New developments in 2025: income tax, social security and EU changes

published on 27 January 2025 | Reading time approx. 12 minutes

The new year will implicate numerous changes and developments that will affect companies and employees alike. Whether changes to payroll tax and social security, important EU decisions or tax and social security aspects of the international assignments of employees – these topics will shape the turn of the year 2025. This newsletter gives you a compact overview of the most important changes.

Guest Post: Impact of donald trump's re-election on US Immigration policy and us tax policy »
new eu border controls: introduction of the ees and etias systems »
european union/schengen area: bulgaria and romania become fully parts of the schengen area as of new year 2025 »
new salary limits for the Eu blue card 2025 »
determination of tax-free and taxable wages in the wages tax deduction procedure »
employer's expenses for employees working in positions exposed to security risk/ for security measures »
tax exemption for top-up contributions per german partial retirement act »

Impact of Donald Trump's re-election on US immigration policy and US tax policy

Guest Post with Teri Simmons (AGG LLP) & Florian darmstadt (R&P USA)

The re-election of Donald Trump as President of the United States on 5 November 2024 and his inauguration as the 47th President of the United States could have far-reaching consequences for US immigration policy, particularly in the area of employment-based migration and work visas. There are also likely to be significant changes to tax policy. During the election campaign, Trump already promised significant tax relief for companies and private individuals. Our immigration attorney Andreas Meier spoke to Teri Simmons, US Attorney and Director International/Global Mobility Practice Group at our partner law firm Arnall Golden Gregory LLP, and Florian Darmstadt, partner at our office in Houston, Texas, USA. This article summarizes the most important aspects of the issues raised above.

What specific changes in U.S. immigration policy might be expected under Trump?

ESTA travel

Citizens of certain countries, including EU member states, can travel to the USA for up to 90 days without a visa, provided they have a valid authorization via the Electronic System for Travel Authorization (ESTA). Despite ESTA, final entry remains subject to customs and border protection authorities. Trump's re-election could mean stricter controls for ESTA travel, especially for frequent or long-term business trips. More intensive questioning on entry and possibly so-called “secondary inspections” are to be expected. This could be stressful for travelers but can usually be avoided by making appropriate travel arrangements.

Work visas and longer-term stays

Work permits for the USA already require complex and time-consuming application procedures. Under Trump, these could become even more complicated. The potential changes include

More restrictive issuance: certain visas such as the L-1B for corporate specialists and the H1B for professionals could be more difficult to obtain.
Delays: Applications could be delayed by additional document requirements (Requests for Evidence).
Increased costs: Higher application fees, such as the recent Premium Processing fee, could place a financial burden on companies.
Stricter checks: Visas for family members and access to the labor market for foreign students could be assessed more critically.
Increased inspections/audits of companies expected - Under the Biden administration, audits regarding H and L visa holders were the exception. Under the Trump administration, as in his last term, increased audits are to be expected. This may in turn lead to increased costs in the application process (see above).

What impact would a stricter visa policy have on German skilled workers and their families who want to move to the USA or are already there?

The impact on companies would be considerable. Existing staff shortages and skills shortages could be exacerbated by longer processing times and more difficult access to work visas. This would hit industries with a high demand for international skilled personnel particularly hard.

How can companies prepare for longer processing times and stricter visa requirements under a potential Trump administration?

To meet the challenges, companies should act proactively. Companies should carefully check the legal requirements and ensure that all the necessary formalities have been completed to avoid problems when entering the country. Strategic planning is crucial for long-term stays. Applications should be submitted well in advance (at least 6-8 months before departure) to avoid delays. Overall, it can be assumed that employee assignments in the USA will be associated with greater hurdles and longer lead times than in the past. In particular, companies should also prepare for increased inspections by the immigration authorities and know in advance which documents/evidence may need to be submitted.

What tax changes could be expected under a new Trump administration?

