Germany’s gas surcharge plans face legal hurdle

Germany wants to bail out its struggling energy sector with a new gas levy in October - but legal rules around fixed-price contracts are causing headaches for the government.

Cost breakdown in German energy bill
A breakdown of costs in a household energy bill. Photo: picture alliance/dpa/dpa-tmn | Andrea Warnecke

The government has said that all gas customers in Germany have to pay the levy, and this was believed to include people who had entered into fixed-price contracts with gas suppliers.

But the legal status of this is apparently murky. According to reports by news agency Reuters, the current Energy Security Act (ESG) only allows a levy to be added to fixed-price contracts if the proceeds go directly to the state. 

In this case, however, the government intends to use the levy to allow struggling gas suppliers to pass rising costs onto consumers, meaning the funds would be paid directly to these companies. 

The issue means that, under current rules, the levy couldn’t be charged to customers with certain types of gas contracts. These include people who have agreed to a fixed price over several years and those with clauses on state levies in their contracts.

Reuters estimates that the issue affects around a quarter of all gas contracts in Germany.

READ ALSO: What is Germany’s new gas ‘tax’ and who will pay it?

To attempt to get around the issue, the Economics Ministry is currently investigating the legal pitfalls and could even move to amend the Energy Security Act. 

This legislative change would be likely to happen in September to allow for the introduction of the levy as planned in October.

However, there are concerns that suppliers may not have enough time to notify consumers of the new levy.

Under German law, companies are obliged to inform customers of price increases at least six weeks in advance. This means that any legal changes could prompt delays in the introduction of the new charge. 

Financial burden for households

So far, the government hasn’t decided how much the levy will cost, but Economics Minister Robert Habeck (Greens) predicts it will be somewhere between 1.5 and 5 cents per kilowatt hour of energy.

This would add anywhere between €300 and €1,000 onto the gas bills of a four-person household who use around 20.000 kilowatt hours of energy per year.

On top of this, households would also be expected to pay 19 percent VAT on top of the inflated costs – though the Free Democrats (FDP) are currently looking at ways to minimise this additional burden.

“The levy must not be a basis for further tax revenue – that is why we are currently examining whether VAT can be waived on the levy,” said the energy policy spokesman of the FDP parliamentary group, Michael Kruse, after a special session of the Bundestag’s energy and climate committee.

READ ALSO: Cold showers to turning off lights: How German cities are saving energy

“Should this not be technically possible, it is clear to me that the additional state revenue must be returned to consumers along with further relief.”

According to calculations by price comparison portal Verivox, the additional costs including VAT for a single household with an annual consumption of 5,000 kilowatt hours of gas per year would be between €89 and €298 due to the levy.

For a couple with an annual consumption of 12,000 kilowatt hours, the additional costs plus VAT would be between €214 and €714, and for a four-persona family with an annual consumption of 20,000 kilowatt hours, the total would be €357 to €1,190 euros.

However, if the VAT on gas products were abolished, a single household would save between €14 and €48, a couple between €34 and €114 and four-person household between €57 and €190.

Member comments

  1. I think the government know exactly how much they want the levy to be. Im guessing its between 90% and 90% so 1,000€ extra plus a little something something for VAT .

    My source dpa-afx

    “Government informed Uniper during the negotiations that it intends to

    introduce a general mechanism for all gas importers to pass through 90% of

    the replacement costs for missing Russian gas as of 1 October 2022.”

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Who benefits most under Germany’s tax relief plans?

German Finance Minister Christian Lindner says he wants to give taxpayers relief worth €10 billion in the face of rising inflation. But there is already pushback, with some saying high earners will benefit the most.

Who benefits most under Germany's tax relief plans?

What’s happening?

As Germany battles rising inflation, Finance Minister Christian Lindner has revealed a plan to give residents tax relief worth more than €10 billion in total. 

“Employees and low-income earners, pensioners and self-employed, students with taxable part-time jobs and, above all, families will benefit,” the FDP politician wrote in a guest article for German daily FAZ on Wednesday.

As well as an adjustment of the benchmarks in the income tax scale, child benefit and child allowance are also to be increased.

