Bundesrat Expresses Need for Amendments to the 2027 Income Tax Reform Act
The Bundesrat (Federal Council) addressed the draft of an Einkommensteuerreformgesetz 2027 (2027 Income Tax Reform Act) at its 1069th session on 16 October 2026 and issued a statement on it. The proposal was treated in the Bundesrat as a particularly urgent bill pursuant to Art. 76 Abs. 2 Satz 4 GG (German Basic Law) and bears the Bundesrat printed matter number 507/26. The committee recommendations were submitted under printed matter number 507/1/26.
In terms of substance, the reform particularly concerns amendments to income tax law, trade tax law, and the Bundeskindergeldgesetz (Federal Child Benefit Act). Following the Bundestag (German Federal Parliament) procedure, the bill will again be referred to the Bundesrat, which will then consider the proposal conclusively.
Criticism of the Planned Amendment Regarding Sunday and Public Holiday Supplements
Bundesrat Sees Additional Administrative Burden
A central point of the statement concerns the planned amendment regarding tax-exempt supplements for Sunday and public holiday work. Under the government draft, the maximum base wage eligible for consideration for tax-exempt Sunday and public holiday supplements is to increase from EUR 50 to EUR 75. For supplements for night work, however, the previous limit of EUR 50 is to remain in place.
The Bundesrat proposes refraining from this increase of the base wage limit for Sunday and public holiday supplements to EUR 75. Instead, in its view, the supplement rates of 50 percent and 125 percent respectively should be increased moderately. The background is the concern that, in the event of differing treatment, a separate distinction would in future have to be made between night work supplements on the one hand and Sunday and public holiday supplements on the other. In the assessment of the Bundesrat, this could lead to additional administrative burden.
Work Incentives and Benefited Income Groups
The Bundesrat also points out that raising the limit would not only benefit higher incomes. At the same time, it could also create work incentives for employees in lower and middle-income groups. The statement therefore considers not only the fiscal effect, but also the practical steering effect of the planned amendment.
Trade Tax Apportionment for Data Centers
Federal States Welcome the Basic Direction of the Bill
The federal states broadly support the amendments to trade tax for data centers envisaged in the government draft. In future, when apportioning the trade tax base amount for data centers, the focus is no longer to be primarily on wages at the respective permanent establishment. According to the available information, it is intended that the trade tax base amount pursuant to § 29 Abs. 1 Nr. 4 GewStG (German Trade Tax Act) be apportioned for data centers only 10 percent according to wages and 90 percent according to the electrical rated connection capacity.
Such a special rule could particularly benefit municipalities in which data centers are located. The Bundesrat statement on this subject area goes back to an initiative by the State of Hesse.
Demand to Exclude Avoidance Structures
However, the Bundesrat demands additional precautions to safeguard the objective of the rule. In particular, opportunities for avoidance are to be consistently excluded. Among the examples mentioned are international tax avoidance models and the establishment of a merely insignificant ancillary business.
The federal states also call for so-called co-locations to be included in the special rule on trade tax allocation. In the discussion concerning the specific design, the question is also raised as to which technical standard is appropriate for the allocation. The industry association Bitkom has criticized the fact that the draft refers to the contractually agreed grid connection capacity and has instead proposed the IT rated load within the meaning of Delegated Regulation (EU) 2024/1364 as the reference parameter.
No Inclusion of the Deletion of the Ten-Year Period for Private Real Estate Sales
Committee Recommendation Concerned § 23 EStG
Particular attention had been drawn by a recommendation from several Bundesrat committees to delete the ten-year period for private real estate disposals pursuant to § 23 Abs. 1 Satz 1 Nr. 1 EStG (German Income Tax Act). This recommendation was included in the committee recommendation as item 2. The government draft itself leaves § 23 EStG unaffected in this respect.
Under the proposed transitional rule, real estate already acquired would also have been affected if the previous ten-year period had not yet expired. The recommendation could therefore also have covered existing cases insofar as the period was still running.
Bundesrat Does Not Adopt Proposal in Its Statement
However, the abolition of the so-called speculation period did not become part of the adopted statement of the Bundesrat. Thus, according to the current status of the legislative procedure, the existing rule on tax exemption for private real estate disposals after expiry of the ten-year period remains in place.
Parallel to the debate in the Bundesrat, a separate bill introduced by the Bündnis 90/Die Grünen parliamentary group to abolish the ten-year period was rejected in the Bundestag on 8 October 2026 in a roll-call vote. The voting result is reported as 446 votes to 131.
Objectives and Key Points of the Government Draft
Relief and Growth Impetus
With the 2027 Income Tax Reform Act, the Federal Government aims to strengthen Germany’s labor force and growth potential in the long term. The draft bill of the Bundesministerium der Finanzen (Federal Ministry of Finance) is dated 18 August 2026. The Cabinet decision was adopted on 2 September 2026, and the government draft introduced on 28 September 2026.
