear and lignite – This draft corresponds to the compromise that was reached by the Federal government in its Relief Package III, namely, to support a revenue cap at EU level. We would like to stress that, irrespective of any decisions made at the EU level, the German Federal government is itself likely to take action at the national level.
(2) Introduction of a solidarity contribution from oil and gas companies.
(3) Measures to reduce gross electricity consumption during peak load times – According to the proposed regulation, the Member States should endeavour to reduce overall electricity consumption by at least 10% by 31.3.2023. To target, in particular, those hours when electricity is most expensive and when gas usually determines the marginal price, the Commission has proposed an obligation to reduce gross electricity consumption by at least 5% during specific peak price hours.
(4) Proposal for a gas price cap.
(5) Emphasis on the particular importance of hydrogen for the transformation.
The Commission expects measures (1) – (5) to raise revenues in the amount of €140 bn for redistribution to vulnerable private consumers and businesses.
Global minimum tax
On 9.9.2022, the finance ministers of Germany, France, Spain, Italy and the Netherlands published a joint statement where they affirmed their commitment to swiftly implement a global minimum tax.
If the unanimity that is needed within the EU cannot be reached in the next weeks then these states want to implement a global minimum tax with effect from 31.12.2023 on their own.
Please note: In Germany, according to a resolution by the coalition, it has already been decided that this will start by 1.1.2024. Here, the minimum tax will apply to businesses with sales of at least €750m.