German Coalition Agrees Key Corporate Tax And Health Funding Reforms

by Ulrika Lomas, Tax-News.com, Brussels

05 July 2006

The members of Germany's grand coalition government have reached agreement on crucial company tax and healthcare reforms, as they attempt to shore up tax revenues while reducing one of the highest corporate tax burdens in the industrialised world.

After many hours of discussions last weekend which ran into the early hours of Monday morning, it emerged that agreement had been reached on a plan to reduce the overall corporate tax burden on large companies in Germany to below 30%. This will be achieved through a cut in the headline corporate tax rate to 12.5% from the current level of 25%.

The regional corporate tax burden will remain at about 14%. However, Germany's overall corporate tax burden will be cut from nearly 40% to about 29% as a result of the federal rate cut. The European Union average is currently about 25%.

In addition, Finance Minister Per Steinbrueck has proposed a flat rate of capital gains tax to reduce capital flight to low tax jurisdictions. At present, capital gains are taxed under income tax rates, which can be as high as 42%. Steinbrueck has suggested a 30% capital gains tax to start on January 1, 2008, falling to 25% one year later.

The corporate tax reforms, which are expected to be introduced in 2008, will cut the company tax burden by an estimated EUR5 billion ($6.4 billion).

In addition, the coalition has agreed to a short-term compromise to guarantee adequate revenue flows for the healthcare system, which will involve an increase in monthly employer and employee contributions to the system by about 0.5%. Also, a central health-care fund will be introduced to pool contributions made by workers and employees. This fund will pass on money to insurance companies who may also raise cash directly from their members through a levy should they require extra funds.

However, members of the coalition still appear to be at odds over long term reform of the healthcare system, which as in many countries, is under increasing strain as the population ages. While right-wing members of the government, including Chancellor Angela Merkel, are keen to reduce non-wage labour costs to stimulate economic growth, left-wingers argue that the wealthy should be made to contribute more to keep the system funded.

Nonetheless, Merkel told reporters on Monday that the talks had "led to a breakthrough by agreeing to decouple labour costs from financing the social system in the long term".

Germany's healthcare system costs around EUR140 billion annually and results in some of the highest non-wage labour costs in Europe. This, it is argued, makes Germany an unattractive investment location for both domestic and foreign companies and is a key reason for the country's recent economic malaise.

The government is expected to agree the still-disputed points of the reforms on July 12, although discussions on the fine print of the agreement are likley to drag on into the autumn.

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