German Firms Unprepared For Tax Reform

by Ulrika Lomas, Tax-News.com, Brussels

04 January 2008

A large percentage of Germany's small- and medium-sized companies knew little ahead of time about how major corporate tax reforms, in force from January 1, would affect their businesses, according to a survey.

The poll of 1,000 SMEs undertaken by corporate software manufacturer, Sage found that many business owners appeared uninformed about key aspects of the tax reforms, such as the cut in the headline corporate tax rate, and how the new tax law would affect depreciation.

For example, 41% of respondents were unable to say how the new tax laws would affect their future tax burden, while 23% said that they did not know of the new law reducing the tax rate levied on reinvested profits.

The tax reforms, approved by the upper house of parliament, or Bundesrat, in July 2006, reduce the overall corporate tax burden on companies in Germany by almost 10%, by cutting the headline corporate tax rate paid by large companies to 12.5% from 25%, although regional corporate taxes, which average about 13%, remain unchanged. This brings the corporate tax burden for German companies down to about 30% from around 40%.

However, under Germany's tax system, which is often criticised for its complexity, many small companies are organised as partnerships and are therefore taxed at the level of the partners at individual rates.

The reforms are expected to cost EUR5 billion (US$6.85 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 have 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.

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