German Interest Tax Plan In Doubt

by Ulrika Lomas, Tax-News.com, Brussels

14 September 2006

A plan to tax company interest payments as part of the German government's company tax reforms has reportedly been taken off the agenda as ministers continue to iron out their differences over the final complexion of the legislation.

The proposal was designed to stop large companies based in Germany from drawing loans from subsidiaries in low-tax countries and booking interest payments as operating costs in order to minimise their tax bills, but it has split the German coalition cabinet, with Economics Minister Michael Glos having openly admitted that he would not support the idea.

According to the Wall Street Journal, Finance Minister Peer Steinbrueck has indicated that the proposal is off the negotiating table for now, although he said that companies cannot expect to have their long-sought after corporate tax cut without accepting the fact that the tax base must be widened to help finance the estimated EUR5 billion ($6.4 billion) revenue shortfall the tax cuts will bring about.

The coalition cabinet has accepted in principle Steinbrueck's plan to bring the overall corporate tax rate in Germany down to about 30% from the current 38%, but a final agreement on the reforms is not expected until mid-October.

Steinbrueck has also 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%. Steinbruek has suggested a 30% capital gains tax to start on January 1, 2008, falling to 25% one year later.

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