Germany's 2025 Coalition Agreement – Key Takeaways For Financial Services Firms

RegCORE – Client Alert | German Regulatory Developments

QuickTake

After the 2025 German federal parliamentary election, the parties CDU (Christian Democratic Union), CSU (Christian Social Union), and SPD (Social Democratic Party of Germany) entered into coalition negotiations to establish the basis for a new governing coalition and to realign central issues such as the budget, taxes and the future of finances and economic growth. After 45 days of intense negotiations, the CDU/CSU and the SPD presented a Coalition Agreement for the future government of Germany on 9 April 2025. The presumptive new Chancellor, Friedrich Merz (CDU), aims to have the government formed days after 28 April 2025 and be up and running by May 2025. SPD co-leader Lars Klingbeil is widely expected to take the powerful posts of Vice-Chancellor and Finance Minister and will be instrumental in delivery of a number of the reforms.

One of the key points of the election campaign, the coalition negotiations and the resulting Coalition Agreement is focusing on correcting Germany' finances and economic growth prospects. In this context, Merz emphasised the need to strengthen the competitiveness of the German economy, which, after two years of recession, requires fundamental reforms. As explored in this Client Alert much of the 144 pages of the Coalition Agreement addresses reforms, including deregulation and red-tape reduction as well as targeted efforts to advance new domestic as well as EU-level legislative initiatives.

While the Coalition Agreement goes into detail on a number of proposed aims and reforms (including well beyond those highlighted above), criticism in the run up to its publication had been expressed by a number of commentators – more may follow also over the weeks ahead. This includes in particular a statement dated 2 April 2025, issued by around 100 associations, including the German Chambers of Industry and Commerce (Industrie- und Handelskammer – IHK) as well as other associations representing banks, trade and the real economy, that sets out that the plans of the future coalition were viewed as being potentially "insufficient" to ensure economic strength and thus presents demands to the coalition parties in four areas. This includes specifically: alongside a noticeable reduction in the tax burden on companies to an internationally competitive level, the demands include reforms of social security systems, a reduction of the bureaucratic burden, and measures to reduce high energy costs. It remains to be seen what else the coalition government will (want to) deliver to meet concerns raised in that statement and by other commentators, so as to possibly deliver beyond what is addressed in the Coalition Agreement.

This Client Alert should be read alongside further coverage from other practice groups of PwC Legal on the 2025 Coalition Agreement as well as further coverage from our EU RegCORE on financial services related matters.

Key takeaways from the 2025 Coalition Agreement for the financial services sector

The 2025 Coalition Agreement for the 21st Legislative Period bears the title "Responsibility for Germany". As in previous legislative periods, much of what is contained in this agreement will likely be of relevance for EU-level policymakers, notably for financial services, as well as a number of other national policymakers across other EU Member States. In terms of fiscal policy, a headline announcement by Merz is that the incoming government will establish an expert commission with the participation of the German Bundestag and the Federal States to develop a proposal for "modernising the debt brake" (Schuldenbremse) which otherwise restricts Germany's public borrowing to 0.35% of gross domestic product. A reform is promised by the end of 2025.

As in previous programmes, the overarching message is dedicatedly pro-EU and committed to completing a number of legislative and institutional reforms that have been advanced at the EU-level, most notably when it comes to dossiers relating to the financial services sector and market participants.

One of the key aspects of the Coalition Agreement is the emphasis on creating a competitive and growing economy through structural reforms and investments. The coalition aims to foster innovation, reduce bureaucracy, and promote fair wages and good working conditions. This approach is expected to create a more favourable environment for financial markets by enhancing the overall economic stability and growth prospects of Germany. The commitment to reducing taxes, levies, and energy prices, as well as supporting decarbonisation, will likely improve the financial performance of firms and attract more investments.

More specifically for the financial services sector this includes the following elements:

1. Financial markets regulation

The Coalition Agreement proposes a comprehensive approach to financial market regulation, aiming to strengthen the resilience and competitiveness of the EU and German financial services sector and the greater use of artificial intelligence (AI), blockchain and cloud-based solutions within and beyond financial services as well as support for robust and rapid implementation of EU-focused legislation on cybersecurity and digital (operational) resilience in particular for critical infrastructure.

