German Tax Plan Delayed Amid Political Angst

by Ulrika Lomas, for LawAndTax-News.com, Brussels

19 October 2006

The German Finance Minister, Peer Steinbrueck, said this week that the Grand Coalition's proposed new corporate withholding tax regime would be applied only from 2009, and would be at the rate of 25%, not 30% as previously suggested.

The tax will apply to capital gains, and to payments of interest and dividends. At present, capital gains are charged at corporate income tax rates, as high as 42%, while withholding taxes on dividends is 20%. The government plans to reduce corporate income tax to less than 30%, but is having difficulty getting political agreement.

The existing high rates of tax are leading companies to ever more inventive ways of escaping taxation. In August, the German Finance Ministry confirmed a report in the national press that companies are escaping EUR65 billion (US$82 billion) in German taxes annually by shifting profits abroad. The claims were based on an internal Finance Ministry report which studied the discrepancy between the overall economic balance sheet and revenues from corporate tax.

The plan to tax interest payments is 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 reportedly split the German cabinet. Economics Minister, Michael Glos, has openly criticised the Finance Ministry's plan to tax interest, saying it could defeat the object of the corporate tax measures by leading to capital flight, particularly among private equity investors.

In September, it seemed that the plan had been taken off the table, but it has now apparently back in the package, albeit delayed and diluted. Estimates of the cost of the package vary widely, but it seems likely to be not less than EUR10bn.

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