The centre-right coalition is set to take office next week
German Chancellor Angela Merkel's conservatives have sealed a coalition deal with the Free Democrats (FDP) based on major tax cut plans.
The deal between the CDU/CSU and the pro-business FDP paves the way for the coalition to take office next week.
Income taxes will be slashed by 24bn euros ($36bn, £22bn) starting in 2011, according to the coalition agreement.
The parties agreed to unite after the September general election in which the FDP achieved its best-ever result.
They have also announced key cabinet posts.
The coalition deal came in the early hours of Saturday morning after three weeks of bargaining.
Offering tax relief while balancing the country's ballooning deficit was the main sticking point for the two sides, as Germany struggles with its most severe recession since World War II.
The final tax cut is less than the 35bn euros the FDP sought, but more than the amount Mrs Merkel wanted.
"The burden on families has to be lessened, the burden on companies and inheritance tax has to be reformed," Mrs Merkel was quoted as saying by AFP news agency at the start of a press conference in Berlin.
The partners had already forged compromises on a range of other issues, from healthcare to nuclear energy and foreign policy.
Mrs Merkel said Wolfgang Schaeuble would move into the role of finance minister after acting as the country's interior minister for the past four years.
FDP leader Guido Westerwelle was named foreign minister.
The party's deputy leader, Rainer Bruederle, is slated to become economy minister, replacing Karl-Theodor zu Guttenberg, who will take over the defence portfolio.
Mr Guttenberg will have the task of overseeing an unpopular mission in Afghanistan and working towards an eventual exit strategy.
The youngest minister in Mrs Merkel's cabinet will be the Vietnam-born Philipp Roesler, 36, who was named as health minister.