The document highlights the importance of a unified European financial regulation to enhance the competitiveness of the European financial markets. This includes a commitment to the EU's Banking Union (albeit without a mutualised EDIS) and Capital Markets Union (see extensive coverage from our EU RegCORE on these topics), avoiding "goldplating" and to ensuring that EU regulations are implemented in a manner that does not impose unnecessary burdens on firms. The coalition equally supports regular reporting by the EU Commission to compare European financial regulations with those of major financial centres outside the EU, ensuring that European markets remain competitive and resilient.

The Coalition Agreement also addresses a number of topics, including permitting both fee and commission based investment advisory practices but focusing on possibly strengthening cost limits on overdraft fees and for basic bank account products that have long been in the focus of the EU as well as domestic legislators and regulators. The Coalition Agreement however does not, albeit EU legislative reforms under way still may, bring the scope of financial investment brokers (Finanzanlagenvermittler) under the scope of BaFin supervision but leaves it (for now) with the local IHK.

2. Capital markets development

The Coalition Agreement underscores the importance of developing a robust capital market in Germany. It also proposes completion of a comprehensive gap assessment (and options to close such gaps) that may exist in the legislative, regulatory and supervisory framework relevant to crypto-assets activity, the "grey capital market" (Grauer Kapitalmarkt) and shadow banking.

As explored further below the Coalition Agreement proposes measures to enhance the availability of venture capital, particularly for start-ups, by improving the participation opportunities for institutional investors. This initiative aims to foster innovation and support the growth of new businesses, which are crucial for economic dynamism. Additionally, the Coalition Agreement suggests creating a legal framework for investments by funds in infrastructure and renewable energy, which will provide a stable and predictable environment for long-term investments.

3. Digital transformation and financial services

Digital transformation is a key focus of the Coalition Agreement, with significant implications for financial services. The Coalition Agreement advocates for the development of a digital euro, which will complement cash and provide a secure, privacy-protecting, and cost-free payment option for consumers. This initiative is expected to enhance the efficiency and security of the payment system, fostering greater trust in digital financial services. Furthermore, the coalition supports the establishment of a digital identity (EUDI-Wallet) for citizens and businesses, which will streamline interactions with financial institutions and regulatory bodies, reducing administrative burdens and improving service delivery. While much of this reflects similar reforms at the EU-level, this is the most positive endorsement yet at a German federal government level to deliver support in putting these proposals into practice.

4. Anti-money laundering and financial crime prevention

The Coalition Agreement places a strong emphasis on combating financial crime, including money laundering and tax evasion. It proposes the consolidation of federal competencies in the area of financial crime to enhance coordination and effectiveness. While this is a proposal pursued by the previous government and at the EU level, notably with the introduction of the EU AML Authority (see extensive coverage from our EU RegCORE on both topics), the Coalition Agreement also supports the expansion of telephone surveillance in cases of severe tax evasion and the introduction of a "Suspicious Wealth Order" to allow for the seizure of assets where there is doubt about their legal acquisition. These measures are expected to strengthen the integrity of the financial system and enhance public trust in Germany's regulatory authorities.

5. Measures to simplify company law

The incorporation of companies and employee capital participation in Germany has long been complicated and complex when compared to many other jurisdictions. The Coalition Agreement proposes change, some of which may also flow into EU-wide efforts. This includes:

a. Digital and bureaucratic simplifications

To reduce bureaucratic hurdles and streamline the process of starting a business, the Coalition Agreement proposes the creation of a "One-Stop-Shop" platform. This digital platform will bundle all applications and administrative procedures, enabling the establishment of a company within 24 hours. Additionally, the Coalition Agreement suggests simplifying notarial processes and digitalising certification procedures, as well as enabling automatic data exchange between notaries, tax offices, and trade offices. These measures are expected to significantly reduce the time and effort required to start a business, making it easier for entrepreneurs to access venture capital and other resources.

b. Employee capital participation

The Coalition Agreement also aims to strengthen employee capital participation through practical adjustments to tax and social security laws. By making it easier for employees to participate in the financial success of their companies, the coalition hopes to create a more attractive environment for start-ups and to align the interests of employees and entrepreneurs.

