Under a proposed amendment to German tax law, trade tax revenue from the operation of data centers would, starting in 2027, be allocated predominantly to the municipalities where the respective data centers are operated. The allocation of the trade tax base among the municipalities, known as apportionment (Zerlegung), would be based primarily on nominal electrical connection capacity.
The draft bill thus addresses a tension that characterizes many data center projects: Host municipalities bear the local impacts of land use, energy consumption, water usage, noise, and infrastructure – yet currently benefit only marginally from trade tax revenue due to the high degree of automation in data centers. This is because, in principle, the distribution of trade tax among municipalities depends on the wages attributable to the respective business premises within the municipalities.
Under the proposal, host municipalities would benefit economically from additional tax revenue, thereby also promoting local residents’ acceptance of such new facilities.
The proposals are included in the government’s draft of the Income Tax Reform Act 2027, published in early September. However, because not every data center and not every operator is intended to be covered by the new regulations, the Federal Council (Bundesrat) advocated in mid-October for a significant expansion of the scope of application. Industry associations and experts generally support the proposal but have suggested refinements to the details.
Which data center operators would be covered by the proposed regulation?
According to the government’s draft, the special apportionment standard would apply only to businesses that exclusively operate data centers as defined in Section 2, No. 18 of the Energy Efficiency Act (EnEfG).
This is intended to limit its application specifically to an industry where the general wage standard inadequately reflects the local nature of the economic activity: Data centers are capital-, space-, and energy-intensive, but due to their high degree of automation, they often employ only a few workers on-site.
The definition of a data center in the EnEfG amendment (BT-Drs. 21/8027) is decisive. This amendment would likely take effect at the end of November 2026, and thus before the 2027 taxable period (Erhebungszeitraum). According to this definition, the term covers facilities used for the hosting, networking, and operation of servers for the storage, processing, or distribution of data, as well as for related activities, and that have installed information technology with an electrical capacity of at least 500 kilowatts.
The decisive factor is the activity of the respective facility, not who owns the property where the data center is operated or whether there is a corresponding lease or rental agreement. According to the wording of the current draft, mixed-use facilities that carry out activities other than data center operations would not be covered by the planned regulation. For them, apportionment would continue to be based on wages, unless, for example, an apportionment agreement is in place. Even supplementary activities, such as managed services provided by a colocation operator, could thus exclude the business concerned from the application of the planned regulation. Also unclear would be the treatment of structures in which infrastructure and IT (colocation) or real estate and operations (Powered Shell, Build-to-Suit, PropCo-OpCo) are separated. If, for example, the property company enters into the grid connection agreement, it is questionable whether any contracted capacity could be attributed to the operator at all.
How should the trade tax be allocated? 10% based on wages, 90% based on connected power capacity
For the businesses covered by the planned regulation, the trade tax base would be apportioned as follows: 10% based on the previous wage-based standard and 90% based on the non-redundant nominal electrical connection capacity. For the allocation of the portion attributable to connection capacity, the decisive factor would be the ratio of the sum of the non-redundant nominal electrical connection capacities of the business locations situated in the respective municipality to the corresponding sum for all business locations of the business. A 10/90 weighting is not new: It has already applied since the 2021 tax assessment period to businesses that operate exclusively wind and solar power plants – though in that case, it is based on the installed capacity of the plants.
What would count as rated electrical connection capacity? According to the legislative rationale, the maximum connection capacity contractually agreed upon between the data center operator and the upstream grid operator or energy supplier – the so-called contracted capacity – would be decisive. It is not decisive whether this capacity has been fully used during the respective tax period or is actually being utilized due to expanded IT capacity. This means that even grid connection capacity reserved for later expansion phases would already be included in full in the trade tax allocation.
The federal government justifies this benchmark primarily on the grounds of its ease of verification and administrative practicality. The contracted capacity could be objectively verified based on the grid connection or supply contracts and allocated to the individual business locations. At the same time, the grid connection capacity is intended to reflect the data center’s specific location dependency: The high-capacity power connection is a central prerequisite for operations and is closely linked to the infrastructure and space requirements at the location.
