German Coalition Mulls Unified Company Income Tax

by Ulrike Lomas, Tax-News.com, Brussels

31 October 2005

Joachim Poss, the finance spokesman for Germany's Social Democratic Party (SPD), has indicated that the 42% top rate of income tax for the country's small incorporated firms may be cut after 2008 in an effort to enhance Germany's competitiveness.

In an interview with Bloomberg News last week, Mr Poss revealed that the current progressive income tax system imposed on the country's closely held companies, which make up about 80% of the 3.6 million businesses in Germany, could be scrapped in favour of a single unified tax rate.

Incorporated companies in Germany pay a composite income tax which averages about 38.5%, made up from a corporate tax rate of 26.5% and a "solidarity" tax which is used to fund infrastructure investment in Eastern Germany.

Poss added that the SPD and the Christian Democratic Union (CDU) have not discussed at what rate the unified tax would be charged, and are consulting with the government's council of economic advisors to suggest a suitable rate.

The SPD and the CDU, neither of whom won a clear majority in September's elections, are still engaged in talks to resolve critical budgetary issues in an effort to ensure that Germany's budget deficit is brought below 3% of GDP, as stipulated by the Stability and Growth Pact underpinning the single European currency. This has led to proposed cuts in the headline corporate tax rate and personal income tax to be put on the backburner, although the SDP is still pushing for corporate tax to be cut to 19%.

Negotiations between the two sides are expected to continue into November, after which the parties plan to approve a coalition on November 14. CDU leader and Chancellor-designate Angela Merkel is then expected to be voted into office around three days later.

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