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German Parliament Approves COVID-19 Stimulus Plan With VAT Cuts

Posted on June 30, 2020

The German Parliament has approved the government’s €130 billion legislative package, which includes a reduction of the standard VAT rate from 19 percent to 16 percent until the end of the year.

In a June 29 release, the government said Germany’s Bundestag (lower house of Parliament) and  Bundesrat (upper house) approved the legislation with the aim of stimulating the economy after the effects of the COVID-19 pandemic.

The main tax measure in the stimulus package is the cut to the standard VAT rate, which will apply from July 1 through December 31. The reduced VAT rate of 7 percent, which applies to items like food, medicine, and newspapers, will be cut to 5 percent. In a separate June 29 government release, Finance Minister Olaf Scholz said the VAT reduction will provide consumers with an incentive to make larger purchases during the second half of 2020 — rather than postpone them — which will benefit the economy.

The rate cuts are expected to reduce VAT collections by approximately €20 billion, according to the release. In Germany, VAT revenue accounts for approximately one-third of the country's total tax revenue. According to the release, in 2019 VAT accounted for over €243 billion of tax revenue out of the total €800 billion in revenue. 

The Parliament also approved proposals to extend the tax loss carryback rules for businesses. Under existing law, companies can carry back losses of up to €1 million for one year. The government increased the maximum amount that can be carried back to €5 million, or €10 million for a joint assessment, for the 2020 and 2021 tax years. 

The stimulus plan also includes a provision to allow accelerated depreciation, instead of straight-line depreciation. The loss carryback and accelerated depreciation provisions are expected to reduce tax revenues by €8 billion.

According to the release, the Parliament approved support for companies’ research and development, including doubling the assessment basis for tax research funding until the end of 2025 to €4 million per company per year.

The stimulus plan also includes a child bonus for parents of €300 per child, which will be taxed but will not affect households’ social benefits. According to the release, the bonus should primarily benefit low- and middle-income households.

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