READ ALSO: How the German Finance Minister wants to ease inflation with tax relief measures

According to sources in the Finance Ministry, the so-called ‘Inflation Compensation Act’ provides for child benefits to be increased in two stages and also to be standardised. Under the plans, the first, second and third child will each receive €227 per month next year. From the fourth child onwards, €250 will be added. In 2024, the rates for the first to third child are to be raised again – to €233.

At the same time, Lindner’s draft provides for an increase in the basic tax-free amount, i.e. the income up to which no tax has to be paid. The Finance Minister wants to raise this limit from the current €10,347 to €10,632 in the coming year and €10,932 in 2024.

Finance Minister Christian Lindner speaks at a press conference in Berlin.

Finance Minister Christian Lindner speaks at a press conference in Berlin. Photo: picture alliance/dpa | Kay Nietfeld

READ ALSO: Germany pledges inflation relief tax package worth €10 billion

Other key values of the tax scale will also be shifted to compensate for the effect of so-called ‘cold progression’. This is the term used to describe a kind of creeping tax rise when salary increases are eaten up by inflation but still lead to higher taxation. People are then hit with higher taxes, although purchasing power does not increase at all in real terms.

“A tax system that also imposes higher taxes on people who are already suffering from high prices is not fair,” Lindner wrote in FAZ. Eliminating this is “not a patronising act, but is called for in several respects”. Lindner says his plans would benefit 48 million taxpayers.

Who would benefit most?

In order to mitigate the effect, the top tax rate, which currently starts at an income of €58,597, will only apply at a level of €61,972 in 2023, and €63,521 one year later.

However, the tax threshold for very high incomes will remain in place. The income limit of €277,826, on which the so-called wealth tax rate of 45 percent is charged, will not be changed.

But there is already widespread criticism of the plans because in absolute terms, top earners would benefit more from Lindner’s tax cuts than low earners.

The FDP’s coalition partners – the Greens – said they considered the plans to be socially unbalanced.

“High and highest income groups would receive more than three times as much as people with low incomes, who actually need the relief most urgently,” said Greens parliamentary group vice-president Andreas Audretsch. Furthermore, people with very low incomes would not get any relief at all because they pay no income tax below the basic tax-free amount.

Katharina Beck, the Greens’ spokesperson for financial policy, expressed similar views. “The other way round would be right: strong shoulders should bear more than low-income shoulders and not be disproportionately relieved,” she told the Redaktionsnetzwerk Deutschland (RND) on Wednesday.

Lindner’s plans have a greater impact on low incomes in percentage terms, but in absolute terms people with high incomes benefit more.

For example, a taxpayer with a taxable income of €20,000 is to be relieved by around €115 per year under the current plans. With an income of €60,000, the relief amounts to €471, according to figures from the Ministry of Finance. 

What’s the reaction elsewhere?

Vice-chairman of the SPD parliamentary group, Achim Post, said the relief doesn’t go far enough.

“The proposed increases in the basic tax-free allowance and child benefit are a step in the right direction, but they are not enough,” he said. 

He suggested direct payments as an alternative, which could provide targeted relief to people with small and medium incomes. 

A woman holds cash in her hand.

A woman holds cash in her hand. Photo: picture alliance/dpa | Daniel Karmann

‘Falls short’

Meanwhile, the German Trade Union Confederation (DGB) rejected the proposals. Lindner’s tax plan “falls far too short”, said DGB Executive Board member Stefan Körzell.

For the relief for people with small and medium incomes, the basic tax-free amount would have to rise to €12,800, said Körzell, adding: “Instead, top earners and the rich benefit, although they have far fewer problems coping with the current price increases.”

Körzell said that “top earners and the wealthy must contribute more to tax revenue”.

He said the FDP politician’s plans would cause “serious revenue shortfalls” for the treasury.

FDP Secretary General Bijan Djir-Sarai rejected the criticism as baseless. The adjustment is aimed at smaller and medium incomes and reduces “the tax burden of the hard-working middle”, he said.

For top earners, the relief amount is capped, he said. “The relief is fair and necessary so that people benefit from a wage or salary increase despite the high inflation and do not have to pay on top through a higher tax burden,” Djir-Sarai said.