Tax cuts for companies

The new Trump presidency could drastically change the framework conditions for companies on both sides of the Atlantic. In his first term in office, Trump set an example with the “Tax Cuts and Jobs Act” by lowering the corporate tax rate from 35 per cent to 21 per cent. This reform encouraged investment and boosted economic growth. Trump plans to reduce the corporate tax rate at federal level from the current 21 per cent to 20 per cent. Companies that locate their production in the USA could even benefit from a tax burden of just 15 per cent. This is part of his strategy to bring production back to the United States.

Permanent relief for private individuals

Private individuals can also expect tax relief. Trump plans to make the "Tax Cuts and Jobs Act”, which among other things lowered the top tax rate from 39.6 per cent to 37 per cent, permanent. This measure would particularly benefit top earners. Other planned changes include abolishing the taxation of social security benefits and tax breaks for tips and overtime, which could provide relief for service workers.

How could German companies benefit or be burdened by Trump's announced tax cuts?

Tariffs and protectionist measures

In addition to the tax cuts, Trump is planning a tariff surcharge of at least ten percent on imported goods in order to promote domestic production. Tariffs on goods from China could even rise to as much as 60 per cent, while Chinese electric cars are to be subject to a surcharge of 200 per cent. Trump's protectionist policies, such as the imposition of punitive tariffs and the renegotiation of international trade agreements, could pose risks for German companies. Navigating the US market could be made more difficult by potential trade conflicts, which would have a negative impact on investment and trade. Nevertheless, German companies can benefit from the planned tax relief, especially if they are already active in the USA. Such measures could increase the competitiveness of German subsidiaries in the USA and create new investment opportunities.

In order to make the most of the opportunities presented by Trump's policy and minimize risks, German companies should adapt their business strategies to the new circumstances. Possible approaches include:

Diversifying markets: an increased focus on alternative sales markets could reduce dependence on the US market.
Strengthening local presence: By investing in local production facilities, companies could benefit from tax advantages and better protect themselves against trade barriers.
Closer cooperation with partners: Cooperation with US companies could help to overcome regulatory hurdles.

Outlook for German companies

The US market remains attractive despite the political uncertainties. Long-term business strategies could help to balance out short-term fluctuations. A flexible and well-thought-out strategy will be crucial to operating successfully in this changing environment. The coming months will show to what extent his plans will become reality.

We would like to refer you to the article by our colleague Matthias Amberg in: Der Betrieb, No. 47 from 18 november 2024 and our colleagues Stefan Größbacher and Sebastian Thurner in: WT Fachjournal, 05-06/2024.

New EU border controls: introduction of the EES and ETIAS systems

Here you will find our Good-to-know article "New EU border controls: Introduction of the EES and ETIAS systems".

European Union/Schengen Area: Bulgaria and Romania become fully part of the Schengen Area as of New Year 2025

Romania and Bulgaria became full members of the Schengen area as of 1 January 2025. The European Council confirmed that Bulgaria and Romania is fully joining the Schengen Area with effect from 1 January 2025 and that border controls for land traffic from other Schengen countries will cease on this date. This decision was made by the EU Interior ministers at the EU Council in Brussels on 12 December 2024. The controls at the internal air and sea borders have already been lifted in March 2024. At the turn of the year, controls at the land borders were discontinued.

It is expected that travel between Bulgaria, Romania and the countries of the Schengen Area will become easier and faster, as travellers concerned will no longer have to undergo border controls. The simplification of overland travel is also likely to bring economic benefits, including lower logistics costs for businesses and an increase in tourism. Schengen is the world's largest area for the free movement of persons. The full integration of Bulgaria and Romania into the Schengen Area will simplify the implementation of the European Union's entry/exit system, as Bulgaria and Romania will no longer be subject to the more complex rules that apply to countries that only partially implement the Schengen rules.

New salary limits for the EU Blue Card 2025

From 1 January 2025, new salary limits will apply for various residence permits in Germany.