6. Further measures to enhance the availability of venture capital for start-ups

In addition to the above, the Coalition Agreement proposes:

a. Establishment of a Germany Fund

One of the key initiatives proposed in the Coalition Agreement is the establishment of a "Germany Fund" (Deutschlandfonds). This fund is intended to leverage private financial markets' strength with the strategic approach of state investment. The federal government will provide at least ten billion euros in equity through guarantees or financial transactions. By combining these public funds with private capital and guarantees, the fund aims to mobilise at least 100 billion euros, which will be invested in various modules to close existing financing gaps, particularly for medium-sized enterprises and scale-ups. The investment decisions will be made under an entrepreneurial governance structure, with a focus on investments within Germany. This model is expected to serve as a blueprint for similar funds in other regions.

b. Continuation and expansion of the Future Fund

The Coalition Agreement also emphasises the continuation and expansion of the existing Future Fund (Zukunftsfonds) beyond 2030. The goal is to more than double the investments by investors in the WIN initiative to over 25 billion euros, further supported by federal guarantees. This initiative aims to provide a stable and long-term financing framework for start-ups, ensuring that they have access to the capital needed to grow and innovate.

c. EU Solvency II reform

To further enhance the availability of venture capital, the Coalition Agreement proposes further reform of the EU's Solvency II Directive. This reform aims to activate billions of euros by lowering the capital requirements for infrastructure projects and venture capital. Additionally, where possible, national capital buffers will be eliminated. This measure is expected to free up significant financial resources that can be redirected towards investments in start-ups and other innovative ventures.

d. Support for female entrepreneurs

Recognising the underrepresentation of women in start-up founding roles, the Coalition Agreement includes specific measures to support female entrepreneurs. This includes expanding targeted support programs for women founders, ensuring that they have better access to venture capital and other financial resources. By fostering a more inclusive entrepreneurial environment, the coalition aims to tap into the full potential of the start-up ecosystem.

7. Taxation and financial incentives

The Coalition Agreement includes several tax-related measures aimed at stimulating economic growth and investment. It proposes a reduction in the corporate tax rate in five steps (one percentage point reduction per step). Unfortunately, this reduction will only start from January 2028 and be "subject to financing". While this may aims to make Germany a more attractive destination for business investments it is viewed by some as being "too little, too late". The same may also be true for a planned 30% depreciation on equipment investments for the years 2025, 2026 and 2027 might encourage short term investment but may not provide lasting relief for corporates.

With regard to trade tax (a tax levied on businesses), both parties agree that the minimum assessment rate should be increased from 200% to 280%. Since municipalities will continue to be able to set their own trade tax assessment rates within the framework of legal provisions, administrative measures are to be taken to prevent relocations of registered offices to municipalities with lower rates. Furthermore, it was agreed to maintain the global minimum tax for large corporations. The coalition partners also have agreed a reduction of the electricity tax to the European minimum level and a halving of transmission network fees for a total relief of at least five cents per kWh.

Additionally, the permanent reduction of the VAT rate for gastronomy from 19% to 7% from January 2026 is another measure intended to support the hospitality sector and stimulate consumer spending. While such sectoral measures may be welcome, little to no change expected in the personal income tax policy. The controversial solidarity surcharge (Solidaritätszuschlag), which is an additional fee on income tax, capital gains tax and corporate tax that was introduced in 1991 will remain at the same level of 5.5% in place since 1998.

Perhaps rather controversially, the Coalition Agreement supports the introduction of a financial transaction tax at the EU level, which aims to curb speculative trading and generate revenue for public investments. It remains to be seen whether this much debated proposal will however (ever) come to fruition.

Outlook

The 2025 Coalition Agreement is full of a number of goals that are ambitious as to their breadth and pace but also susceptible to political squabbles in Berlin meaning that, certainly for financial services, EU-level reform efforts led out of Brussels may drive more meaningful impact on the financial services sector in Germany and its contribution to but also interoperability with the entirety of the EU's Single Market, including well beyond "just" financial services. Much of the devil will remain in the detail of where the new incoming coalition government will look to secure some quick wins to deliver on the Coalition Agreement's title of taking "Responsibility for Germany" and driving economic growth over the 21^st legislative period and beyond.