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The Week in Germany: Business and Technology

March 16, 2007

German Cabinet Approves Corporate Tax Overhaul

The German cabinet on Wednesday approved a draft law to overhaul company taxes. The law aims to cut the corporate tax burden - one of the highest in the industrialized world - by reducing the overall corporate tax rate to 29.8 percent from the current level of 38.7 percent.

Due to come into force next year, the reform will be partly financed by the closure of tax loopholes and the introduction of a 25 percent capital gains tax in January 2009.

Finance Minister Peer Steinbrück, who drafted the program, said it would make Germany more attractive for investors and improve the state's financial capabilities in Europe's biggest economy.

The first three years of the reform are expected to see corporate tax revenues drop by 6.5 billion euros (8.4 billon dollars), instead of the original estimate of 5 billion euros.

But Steinbrück dismissed claims from members of his Social Democratic Party (SPD) that he was making an unjustified gift to employers at a time when individual tax breaks were disappearing.

"This is not a tax gift," the minister told a press conference in Berlin. "It is an investment in Germany as a place to do business."

Economics Minister Michael Glos, a member of the conservative Christian Social Union (CSU), complained that the bill did not provide enough relief to medium-sized firms.

Glos said he would seek amendments to the legislature before it is passed by Germany's lower house of parliament, the Bundestag, before the summer recess begins in July.

The government plans to slash the headline corporate tax rate paid by large companies to 15 percent in 2008. Private companies that reinvest their profits will also have their tax burden reduced.

One offsetting measure restricts the amount of interest on loans received from overseas units that German companies can deduct from taxable income.

Steinbrück said the new measures would reduce to a minium the practice by which companies can transfer profits abroad and register their losses in Germany.

Experts estimate that 100 billion euros bypass the German tax authorities through this legal method of transfers.

The introduction of a 25 percent capital gains tax from January 2009 will replace the current system, whereby capital gains are subject to personal income tax, which can be as high as 42 percent.

The capital gains tax will apply to income from earned interest and dividends, and private investors' share sales. (dpa)

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