The regular minimum annual gross salary for the approval-free EU Blue Card will be 48,300 euros from 1 January 2025 (2024:45,300 euros ), while a reduced limit of 43,759.80 euros (2024: 41,041.80 euros) will apply for so-called shortage occupations such as IT, engineering or medical professions. The latter also applies to young professionals who have obtained their educational qualifications in the last three years before applying for the EU Blue Card.
The minimum annual gross salary for Skilled Worker Permit applicants aged 45 or older is 53,130 euros (2024: 49,830 euros). Otherwise, applicants must provide evidence of adequate pension provision.
The minimum annual gross salary for residence permits based on extensive work experience is 43,470 euros (2024: 40,770 euros).

Important facts on the Blue Card: In accordance with Article 8 (1) of Directive 2021/1883/EU, an EU Blue Card may be revoked, withdrawn or refused to be renewed by the respective Member State if the relevant salary limits are no longer met.

Determination of tax-free and taxable wages in the wages tax deduction procedure

If an employee's wages are tax-free in Germany under a Double Taxation Agreement (DTA) or the Foreign Employment Decree, it should be checked already as part of the wages tax deduction procedure which portion of the pay is attributable to foreign and which to domestic activity. Directly attributable are, for example, travel expenses, overtime pay, expat allowances, etc. (see marginal note 227 of the BMF letter dated 12 December 2023, German Federal Tax Gazette (Bundessteuerblatt, BStBl. 2023 I, 2179). They are tax-free in Germany insofar as they can be directly allocated to the foreign activity. Wages that cannot be directly allocated to foreign or national activities (further: the remaining portion of wages) must be divided by days.

This must be done in compliance with the letter of the Federal Ministry of Finance (BMF) published on 8 October 2024 on the determination of tax-free and taxable wages under DTA and the Foreign Employment Decree under the wages tax deduction procedure. The BMF letter replaces the previous BMF letter dated 14 March 2017 (BStBl. I p. 473) and is applicable to wages paid from 1 January 2025. Although the regulation on the calculation of wages tax according to the per diem scale described under point 3 is already included in the German Wages Tax Regulations [Lohnsteuer-Richtlinie, LStR] 2023, the BMF letter contains a transitional regulation for the years 2023 and 2024.

Important changes

Division of wages by working days

The remaining portion of wages are to be divided by the number of actual working days within a period in which wages were earned, instead of based on the calendar year, as previously. Even if the calendar year is still the period of reference for the division of the current wages, different procedures are also possible, for example in the case of a salary increase due to a change of function or a promotion. The BMF letter dated 12 December 2023 (BStBl. I p. 2179) serves here as the basis.

Methods for dividing wages

The remaining portion of wages are to be divided, as previously, according to the number of actual working days. Various methods can be used for that, based on a calendar year or individual calendar months. Changing the division method during the year is still not possible. As before, the division can be based on actual working days in the entire employment period within a calendar year or a calendar month, or on the agreed working days in a calendar month. Newly added are methods for flat-rate division, for example, based on 20 working days per month.

Reduced number of taxable days

If the employee has received tax-free wages under DTA or is only subject to (limited) income tax liability in Germany for certain days of the month, the wages tax on the portion of wages taxable in Germany should be calculated in accordance with R 39b para. 2 sentence 4 LStR 2023 using the so-called per diem scale. This reduction generally leads to a higher wages tax burden compared to the previous procedure, as the taxable wages are spread over fewer taxable days. In the annual assessment as part of the income tax return for persons with unlimited tax liability, the taxable days no longer play a role – however, the higher wages tax withheld during the year may anticipate the effect of the proviso safeguarding progression. However, the regulation is of particular importance when calculating wages tax for employees with limited income tax liability, as in this case the wages tax is to be regarded as the final tax.

