Confusion Reigns Over German Tax Reforms

by Ulrika Lomas, Tax-News.com, Brussels

04 July 2001

Reports earlier this week that Finance Minister Hans Eichel had decided to allow municipal taxes of 13% on the proceeds of corporate divestments have been denied by the Finance Ministry.

The municipal 'trade tax' currently averages around 13% depending upon authority, and it was thought that Eichel was responding to pressure from the big municipal authorities, for whom the reforms will mean a decline in revenues. DST, the association of municipalities, on Tuesday confirmed that it had on several occasions pointed out to the government the negative impact the tax reforms will have on its members' revenue, and had urged it to take corrective action.

But it now seems that the Finance Ministry never intended to allow the tax reforms fought through last year to be blunted; instead, its own experts had noticed an inconsistency between the new tax legislation and existing laws, which state that a company becomes liable to trade tax on dividend payouts and divestment profits on a shareholding interest when that interest represents less than 10% of the total capital. They raised this with the state governments as an issue requiring resolution (which it does).

Under the reforms, due to take effect in 2002, profits generated by corporations from the sale of shareholdings in other German companies are to be exempt from corporate tax (currently 25%). On stock markets this week, German finance stocks suffered losses as a result of the report of the planned dilution of the reforms. Large banks and insurance companies are seen to have the most to gain from the reforms. President of the BDI confederation of German industry, Michael Rogowski, said making divestment profits subject to trade tax would "damage the foundations of the tax reform program, and represent the abandonment of one of the program's central tenets."

But now there is considerable confusion. Many newspapers are carrying reports such as (in the FT): 'a finance ministry spokeswoman confirmed that Germany's powerful regional states were calling for minor changes to the legislation, but said these had been rejected. "There are no plans to implement the proposals," she said.'

This appears disingenuous on the Ministry's part, and if its experts are correct about the conflict between the tax laws, the government has a problem. At the best of times, it is at the mercy of the upper house of Parliament where the Lander (state governments) can wield a blocking majority; and if the Lander are already unhappy about loss of revenue through the new tax rules, they are scarcely going to go as sheep to the slaughter if Mr Schroder now has to try to modify the trade tax laws to exempt corporate reorganisations.

Watch this space!

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