Corporate Tax Rate Cut From 2028

The corporate tax rate cut at a glance

The corporate tax rate cut legislated in 2025 reduces German corporate income tax (Körperschaftsteuer) in five annual steps from 15% to 10%. Under § 23(1) of the Corporate Income Tax Act (KStG), the rate is 15% for assessment periods up to 2027, 14% for 2028, 13% for 2029, 12% for 2030, 11% for 2031 and 10% from 2032. The solidarity surcharge of 5.5% continues to be levied on corporate income tax, and municipal trade tax (Gewerbesteuer) remains unchanged in structure. The overall tax burden on retained corporate profits therefore falls from roughly 30% to roughly 25% in a typical municipality.

For companies, investors and their advisers, the cut is more than a rate change. It affects the timing of income and deductions, the value of loss carryforwards and deferred tax assets, the choice of legal form, financing structures, transfer pricing and the comparison with foreign locations. Because the reduction is phased in, the years 2027 to 2032 offer specific planning opportunities and some traps.

The combined figures are illustrative. Trade tax is calculated as 3.5% of the trade income multiplied by the municipal multiplier (Hebesatz); at 400% it amounts to 14%. Multipliers vary widely between municipalities, from the statutory minimum to well above 400% in large cities, so the actual combined rate differs from place to place.

What the corporate tax rate cut changes and what it does not

The cut applies to all entities subject to corporate income tax, including GmbHs, stock corporations, SEs and partnerships that have opted to be taxed as corporations under § 1a KStG. It applies equally to domestic corporations and to foreign corporations with German permanent establishments or real estate income. The solidarity surcharge remains at 5.5% of the corporate income tax; the Federal Constitutional Court rejected a constitutional complaint against the surcharge for 2020 and 2021 in its judgment of 26 March 2025 – 2 BvR 1505/20.

Several elements remain unchanged. Trade tax continues at a base rate of 3.5% multiplied by the municipal multiplier, and from the 2027 assessment period the statutory minimum multiplier rises from 200% to 280% (§ 16(4) GewStG, applicable from 2027 under § 36(5b) GewStG). Withholding tax on dividends remains at 25% plus solidarity surcharge. The participation exemption for dividends and capital gains under § 8b KStG, the interest barrier and the minimum taxation of loss carryforwards are not changed by the rate cut itself. As a result, trade tax will account for a larger share of the total corporate tax burden.

In parallel, the legislature lowered the special rate for retained profits of partnerships and sole proprietors under § 34a of the Income Tax Act, from 28.25% up to 2027 to 27% in 2028 and 2029, 26% in 2030 and 2031 and 25% from 2032, so that the retention option keeps pace with the corporate rate.

Timing of income and deductions

A falling tax rate rewards deferring taxable income and accelerating deductions. Every euro of income taxed in 2032 instead of 2027 saves five percentage points of corporate income tax, and every euro of expense deducted in 2027 instead of 2032 is worth more. Companies should therefore consider:

• using the temporary declining-balance depreciation of up to 30% for movable assets acquired or produced between 1 July 2025 and 31 December 2027, explained in our article on declining-balance depreciation;
• bringing forward maintenance, research and other deductible expenses where commercially sensible;
• reviewing the timing of disposals of assets with hidden reserves and of intra-group transactions that realise gains;
• assessing whether provisions and write-downs permitted under tax law are being fully used in the high-rate years.

The tax authorities scrutinise transactions that shift profits between periods without commercial substance, and the general anti-abuse rule in § 42 of the Fiscal Code applies. Timing measures should therefore follow genuine business decisions. In groups, intra-group pricing must remain at arm's length; shifting profits into later years through artificial transfer pricing adjustments is not a legitimate planning tool, as discussed in our article on transfer pricing documentation.

Loss carryforwards and deferred taxes

The value of corporate income tax loss carryforwards falls with the rate. A loss carryforward of EUR 10 million is worth EUR 1.5 million in corporate income tax at 15%, but only EUR 1 million at 10%. Companies with large losses may wish to use them earlier, for example by realising hidden reserves in the high-rate years, subject to the minimum taxation rules and the rules on loss forfeiture discussed in our article on loss forfeiture under § 8c KStG. Trade tax loss carryforwards are not affected by the corporate rate cut.

For financial reporting, deferred tax assets and liabilities must be measured using the tax rates expected to apply when the temporary differences reverse, based on enacted law. Since the rate schedule was enacted in 2025, deferred taxes in German entities generally had to be remeasured, leading to a reduction of deferred tax assets and liabilities. Companies with significant deferred tax assets on loss carryforwards faced a one-off expense; those with net deferred tax liabilities recorded income. The effect continues as the timing of reversals is reassessed each year.

