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Germany Approves Draft Annual Tax Act 2026 With Major VAT Grouping Reform

1 month ago
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Summary

  • The German Federal Cabinet approved the draft Annual Tax Act 2026 on 12 August 2026. The package contains technical amendments intended to reflect EU law, court decisions, digitalisation objectives, procedural simplification and measures against abusive tax arrangements. It must still pass through the Bundestag and Bundesrat. [bundesfina…sterium.de], [bundesfina…sterium.de]
  • For VAT, the draft proposes replacing Germany’s automatic VAT grouping system with an application or declaration-based regime. A VAT group would no longer arise solely because the financial, economic and organisational integration conditions are met. Recognition would instead depend on an express submission to the tax authorities. [ebnerstolz.de], [kpmg.com]
  • German groups should map existing and potential VAT group relationships, identify unintended grouping exposures and monitor the transitional rules. The Cabinet-approved version reportedly schedules the new system from 1 January 2030, later than the 1 January 2029 date discussed in commentary on the earlier ministerial draft. [ebnerstolz.de], [kpmg.com]

Article

Germany’s Federal Cabinet approved the government draft of the Annual Tax Act 2026 on 12 August 2026. The proposed legislation contains numerous amendments across German tax law, including changes responding to EU law, decisions of the Court of Justice of the European Union and German courts, as well as measures intended to support digitalisation, reduce administrative burdens and counter inappropriate tax arrangements. The package is not yet law and remains subject to the parliamentary process. [bundesfina…sterium.de], [bundesfina…sterium.de]
From an indirect-tax perspective, the proposed reform of the German VAT grouping regime, known as the Organschaft, is particularly important. Under the existing approach, a VAT group can arise automatically where the statutory conditions of financial, economic and organisational integration are satisfied. This can create uncertainty because the VAT consequences may apply even where the entities concerned did not intend to establish a VAT group or did not initially recognise that the conditions were met.
The draft would introduce an application or declaration-based system. Under that approach, meeting the substantive integration requirements would remain necessary, but would no longer be sufficient on its own. The parties would also need to make an express submission before the VAT group was recognised. The proposed model is intended to improve legal certainty and reduce disputes over whether a group existed automatically during an earlier period. [kpmg.com], [bundesfina…sterium.de]
An important timing point has emerged during the development of the proposal. Commentary on the earlier Ministry of Finance draft referred to first application from 1 January 2029, with a transition through the end of 2028. Reporting on the Cabinet-approved government draft states that the new rules would instead take effect from 1 January 2030. Businesses should therefore use the latest Cabinet version for planning purposes, while recognising that the date and detailed transitional provisions may still change during the legislative process. [ebnerstolz.de], [kpmg.com]
The reform could have significant consequences for intercompany invoicing, VAT registrations, return filing, input VAT recovery and systems configuration. Existing German VAT groups should determine what procedural action will be required to continue their status under the future regime. Groups that may currently fall within the automatic rules unintentionally should assess whether the proposal could offer a route to greater certainty.
Businesses should begin mapping all German entities and establishments that have close ownership, management and operational links. Particular attention should be given to shared-service structures, cash pooling, common management, centralised IT and intercompany supplies. That assessment should distinguish the current-law position from the expected position under the proposed declaration system.
As the Annual Tax Act remains a draft, implementation projects should remain flexible. Final action should be based on the legislation ultimately adopted by the Bundestag and Bundesrat and on subsequent administrative guidance.

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