Finance ministry spokesman Martin Kotthaus told a regular news conference in Berlin that a law was due to be passed on Friday which would retroactively make this compensation non-taxable.
"This problem no longer exists, or at least will no longer exist very soon," Kotthaus told reporters.
The victims of forced labour during World War II were compensated by a one-off payment that was not subject to tax, added the spokesman.
However, some forced workers also received a pension to compensate them for pension money they would otherwise have received.
This had been considered taxable until now, but the law to be passed on Friday would change that, Kotthaus said.
A row broke out over the weekend, when Belgian Finance Minister Didier Reynders vowed to tackle Berlin over "morally indefensible" tax demands German officials had issued to Belgian survivors of the forced labour programme.
Several dozen former victims had complained of receiving the letters, according to reports in the Belgian press, demanding tax on pensions paid out since 2005, sometimes amounting to several hundred euros.
Thousands of Belgians were among the 13 million people conscripted into the Nazis' forced labour programme. It was only in recent years that Germany finally compensated them.
Germany's EVZ Foundation set up in 2000 to handle compensation payments for surviving victims of the programme wound up in 2007. It had paid out €4.4 billion ($5.9 billion) to 1.66 million people in nearly 100 countries.
Kotthaus said that the tax issue had affected 25,000 people and was not confined to Belgium.