The interior ministry aims to unveil a draft law “soon” that will be submitted to the cabinet for approval, a spokesman told AFP.
Under the proposed new rules, naturalisation would be possible after five years of residency instead of eight, and even as little as three years for people deemed to have integrated particularly well.
Children born in Germany would automatically become citizens if one of their immigrant parents has lived in the country legally for at least five years.
The interior ministry also plans to relax some language requirements for elderly immigrants and make it easier for people to hold multiple nationalities.
The overhaul of Germany’s citizenship legislation was a key pledge made by Chancellor Olaf Scholz’s centre-left-led coalition government when it came to power a year ago.
It comes as Germany, an ageing country home to more than 80 million people, faces an acute shortage of workers across numerous industries.
The labour ministry has predicted a shortfall of some 240,000 skilled workers by 2026 in Europe’s biggest economy.
“We will create a modern citizenship law,” Scholz’s three-party government said in its coalition agreement.
“To this end, we will make multiple citizenship possible and simplify the path to acquiring German citizenship.”