However, this approach has a noticeable lead-time effect. For a site developed in multiple construction phases, the grid connection capacity contracted for the final expansion may be agreed upon several years before the IT infrastructure is actually built and becomes operational. The government’s draft bill thus deliberately takes the contractually guaranteed maximum capacity as its starting point, rather than current utilization or actual electricity consumption.
Exclusivity requirement, colocation and more: What refinements is the Federal Council calling for?
On Oct. 16, 2026, the Federal Council issued a statement on the government’s draft bill. It generally supports the proposed legislation but considers it necessary to expand its scope of application and to include provisions to prevent abusive arrangements:
- First, the special allocation criterion should apply not only to businesses that operate exclusively as data centers but also, in any case, to businesses whose activities consist predominantly of operating data centers. This is intended to prevent results and arrangements that are not objectively justified due to minor ancillary activities. The committees of the Federal Council had previously called for the complete removal of the “exclusivity” criterion.
- Second, colocation arrangements should be included. The special standard should therefore not fail solely because the operator of the physical and technical data center infrastructure and the company that operates its own information technology there are different entities.
- Finally, the Federal Council calls for effective safeguards against circumvention arrangements, particularly through cross-border structures or the establishment of merely insignificant ancillary operations.
When would the proposed regulations take effect, and would existing data centers also be affected?
The proposed regulations would take effect for the first time in the 2027 tax assessment period. According to the government’s draft, they would generally apply to existing data centers as well; no special transitional or grandfathering provisions are provided for. The Federal Council’s committees had suggested such provisions, but they were not included in the Federal Council’s statement. Consequently, a “hard” transition at the turn of the year will likely remain.
The legislature aims to give host municipalities a greater share of trade tax revenue as soon as possible while simultaneously supporting the goals of the federal government’s data center strategy. The new regulation is intended to strengthen local acceptance of new data center facilities and expansions. For existing operational structures, however, immediate application may lead to significant shifts in the allocation of tax revenue between municipalities where wages are paid or headquarters are located and municipalities where the data centers are physically located.
Conclusion: The operational structure and grid connection are the decisive factors
Industry generally supports the proposed regulation. It directs trade tax revenue to the locations where data centers have their local impact and, with the 10/90 split, draws on a mechanism that has often proven effective for wind and solar power plants.
Industry’s main point of criticism is the use of contracted grid connection capacity as a benchmark. Although it is easy to determine, it is often agreed upon in advance for the final configuration, includes cooling and auxiliary power, and only partially accounts for on-site generation or direct connections. Associations such as the GDA therefore advocate for the operationally ready IT rated load, which may more accurately reflect actual activity at the site, though it is more complex to determine.
A more fundamental need for refinement is also widely seen with regard to the scope of the proposed regulation. The exclusivity criterion would lead to an “all-or-nothing” effect, and colocation structures are not readily covered by the wording. It remains to be seen whether the expansion suggested by the Federal Council and the associations – for example, to businesses that predominantly operate data centers – will be adopted. In any case, a reasonable allocation of revenue suggests that ancillary activities subordinate to data center operations should be deemed harmless. In the case of affiliated companies, the activity of the entire group of affiliated companies may be decisive. Furthermore, the relationship to existing allocation agreements under Section 33(2) of the German Trade Tax Act requires clarification.
The proposed effective date is Jan. 1, 2027. If the regulations come into force, affected host municipalities would likely see additional revenue, while municipalities that previously collected tax based on registered offices or wages would likely see a decrease in revenue. Since the distribution of the trade tax assessment base is changing, the impact on the trade tax burden will depend on the assessment rates of the participating municipalities. The special apportionment standard is particularly relevant for covered businesses with permanent establishments in multiple municipalities. For existing data centers and ongoing data center projects, the specific operational structure and the allocation of contractually agreed-upon capacity will therefore be decisive. A stake in a property holding company or the leasing of data center space does not, in and of itself, constitute direct applicability. In cases where ownership, infrastructure, and IT operational structures are separate, it must be clarified which entity falls under the planned regulation. It also remains unclear whether, and to what extent, ancillary services to the operation of data centers preclude the application of the planned regulation. Consequently, these demarcation issues also come into focus when making location decisions, conducting transactions, and evaluating expansion phases.
Further Reading:
German Federal Government Bill (German Language)