Possible options for reducing the number of taxable days

Two options for reducing the number of taxable days are permitted. Either the calculation is based on the ratio of calendar days to actual working days, whereby 20 working days per month can be recognised at a flat rate, or the employer takes into account the employee's days of presence in Germany, which the employee must credibly document, cf. 39.5 para. 2 sent. 2f. of the German Wage Tax Guidelines and 39b.5 German Income Tax Notice We have already explained the difference in Global Mobility Pulse Newsletter, Issue 1 2024.

Final annual assessment

As before, at the end of a calendar year or upon termination of an employment relationship, payroll accounts prepared to date should be reviewed. The only permissible method is to allocate the wages based on days actually worked in Germany and abroad in the entire employment period within the calendar year (allocation based on working days on an annual basis).

However, the final annual assessment not only applies to the allocation of the remaining portion of wages, but also to the calculation of wages tax according to the procedure described above using the reduced number of taxable days, and the calculation of the wages tax according to the so-called per diem scale. The wages tax for all calendar months of the calendar year or the period of employment should be adjusted, if necessary. The simplification rule according to which for employees with unlimited tax liability, employed for the whole year, the employer could make a single adjustment at the end of the calendar year in line with the calculation principles of Article 42b German Income Tax Act until the end of February of the following year before submitting the wages tax statement, will no longer apply from 2025.

Transitional regulations for 2023 and 2024

Employers who have not yet been able to fully implement the new regulations on the use of the reduced number of taxable days may apply the previous regulations of 39b.5 of the German Wage Tax Guidelines in the version applicable before 2023 until the end of the year. However, it is imperative to implement the new requirements from 1 January 2025.

Conclusion

The new BMF letter dated 8 October 2024 somewhat clarifies the issue of reducing the number of taxable days and brings the approach into line with current practices. Employers are obliged to document the allocation of wages accurately. Companies should ensure that they have implemented the regulations on the reduction of taxable days by the end of 2024 in order to be able to correctly calculate the wages tax from January 2025.

Employer's expenses for employees working in positions to security risk/for security measures

In its letter dated 11 November 2024, the Federal Ministry of Finance (BMF) published revised rules for how to treat for wages tax purposes security equipment and other measures implemented for employees working in positions exposed to security risk; the original rules were published on 30 June 1997 (German Federal Tax Gazette BMF letter dated 11 November 2024, BStBl. 1997 I, 696). The new rules apply to all open cases and supersede those published in the previous BMF letter.

As before, employer expenses for staff exclusively providing personal protection services (e.g. security guards) will not result in taxable income, as personal protection is provided in the employer's own business interests. In the case of employees who are categorised into risk levels 1 to 3 by an authority responsible for risk analysis (security authority), the tax authorities continue to assume that the installation of security equipment (basic and special protection equipment) is predominantly in the employer's own business interests, so no income is involved. In the case of employees with risk level 3, however, this only applies up to the threshold of 30,000 euros. As previously, additional expenses will only be treated as predominantly serving the employer's own business interests if they were incurred for the installation of security equipment recommended by the security authority.

If the employee is not classified into any risk level, employer payments for security installations will trigger taxable income. According to the previous BMF letter, it was possible to request a supreme federal or state authority for a notional confirmation of the risk level for a specific position or to prove it or make it credible in another way. In the past, such notional confirmation allowed recognising expenses up to an amount of DM 15,000 (EUR 7,669) as predominantly serving the employer's business interests. This will no longer apply from 2025.

In addition, the following rules will apply:

It does not matter whether the security equipment is installed in a rented flat or in a flat owned by the employee and whether it becomes the property of the employee.
For tax purposes, operating and maintenance costs are treated in the same way as installation costs and may be taxable in proportion to the taxable share of the total installation costs.
It is irrelevant in which assessment period the expenses were incurred. Taxable benefits, if any, are allocated to the employee as income immediately upon installation. The above-mentioned threshold of EUR 30,000 also applies if the expenses were incurred in different assessment periods.
If the risk classification changes later on, this does not trigger any tax consequences unless it is changed within the same year in which the security equipment is installed.

