The move is part of the coalition's budget saving measures which will come into effect from January 1st 2024.
The temporary reduction of the VAT rate from 19 to seven percent on meals (excluding drinks) in restaurants and other catering establishments was originally introduced in response to the Covid-19 pandemic which resulted in many businesses struggling due to shutdown measures.
The VAT cut was extended until the end of 2023 against a background of increasing inflation due to the energy crisis.
German newspaper Bild reported earlier this week that the coalition would not extend the VAT reduction in restaurants.
In September, the Federal Ministry of Finance, led by the FDP, estimated the cost of the VAT reduction at €3.4 billion.
The catering industry has warned there could be a wave of businesses going bankrupt due to the changes.
Meanwhile, the German government's caps on gas and electricity prices will stay in place until March 31st next year.
The energy price brakes were initially meant to expire at the end of 2023, but Economics Minister Robert Habeck, of the Greens, campaigned for an extension to offer more security for German residents.
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