The Bundesrat, Germany’s upper house representing the federal states, has approved the 2025 tax reform law, clearing the path for a package of measures intended to stimulate the hospitality sector and ease the financial burden on commuters. However, the passage follows a protracted and contentious debate highlighting the complex balance of power between the federal government and the states.
The central provision of the law, effective January 1, 2026, will significantly reduce the value-added tax (VAT) rate for restaurants and catering businesses, excluding beverage sales, from the current 19 percent to a more competitive 7 percent. The federal government projects an annual relief of approximately €3.6 billion for hospitality businesses and consumers. While proponents celebrate this as a necessary boost for an industry reeling from economic pressures, critics argue the measure disproportionately benefits larger chains while offering limited support for smaller, family-run establishments.
Furthermore, the law increases the commuter allowance-a tax deduction for employees traveling to work-to 38 cents per kilometer, applicable from the very first kilometer driven, a significant improvement from the previous threshold of 21 kilometers. This change aims to provide some financial respite for employees facing rising transportation costs.
Underlying the approval lies a history of disagreement between Berlin and the states, who expressed concerns over the fiscal implications of the reform, contending it placed an undue strain on their budgets. The states initially sought a mediated solution via the Conciliation Committee, but ultimately conceded, paving the way for the Bundesrat’s green light. This surrender to the federal government raises questions about the long-term fiscal autonomy of the states and the efficacy of cooperative federalism in navigating complex economic challenges. The reform, while intended to be a positive step, underscores the ongoing power dynamics and potential for future clashes between the federal government and its constituent states.