Legal form, distributions and shareholders

The rate cut shifts the comparison between corporations and partnerships. Retained profits in a corporation will be taxed at about 24.5% to 25% in a typical municipality from 2032, compared with the top personal income tax rate plus solidarity surcharge for partnership profits, mitigated by the trade tax credit under § 35 of the Income Tax Act and the retention rate under § 34a. Upon distribution, dividends to individual shareholders are taxed at the flat 25% withholding tax plus solidarity surcharge or, for business shareholders, under the partial income method. The overall burden on distributed profits therefore falls less than the burden on retained profits.

For family businesses and owner-managed companies, this favours retention and reinvestment within a corporation. Partnerships may consider the option to be taxed as a corporation under § 1a KStG, which has become more attractive. Conversions of partnerships into corporations raise their own tax issues, including real estate transfer tax and lock-up periods, and should be evaluated together with succession planning; see our page on corporate and transaction tax.

International comparison and anti-avoidance rules

With a combined rate of around 25% from 2032, Germany moves from one of the highest-taxing large economies in the EU to a middle position. For inbound investors, this improves the case for holding intellectual property, financing and principal functions in Germany. For outbound structures, the change affects the controlled foreign company rules: foreign income is regarded as low-taxed under the Foreign Tax Act if it bears income taxes of less than 15% (§ 8(5) of the Foreign Tax Act), a threshold that is not linked to the German rate. Interest and licence barrier rules, withholding tax relief and treaty considerations should be reviewed in light of the new rate differential.

The Minimum Tax Act implementing Pillar Two remains relevant for groups with consolidated revenue of at least EUR 750 million. Even at a 10% corporate rate, the German effective tax rate will usually remain above 15% because of trade tax, particularly after the minimum multiplier of 280% takes effect from 2027. Groups should nevertheless monitor their German jurisdictional effective rate, especially where incentives, tax credits or losses reduce covered taxes; see our article on the Minimum Tax Act.

The corporate tax rate cut in M&A and valuation

The corporate tax rate cut also affects transactions. Buyers valuing German targets on a discounted cash flow basis should model the declining tax rate rather than a flat 15%, which increases after-tax cash flows from 2028 and supports higher valuations. Purchase agreements should allocate pre-closing taxes carefully, because tax refunds and payments relating to high-rate years may differ significantly from those relating to later years. Tax indemnities and locked-box mechanisms should reflect the period to which a tax relates rather than the date of payment.

Sellers may consider the timing of disposals. For corporate sellers, capital gains on shares are largely exempt under § 8b KStG, so the rate cut matters mainly for asset deals and for the 5% of gains treated as non-deductible expenses. For buyers of assets, a step-up in tax basis creates depreciation that is deductible at the rates of the years in which it is claimed; deductions in high-rate years are more valuable.

Illustration: a GmbH plans a machinery investment of EUR 5 million. If it acquires the machines in 2027, it can use declining-balance depreciation of up to 30% while corporate income tax is still 15%. If it waits until 2029, linear depreciation applies and the deductions reduce tax at 13% or less. Assuming similar business returns, the earlier investment produces a measurably higher net present value from tax savings, which the corporate tax rate cut makes more pronounced. The decision should nonetheless follow the company's operational needs.

Planning checklist for the corporate tax rate cut

1. Prepare a multi-year tax rate model for each German entity, including municipal multipliers.
2. Plan investments to use declining-balance depreciation before the end of 2027.
3. Review the timing of gains, disposals and intra-group restructurings.
4. Assess the use of loss carryforwards and the remeasurement of deferred taxes.
5. Reconsider legal form and profit retention policies for family-owned groups.
6. Update transfer pricing and financing structures for the new rate differential.
7. Check the Pillar Two position and the effect of incentives on the effective tax rate.

How TRW & Co helps with the corporate tax rate cut

We advise companies, family businesses and international investors on the consequences of the corporate tax rate cut: multi-year planning models with finance teams, structuring of investments and disposals, legal form decisions including the option under § 1a KStG, and the review of group financing, transfer pricing and Pillar Two positions. Our tax lawyers work alongside our corporate and M&A colleagues so that tax planning is integrated with transactions. Further information is available on our tax and private clients page, or you can contact us directly. This article provides general information and is not tax or legal advice.