German Coalition Agrees Company Tax Reforms

by Ulrika Lomas, Tax-News.com, Brussels

06 November 2006

Germany's coalition last week arrived at an agreement over key company tax reforms which will reduce the overall corporate tax burden, currently one of the highest in the world.

Finance Minister Peer Steinbrueck told reporters after a working group meeting that the reforms will cut the overall corporate tax burden to a little under 30% from the current level of almost 40%.

This will be brought about largely by a cut in the 25% headline corporate tax rate, paid by large companies, to 15% in 2008. Companies will continue to pay corporate tax at the local level at an average of about 13%.

Steinbrueck hailed the agreement as "an important piece of work" that will strengthen Germany as a centre for business.

However, the proposals have been given a mixed reception from business, with many accusing the government of giving with one hand while taking away with the other.

The reforms are expected to cost EUR5 billion (US$6.4 billion) in the first year and EUR30 billion overall, but EUR25 billion of this will be clawed back through efforts to widen the tax base.

One offsetting measure is the controversial decision to restrict the amount of interest that German companies can deduct from loans received from overseas units. Many business leaders worry that this measure will restrict companies' ability to invest.

The ruling coalition parties also agreed to introduce a 25% capital gains tax from January 1, 2009. This will replace the current system, whereby capital gains are subject to personal income tax, which can be as high as 42%. This will apply to income from earned interest and dividends, and private investors' share sales.

Small companies, which are also taxed under the personal income tax system, will receive preferential treatment on retained profits.

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