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Germany mulls new tax rebates for skilled foreign workers

July 9, 2024

The German government wants to grant skilled foreign workers tax relief if they take up employment in Germany. But some critics have described the idea as "socially explosive."

A factory worker checking a filter system
According to the German Economic Institute, there is a shortage of around 573,000 skilled workersImage: Jan Woitas/dpa/picture alliance

Tax benefits for companies, incentives for those who work longer before retiring, and measures to reduce red tape are just some of the measures the German government hopes will make Germany more attractive to businesses.

There are also plans to increase the immigration of foreign skilled workers to Germany. "We are creating a tax rebate for foreign professionals during their first three years in Germany. There will be rebates of 30%, 20%, and 10% for those people who come here as qualified specialists," said Federal Finance Minister Christian Lindner of the business-oriented Free Democratic Party (FDP) at a presentation of the new measures on July 5. 

But the plan has not been well received by many in Germany: "Blatant discrimination against domestic workers." "A danger to social peace," "A policy that is openly hostile to everyone here." "Utter indifference towards the domestic workforce." These are some of the comments made by opposition politicians and trade unionists.

However, criticism has also come from the ranks of the governing parties. The Greens have cited the principle of equal treatment in the German constitution and labor law. They argue it could therefore be unconstitutional for certain groups to earn more for the same work thanks to tax incentives.

Green Party lawmaker Beate Müller-Gemmeke told DW that according to the Basic Law, which functions as country's constitution, all people are equal before the law. "We have the principle of equal treatment in Germany, which means that no one should be treated worse. From my point of view, it would be a bit of discrimination against nationals if we were to say that those who come from other countries are exempt from paying tax on at least a certain part of their salary."

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Criticism of tax rebates for foreign skilled workers

The most prominent critic coming from within the governing coalition is Federal Minister of Labor Hubertus Heil. The politician from Chancellor Olaf Scholz's center-left Social Democrat party (SPD) said on Deutschlandfunk public radio: "We need to take a closer look at this. We have to be careful that there are no public misunderstandings."

The criticism has been particularly frustrating for the FDP, which has been fighting for months to stimulate the economy with all means at its disposal. In summarizing the economic situation in Germany, the managing director of the Association of German Chambers of Industry and Commerce, Martin Wansleben, said: "The current situation is poor for companies; for industry, it is even worse."

"Hopes in recent months that strong foreign business or a recovery in domestic demand could act as a driver for domestic companies have not materialized," said Wansleben.

One of the structural challenges that has been evident for years is the massive shortage of skilled workers in Germany. This is due to the fact that an increasing number of older people are retiring, while fewer young workers are available. Economists now say that the shortage of skilled workers is the biggest risk to future economic growth.

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Measures to encourage skilled workers to immigrate

According to a recent study by the German Economic Institute, there is currently a shortage of around 573,000 skilled workers in Germany. Economists have calculated that economic growth this year would be more than 1% (€49 billion or $53 billion) higher if there were enough workers. That's a lot, considering that economic forecasts for 2024 predict a growth rate of just 0.2%.

In 2020, the government introduced a Skilled Immigration Act, which has been continuously reformed ever since. The aim is to remove as many obstacles as possible that could discourage foreign workers from coming to Germany. These are mainly bureaucratic obstacles. 

But the hoped-for influx has not materialized. According to a study by the Bertelsmann Foundation, around 70,000 skilled workers from non-EU countries came to Germany in 2022. This was significantly higher than the previous record of around 64,000 people in 2019, before the COVID-19 pandemic. However, this is still far too few to compensate for the shortage.

The planned tax rebate is yet another attempt to make Germany more attractive for skilled workers. However, Labor Minister Hubertus Heil emphasizes that what is most important is to remove bureaucratic hurdles, speed up the issuing of visas, and improve professional accreditation.

The language problem is also a serious obstacle, he points out. Germany ranks only fifth on the list of countries most attractive to skilled immigrants. "There are four English-speaking countries ahead of us."

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Tax benefits for foreign skilled workers in the EU

In response to a parliamentary request from the Greens in 2018, when they were still in opposition, the federal government provided a list of countries that offer tax breaks for foreign skilled workers. It included Belgium, Denmark, Finland, France, Ireland, Italy, Luxembourg, Malta, the Netherlands, Austria, Portugal, Sweden, Spain, the UK, and Cyprus.

Steffen Hebestreit, spokesman for the German government, also referred to this on Monday. "London is a financial center, Paris is a financial center, Milan is a financial center, and Frankfurt is a financial center. In all of these places, as in many other European countries, there are these kinds of tax incentives and benefits for attracting specialists to those locations."

According to Hebestreit, however, it is not the federal government's intention to give tax benefits to all foreign workers from now on. The plan is only intended for "certain sectors," the details of which are still being worked out. "Then there will also be a minimum annual income at which it will apply, and a maximum threshold as well so that multimillionaires are not given tax breaks to encourage them to come to Germany."

This article was originally written in German.

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