Planned Changes to Allowances and Child Benefit
The government draft provides for several relief measures, which are to enter into force in two stages on 1 January 2027 and 1 January 2028. In particular, the following adjustments are envisaged:
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The basic tax-free allowance is to increase from the current EUR 12,348 to EUR 12,564 in 2027.
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In 2028, the basic tax-free allowance is to be increased to EUR 12,900.
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The child allowances are to increase from EUR 9,756 to EUR 10,056 in 2027.
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A further increase in the child allowances to EUR 10,236 is planned for 2028.
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Child benefit is to be increased from EUR 259 to EUR 267 in 2027.
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In 2028, child benefit is to rise to EUR 272.
According to information from the parliamentary procedure, around 36 million taxpayers are to be relieved by a total of approximately EUR 10 billion. This order of magnitude was assessed differently in the Bundestag debate.
Rate Changes for High Incomes
Top Tax Rate for High Earners to Apply Earlier
For taxpayers with particularly high incomes, the government draft provides for a higher burden. The so-called top tax rate for high earners (Reichensteuersatz) of 45 percent is to apply in future already from a taxable income of EUR 250,000. At present, this rate applies only from EUR 277,826.
In addition, a tax rate of 47 percent is to be introduced from a taxable income of EUR 280,000. The Federal Government justifies these changes on the grounds that taxpayers with very high incomes should contribute more strongly to financing the relief for the majority.
Effects on Entrepreneurs Under Discussion
The planned tightening is also being discussed with regard to SME structures. The Deutscher Industrie- und Handelskammertag (DIHK, Association of German Chambers of Industry and Commerce) warns that many entrepreneurs could be affected who operate as sole proprietors or in partnerships. In these cases, income tax is regularly directly relevant to the taxation of business income.
According to available information, the reform will lead overall to reduced tax revenue of around EUR 5.5 billion per year. In view of annual municipal deficits of around EUR 30 billion, the Deutscher Städte- und Gemeindebund (German Association of Towns and Municipalities) is calling for full compensation for municipal revenue shortfalls resulting from the reform.
Employee Lump-Sum Allowance, Progression, and Minijobs
Employee Lump-Sum Allowance to Increase
The employee lump-sum allowance is to be increased under the government draft from EUR 1,230 to EUR 1,430. The Federal Government assumes that, as a result, approximately 1.3 million taxpayers would no longer have to itemize their actual income-related expenses in Annex N in future. The prerequisite for this is that the actual expenses are below the new lump-sum allowance.
The Federal Government also views this change as a contribution to reducing bureaucracy. However, the specific tax effect continues to depend on the individual circumstances of the respective taxpayer.
Further Rate Adjustments
In addition to increasing the basic tax-free allowance, it is planned to flatten the second progression zone. The top tax rate of 42 percent is to apply only from a taxable income of EUR 70,600. This measure is connected with the intended relief for low and middle incomes.
Higher Flat-Rate Tax for Minijobs
To counterfinance the measures, the draft also provides for tax-increasing measures. These include the planned increase of the uniform flat-rate tax for minijobs pursuant to § 40a Abs. 2 EStG from 2 percent to 5 percent. Additional revenue of around EUR 750 million per year is expected from this.
This change is being discussed in particular with regard to businesses that employ marginally employed workers on a larger scale. The government draft places the measure in the context of reducing tax benefits.
Tradesmen’s Services and Further Counterfinancing
Reduction of Tax Deductibility
The government draft also provides for a reduction in the tax support for tradesmen’s services. The tax deductibility of expenses is to decrease from 20 percent to 15 percent. At the same time, the maximum amount is to be reduced from the current EUR 1,200 to EUR 900.
According to the Federal Government, subsidies are to be reduced with a sense of proportion while targeted work incentives are set at the same time. The changes regarding tradesmen’s services thus stand alongside further counterfinancing measures in the draft.
Interaction with Supplements for Sunday and Public Holiday Work
By contrast, the planned increase in the maximum permissible hourly wage for tax-exempt Sunday and public holiday supplements is intended to create an additional work incentive. However, precisely this point is the subject of the Bundesrat’s criticism, because the federal states expect additional administrative burden if treatment differs from that of night work supplements.
Further Legislative Procedure
Public Hearing in the Finance Committee
The Finanzausschuss des Bundestages (Finance Committee of the German Federal Parliament) has scheduled a public hearing on the 2027 Income Tax Reform Act for Wednesday, 4 November 2026, from 11:00 a.m. to 12:30 p.m.
Significance for Companies, Investors, and Private Individuals
The changes discussed in the legislative procedure affect different groups in different ways. For employees, the basic tax-free allowance, the employee lump-sum allowance, child benefit, and supplement rules may be particularly significant. For companies and investors, the changes relating to minijobs, the trade tax apportionment for data centers, and the adjustments for high taxable incomes may become particularly relevant.
Since the legislative procedure has not yet been completed, it remains to be seen which rules will be adopted in the final version. MTR Legal Rechtsanwälte advises on tax law issues at the interface with corporate structure, asset planning, and investments. Further information can be found at legal advice in tax law.
