German Firms To Get Higher Tax Write-Offs Under EUR25bn Economic Stimulus Plan

by Ulrika Lomas, Tax-News.com, Brussels

20 January 2006

The German government has approved a EUR25 billion ($30 billion) investment plan including several billion euros worth of business tax breaks, as Chancellor Angela Merkel attempts to kickstart the economy and follow through on her pledge to restore Germany as one of the three leading economies in Europe within 10 years.

The programme, agreed by the cabinet at a two-day strategy meeting at Genshagen palace, south of Berlin, will run from 2006 through to 2009 and will provide small- and medium-sized businesses with higher investment write-offs worth about EUR4.4 billion until the end of 2007.

The investment program also includes tax breaks for private home improvement and for growing families.

A further EUR4.3 billion will be spent on infrastructure projects, while an extra EUR6 billion has been earmarked for research and development.

"The...(aim) of better growth and employment conditions enjoys top priority with the federal government," the Finance Ministry declared in a statement.

"A higher number of permanent jobs, lower labour market spending and higher tax revenue can only be generated with high growth," the ministry added.

However, the investment plan has elicited a mixed response from politicians, business groups and economists.

Opposition free-market liberal General Secretary, Dirk Niebel slated the investment plan, dismissing it as "typical of Social Democrat economic thinking".

“This policy of laying on special investment programs so you get a blip on the screen has failed so many times in the past," he was quoted by Deutsche Welle as remarking.

"It means that the state ends up spending taxpayers’ money more or less indiscriminately. No thought is given to how the state could both reduce expenditure and cut lower taxes for ordinary people at the same time," he added.

However, other experts, such as Gustav Horn, head of the IMK institute for macroeconomic research in Duesseldorf, have complained that the investment did not go far enough.

"25 billion euros won't be enough to kick-start the economy. It's a drop in the ocean," he observed, according to AFX News.

While Merkel's grand coalition is attempting to stimulate the economy on the one hand, it is also closing off a number of tax breaks and loopholes and increasing some taxes in order to narrow the country's EUR35 billion budget deficit and bring its finances back into line with the European Union's Stability and Growth Pact.

In November, the government announced that loss write offs for investors in specialist closed funds, such as those concerned with film and media financing, shares in commercial shipping operations, wind farms and leasing, will be scrapped in a bid to recoup around EUR2 billion annually in lost tax revenues.

The following month, the cabinet backed plans to close off a number of tax loopholes, which the Finance Ministry has calculated will bring in an additional EUR815 million (US$975 million) in revenues annually by 2010. These measures seek to thwart tax evasion in six areas including the personal use of company cars and the trading of gasoline receipts on the internet.

Furthermore, VAT will be raised from 16% to 19% from January 1st, 2007, and there will be a 3% income-tax surcharge for high earners, taking the top rate of income tax to 45%, although small businesses will be exempt.

A number of other income tax concessions will be withdrawn, including many business subsidies and tax breaks for teleworkers, commuters and private house-builders.

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