Germany To Extend Capital Gains Taxes

by Ulrika Lomas, Tax-News.com, Brussels

18 November 2002

With the tax take likely to fall 15 billion euros short of projections this year, German Finance Minister Hans Eichel has proposed a 15% capital gains tax in preparatory talks between ruling coalition members Social Democrats and the Green party.

The tax, expected to raise about 650 million euros in its first year, would apply to investments made after its introduction next February, and would cover both equities and real estate sales. A 1.5% flat rate charge would apply to sales of investments made prior to February. Banks will be obliged to report investment gains and losses to the tax authorities, meaning changes to existing banking secrecy laws which would prohibit such information flows.

Currently, capital gains derived from the sale of nonbusiness assets in Germany are generally tax exempt unless they are considered to be speculative. Capital gains are considered speculative when, in the case of real estate, the sale occurs within 10 years of acquisition and, in most other cases, within one year of acquisition. Furthermore, capital gains derived from the sale of a substantial stake in a company (more than 10%) are also taxable. Such capital gains are taxable at the same rates as personal income; so there was some relief that the new tax is being levied only at the reduced 15% rate.

The Government was forced into action by predictions that its deficit will break the Stability and Growth Pact 3% barrier both this year and next; last week the EU Commission issued an official warning to Germany and France on their deficits.

The capital gains tax increases will join other revenue-raising measures agreed on recently in the finance bill covering next year's budget, whcih will have its first reading this week in the lower house of parliament. Payroll taxes are being increased from 19.1% to 19.5% next January, and the maximum monthly income on which they must be paid is also being increased by 13%, to 5,100 euros. Companies will face limitations on their ability to carry foward losses, and individual taxpayers will have to accept a reduction of the tax benefits for homeowners.

In total, the package should raise 5 billion euros a year of additional revenue. Germany is already one of the highest-taxed nations in the world, and many economists say that expenditure reductions would be a more appropriate response to tightening fiscal conditions than further tax increases. But the German government seems to lack the political will to take such steps.

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