German Cabinet Unite On Initial Tax Cut Plans

by Ulrika Lomas, Tax-News.com, Brussels

11 November 2009

During a recent Cabinet meeting held in Berlin, Germany’s newly elected Coalition government united on plans for a first wave of tax reductions.

From 2010, the government has agreed to reduce the tax burden on parents, businesses, heirs, and the hotel industry, by around EUR8.5bn each year.

The proposed tax relief initiatives are contained in the government’s new growth acceleration law (Wachstumsbeschleunigungsgesetz). Designed to combat the effects of the global economic crisis, the law forms the third economic stimulus package drawn up in Germany within the space of a year.

Determined to support German businesses and to strengthen their international competitiveness, the government is intending to introduce changes to the country’s 2008 reform of corporate taxation.

Plans are to simplify the existing system to enable companies to offset losses against tax, and to relax regulations governing the deduction of interest expenditure. The highly controversial general interest barrier (Zinsschranke) has been fiercely criticized since its adoption, but particularly during the economic downturn, for unnecessarily increasing the burden on businesses.

Within the framework of the government’s emergency program or “Sofortprogramm," vital amendments are to be made to the country’s inheritance tax. Proposed initiatives will enable not only close relatives, such as children and spouses, to benefit from reduced tax following the succession of a business, but also other relatives such as siblings and nieces and nephews. In addition, conditions governing tax exemptions for the transfer of family businesses will also be relaxed.

In a bid to support tourism, and following the European Union’s decision earlier this year to allow certain services to benefit from a reduced value-added tax (VAT) rate, the government has agreed to allow the hotel industry to benefit from the reduced VAT rate of 7% instead of the standard rate of 19%.

The government has also agreed to increase the child tax-free allowance from EUR6,024 to EUR7,008, and to raise the child allowance. For top earners, however, the child allowance will be included in the child tax-free allowance.

Parliament is due to examine the proposals shortly.

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