Annual Tax Act 2026

The German Federal Ministry of Finance has published the draft of the Annual Tax Act 2026. It includes, among other things, a statutory rule on the allocation of the total purchase price for a built-up property, procedural simplifications for withholding tax relief, a fundamental re-regulation of the VAT group and an adjustment of the interest rate for full interest. We present these and other key measures.

Lawful rule for allocation of a total purchase price for built-up properties

The new regulation in Section 6f of the German Income Tax Act (Einkommensteuergesetz; EStG) draft is intended to legally specify the required allocation of a total purchase price for a built-up property. If a contractual allocation of the purchase price is missing or such an allocation cannot be used for taxation because, for example, it does not reflect the real value relationships, it shall henceforth be expressly stipulated that the allocation shall be made according to the ratio of the market values attributable to the land on the one hand and to the building on the other, taking into account the highest court case law and the accepted principles of market value determination of real estate.

A minimum value rule is also intended to prevent, as a precaution, the possibility that for example a property containing a liquidation object could result in a negative building value component.

The new regulation in Section 6f EStG draft is intended to apply for the first time to built-up properties that were acquired on the basis of an obligatory contract or equivalent legal act concluded with legal effect after the day of promulgation of this law.

Shorter minimum period for permanent assignment to a first place of work in Germany

With regard to a first place of work, Section 9 (4) EStG requires a permanent assignment of the employee to that place of work by appropriate service or employment law provisions. The relevant period after which a permanent assignment is to be assumed, and thus a first place of work may exist, is to be reduced for domestic assignments from 48 months to 24 months as of January 1, 2027. For foreign assignments, a period of 48 months shall continue to apply.

Simplifications for closing payroll tax records

From January 1, 2028 it shall be possible to close the employee’s payroll account no later than the last day of February of the following year and to transmit legally permissible amended payroll tax certificates without restriction by that date (Section 41b (1) sentence 1 EStG draft). Currently this must be done by the end of the calendar year. In addition, the previous official form of the electronic payroll tax certificate is to be developed into an official electronic dataset.

Procedural simplifications for withholding tax relief

The exemption threshold introduced in June 2021 in Section 50c (2) sentence 1 number 2 EStG in the amount of EUR 5,000 was already raised to EUR 10,000 in March 2024. It is now to be significantly increased again to EUR 100,000 in order to enable a considerably larger number of payers of remuneration to benefit, under certain conditions, from the low-bureaucracy, application-free (partial) exemption from withholding tax upon payment.

To avoid previous abusive arrangements by non-resident major shareholders, Section 50c (2) EStG is to be supplemented by a sixth sentence. Until now, these shareholders could still receive capital income without or with a reduced withholding tax under the respective double taxation agreement in the case of pooled or special custody shares and the issuance of an exemption certificate. Therefore, the refund procedure shall also be applied in such cases in the future, which also reduces administrative effort. This amendment is to apply for the first time to capital income accruing after December 31, 2026. The validity of already issued exemption certificates for corresponding capital income shall expire at the latest at the end of 2026.

Re-regulation of the VAT group

To date, Section 2 (2) number 2 of the German VAT Act (Umsatzsteuergesetz; UStG) provides for a VAT group where a legal person is integrated financially, economically and organizationally into an enterprise according to the overall picture of the factual circumstances.

On the one hand, the planned re-regulation clarifies that - pursuant to case law of the European Court of Justice and the German Federal Fiscal Court - partnerships may also be group members within a VAT group, provided the integration requirements are met.

On the other hand, no option to choose whether to enter into a VAT group and its legal consequences has been foreseen so far. This often led to the formation of VAT groups without the companies covered by the group being aware of being part of a VAT group (so-called unrecognized VAT groups). To avoid this, the re-regulation provided for in Section 2c UStG draft supplements the previously applicable and largely adopted rules for VAT groups in that the legal consequences of the VAT group shall in future only arise upon express declaration. Further rules, in particular on the reversal of an erroneously assumed VAT group or the regular termination of a VAT group, follow.

The new regulation of Section 2c UStG is to apply for the first time as of January 1, 2029. However, the possibility should be granted to submit corresponding declarations already from July 1, 2028.

Adjustment of the interest rate for full interest

A law from mid-2022 reduced the interest rate for additional and refund interest pursuant to Section 233a of the German Fiscal Code (Abgabenordnung; AO) retroactively for interest periods from January 1, 2019 from 0.5% to 0.15% per month, i.e. from 6% to 1.8% per year (Section 238 (1a) AO).

Pursuant to Section 238 (1c) AO, the appropriateness of this interest rate is to be evaluated taking into account the development of the base rate pursuant to Section 247 of the German Civil Code (Bürgerliches Gesetzbuch; BGB). Since the base rate has risen significantly since January 1, 2022, the interest rate is to be increased to 0.3% per full month for interest periods from January 1, 2027, i.e. 3.6% for a full year, in order to ensure its appropriateness.

Increase of the reporting threshold under the Research Allowance Act

The total amount of state aid granted for a research and development project is to be increased retroactively to January 1, 2026 from previously EUR 15 million to EUR 25 million.