Germany’s Federal Ministry of Finance has proposed an income tax reform package for 2027 that would increase the basic tax-free allowance, child tax allowances, and Kindergeld while introducing a new 47% top tax rate. The draft also proposes changes to trade tax allocation for data centres, a higher mini-job tax rate, and reductions in certain tax reliefs.

RF Report

Germany’s Ministry of Finance has published the Draft Income Tax Reform Act 2027 (Einkommensteuerreformgesetz 2027), which was approved by the Federal Cabinet on 2 September 2026.

The draft outlines a proposal from the German Federal Ministry of Finance for an income tax reform set to begin in 2027. This legislative initiative seeks to foster economic growth and social equity by increasing basic tax-exempt amounts, child allowances, and monthly child benefits. To offset these tax reductions, the plan introduces a higher “rich tax” rate and raises the flat-rate tax for marginal employment, known as mini-jobs.

Business and trade tax adjustments

The proposed draft tax bill creates a new way of splitting trade tax revenue for companies that run data centres as their sole business. Right now, trade tax gets divided among municipalities based on where a company’s payroll sits. That doesn’t work well for data centres, since they employ relatively few people but draw enormous local resources (land, power grid capacity, infrastructure).

So the draft carves out a separate allocation formula under Section 29(1) No. 4 GewStG: 10% of the tax base still follows wages, but 90% follows each site’s non-redundant nominal electrical connection capacity, basically how much guaranteed power capacity the facility has hooked up, excluding backup/redundant capacity.

To qualify, a data centre needs at least 500 kW of installed IT electrical capacity, using the same threshold already defined in Section 2 No. 18 of the Energy Efficiency Act. This takes effect for the 2027 assessment period, so it’s not retroactive, and companies have time to prepare.

On the corporate income tax side, there’s no direct rate change or structural reform in this draft.

Subsidy reductions and other special taxes

  • Craftsman tax relief cut: Homeowners who deduct craftsman costs for renovation, repair, and modernisation work are getting a smaller break starting 1 January 2027. The deductible share drops from 20% to 15% of eligible expenses, and the annual cap falls from EUR 1,200 to EUR 900. Anyone planning a renovation around the old numbers should move the work up if possible, since the new limits apply from the 2027 tax year on.
  • Mini-job flat tax more than doubles: Employers currently pay a flat 2% tax on mini-job wages. From 1 January 2027, that rate jumps to 5%. The government is using this increase to help pay for the income tax relief measures elsewhere in the package, so it’s a direct funding trade-off rather than a standalone policy.
  • Tax-free Sunday, holiday, and night work bonuses: The tax-free ceiling on the hourly base wage used to calculate Sunday and holiday work bonuses rises from EUR 50 to EUR 75, effective 1 January 2027. Night work keeps its existing EUR 50 cap; no change there.

Personal income tax brackets and thresholds

  • New tax brackets for 2027: Starting 1 January 2027, the basic tax-free allowance is raised by EUR 216 to EUR 12,564. The first progression zone covers incomes from EUR 12,565 to EUR 17,799. The second progression zone is adjusted to cover incomes up to EUR 70,600. The top tax rate of 42% begins at EUR 70,601.  Additionally, the first wealth tax threshold of 45% is brought forward to begin at EUR 250,000 (previously starting at EUR 277,826). A new second wealth tax rate of 47% is introduced for taxable income starting from EUR 280,000.
  • Tax bracket tariffs for 2028: Effective 1 January 2028, the basic tax-free allowance is increased by a further EUR 336 to EUR 12,900. The first progression zone is updated to cover incomes from EUR 12,901 to EUR 17,799. The other progressive zones and tax rates (42%, 45%, and 47%) remain at their respective thresholds of EUR 70,601, EUR 250,000, and EUR 280,000, with minor formula adjustments for progression coefficients.
  • Wage tax class V and VI rules: This adjusts the payroll withholding tax formula for people in tax classes V and VI, the classes mainly used for the lower-earning spouse in a married couple where the other spouse takes class III. Under Section 39b(2) EStG, the calculation now starts with a 14% minimum rate on taxable annual income. From there, the 42% bracket applies up to EUR 35,299; income above EUR 200,000 is taxed at 45%, and anything above EUR 224,000 hits 47%. These figures get a small bump starting 1 January 2028: the 14% minimum-rate threshold rises to EUR 14,528.

Allowances and family-related relief

  • Employee lump-sum allowance: The standard allowance for employment-related expenses will increase by EUR 200, from EUR 1,230 to EUR 1,430, effective 1 January 2027. The measure is expected to reduce payroll tax deductions for employees and benefit around 1.3 million taxpayers without requiring them to provide detailed expense documentation.
  • Child tax allowance: The child subsistence allowance will increase by EUR 150 per parent to EUR 3,564 for 2027. Together with the existing care, education, and training allowance, the total will reach EUR 5,028 per parent. For 2028, the subsistence allowance will rise by a further EUR 90 to EUR 3,654, bringing the total child allowance to EUR 5,118 per parent.
  • Child benefit: Monthly child benefit will also increase, rising by EUR 8 to EUR 267 per child from 1 January 2027. A further EUR 5 increase will take effect in 2028, bringing the monthly benefit to EUR 272 per child.