Impact Of CGT Changes On German Corporate Landscape Disputed

by Ulrika Lomas, Tax-News.com, Brussels

27 May 2002

Opinion is divided as to whether the German government's decision to abolish the 50% capital gains tax (CGT) paid by publicly listed companies selling stakes in other listed companies has achieved what it set out to.

The move, implemented this year by Gerhard Schroeder's government, was intended to change the corporate landscape in Germany, freeing up shares locked in long-term holdings by large companies. The government believes that this has happened, and has deemed the initiative a success.

'The provisions of the new law are being taken up by more companies than the government had expected for the first year,' a Finance Ministry spokesman revealed last week, adding that: 'It is clearly evident that Deutschland AG is repositioning itself.'

However, many commentators disagree with the official line, arguing that the predicted flurry of merger activity and corporate restructuring has not yet come to pass.

Speaking to the Financial Times on Thursday, several leading business and institutional investors explained that although the punitive CGT rates had been a consideration in the past, other factors also play a part in the decision to buy or sell stakes in other companies, and that the timing is just not right.

The Managing Director of JP Morgan in Frankfurt, Christian Stroop, pointed to equity prices as the reason why many German companies are choosing to sit tight for the moment: 'The current situation is not conducive to selling, he explained to the business daily. 'The holders want to maximise shareholder value'.

Munich Re, one of the country's largest investors also revealed that financial and strategic considerations, as well as reinvestment opportunities, play a large role in when, where, and what it sells.

However, it may soon be a case of 'use it or lose it' with regard to the CGT break for corporate investors. Critics have alleged that the measure is unfair, as medium-sized family owned enterprises - which constitute a large section of the German corporate landscape - are not eligible for the tax break.

With the general election now only a few months away, a number of the government's political opponents have warned that they will 'review' the CGT break for larger companies, and several opposition candidates have said that they would consider reinstating the tax if successful in the September general election.

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