Compromise Deal Reached On German Corporate Taxes

by Ulrika Lomas, Tax-News.com, Brussels

14 April 2003

The German government and the Christian Democrat opposition reached a compromise last week on plans to increase the tax take from business by cutting tax credits. The measure will raise EUR4.4 billion in extra revenue, though falls far short of the government's original expectations.

The new plan aims to boost the government's revenue from corporate taxes by restricting the use of tax credits available to German firms. It will mean companies will be unable to use tax credits set out in the 2001/2005 tax-relief package for a three year period starting this year. The new measures also call for restrictions on the use of subsidiary companies as a means to write off tax.

Chancellor Gerhard Schroeder's original plan hoped to raise an extra EUR15 billion from changes to corporate tax though it encountered dogged opposition from conservatives in the upper chamber. Eventually, it took intervention by a parliamentary mediation committee to work towards the EUR4.4 billion compromise deal.

The new measures are aimed at closing the yawning German fiscal deficit which breached the EU Growth and Stability pact threshold last year when it climbed to 3.5% of GDP. Forecasts for this year are slightly more upbeat, predicting debt at 2.85% of GDP. However, many economists say this has been based on an over-optimistic assumption that the economy will grow by 1% in 2003.

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