Schroder's Tax Triumph Will Lead To A European M & A Boom

Ulrika Lomas, Tax-news.com, Berlin

17 July 2000

Using the late-night negotiating techniques which he will have honed to perfection during EU horse-trading sessions, Gerhardt Schroder scored a memorable triumph early on Friday morning when the five States in which the SPD rules with opposition coalition partners agreed to support the German Chancellor's tax reform package. Later in the day, it easily cleared the Bundesrat, Germany's upper house of parliament.

The Chancellor has to give some concessions to the opposition: the income tax rate will now fall to 42% instead of 43% in 2005, the final year of cuts under the reform package, with previous cuts from 51% this year to 48.5% in 2001 and 47% in 2003.

As planned, the main rate of corporation tax will fall from 40% to 25% from next year. The abolition of corporate capital gains tax on the sale of shareholdings, key to the restructuring of German industry, will come into effect a year later than proposed, in 2002. The Chancellor also agreed to a package of tax cuts for non-incorporated traders worth about Dm2bn.

Even with the delayed abolition of capital gains tax, the package will represent a major boost to German industry, making German companies more attractive to foreign predators and increasing cash flow from profits. The shares of leading German companies shot up on Friday, presaging an m & a boom over the next few years as German companies sell off antique but valuable cross-holdings to focus on shareholder value and reorganise themselves to take advantage of the 'new economy'.

Corporate financiers in Frankfurt and London will have spent the weekend celebrating: the value of cross-shareholdings, many of which will now be unwound, is not known accurately but probably tops $200bn. Some of these shares will simply be sold on the market, but too much open selling would be bad for share prices. Much more likely is a string of deals in which assets are swapped as part of more or less complicated corporate reorganisations, mergers and acquisitions.

The effect won't be limited to Germany. Although the sclerotic German industrial sector was a particularly bad example, other euro-zone countries have similarly high corporate taxes, and equivalent cross-shareholdings, for instance France and Italy. In all probability the competitive advantage now gained by German companies will have to be matched in other countries. The boom in corporate reorganisation in Europe, which has already generated a massive upsurge in corporate finance activity, has only just begun.

.

Recommended

Write a comment