These rules apply not only to security equipment installed by the employer, but also to cases where the employee installs such equipment himself and the costs of installation and operation and/or maintenance are reimbursed by the employer. However, the timing of the reimbursement of expenses must match the timing of the installation or the payment of ongoing operating or maintenance costs; otherwise the reimbursement of expenses is treated as taxable income.

Expenses for security equipment not reimbursed by the employer for an employee exposed to a specific security risk are deductible as income-related expenses. If the employee is not exposed to any specific security risk, the costs of security equipment are treated as the cost of living.

Special rules for determining the value of a benefit in kind arising from the private use of a vehicle where the employee is provided with a security-enhanced (armoured) vehicle for private use continue to apply unchanged. The basis for this can be the gross price list of a lower-performance vehicle that would be provided to the employee if he/she were not exposed to security risk (cf. R 8.1 para. 9 no. 1 sentence 7 of the German Wage Tax Regulations [LStR]). When applying the logbook method, depreciation can be recognised based on the acquisition cost of the lower-performance vehicle or based on the corresponding leasing instalment for the lower-performance vehicle that would be made available to the employee if he/she were not exposed to security risk. With regard to the higher running costs caused by the armouring, 70 percent of the actually determined running costs can be recognised (cf. marginal note 38 of the BMF letter dated 3 March 2022, BStBl. I p. 232). If the armoured vehicle is not suitable for autonomous driving, manning the vehicle with a driver does not trigger any separate taxable benefit in kind. This applies regardless of the risk level into which the employee is categorised (cf. R 8.1 para. 10 sentence 3 no. 4 of the German Wages Tax Regulations).

Tax exemption for top-up contributions per German Partial Retirement Act

In accordance with Section 3 para. 28 of the German Income Tax Act (EStG), top-up contributions within the meaning of Section 3 para. 1 no. 1 of the German Partial Retirement Act (AltTZG) are tax-free but are subject to the proviso safeguarding progression (Section 32b para. 1 no. 1 lit. g EStG). To enjoy this tax exemption, the employee must meet the conditions specified in Section 2 of the AltTZG. Among others, the employee may not be retired yet. However, it is insignificant whether partial retirement is subsidised by the Federal Employment Agency (Bundesagentur für Arbeit) as per Section 4 AltTZG and whether the top-up contributions exceed the minimum reimbursement amounts specified in AltTZG (20 percent of regular pay). However, it should be noted that the total of the net salary received during partial retirement and the top-up contributions may not exceed 100 per cent of the net salary that the employee would normally have received in the respective salary payment period if he/she had not been in partial retirement. Other salary components that are not part of regular pay may also be topped up.

In the decision of 24 October 2024 (case no. VI R 4/22), the Federal Fiscal Court (BFH) decided that tax exemption under Section 3 para. 28 EStG does not require the employee to still be in partial retirement at the time of receiving the remuneration. Rather, the decisive factor is that the salary that is topped up is paid for a period in which the employee is in partial retirement. In this case the employee was paid a long-term bonus at a time when he was already retired, which he had earned during the period in which he was in partial retirement. The employer topped up this amount by 40 percent same as the other remuneration paid during the partial retirement period. The top-up contributions could continue to be treated as tax-free.

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New developments in 2025: income tax, social security and EU changes

Guest Post: Impact of donald trump's re-election on US Immigration policy and us tax policy »

new eu border controls: introduction of the ees and etias systems »

european union/schengen area: bulgaria and romania become fully parts of the schengen area as of new year 2025 »

new salary limits for the Eu blue card 2025 »

determination of tax-free and taxable wages in the wages tax deduction procedure »

employer's expenses for employees working in positions exposed to security risk/ for security measures »

tax exemption for top-up contributions per german partial retirement act »

Impact of Donald Trump's re-election on US immigration policy and US tax policy

Guest Post with Teri Simmons (AGG LLP) & Florian darmstadt (R&P USA)