Details emerged on Friday of additional elements to the German tax reform package when chancellor Gerhard Schröder unexpectedly announced that exemptions for large companies from capital gains tax on corporate restructurings would be extended also to small and medium-sized private companies, allowing them to reinvest profits made from the sale of investments tax free.
The previously announced measures included a reduction in corporation tax to 25% from the current rate of 40%, and major changes in the treatment of inter-company dividends. The government had been criticised, however, for not giving the capital gains tax exemptions to smaller private companies, both by the opposition and by the Greens, Mr Schröder's coalition partner.
Mr Schröder said: "We want to treat medium-sized private companies selling stakes in the same way as listed firms. That's what we are going to do, to the extent that it is possible." The change, worth E150m ($132m) a year in tax relief, will be included in a package which is expected to be agreed in cabinet on Wednesday, and will take effect from January.
The finance ministry said that there would be safeguards to prevent abuse, and private companies will have to reinvest profits within two years of the sale of investments to qualify for tax relief. Hans Eichel, finance minister, had earlier refused to allow the change but changed his mind following an intervention by Mr Schröder, said an official.
Perhaps Mr Schroeder has been influenced by the rapidly worsening German economic picture. In an interview with German magazine Stern published on Wednesday, Schroeder said that growth would probably come in at 1.5% to 2%, less than previous forecasts, and well below last year's 3%. And on Friday he admitted that his target of cutting unemployment to 3.5m before next year's elections would not be met. Seasonally adjusted unemployment rose to 3.86m in July.
"Unemployment of 3.5m would have been achievable without the economic weakness in America and Japan," he said in a television interview over the weekend.
"Because of the economic trough, which will not become a recession, we have to wait a little longer to reach the goal," he added, insisting however that the government will stick to an austerity plan designed to balance the national budget by 2006.
The government has been under pressure from the conservative opposition for months to revive the economy with deeper tax cuts and by freeing up the country's heavily regulated labor market, especially after German companies including Siemens MAN announced thousands of job cuts. But Schroeder insisted that his government will keep a "steady hand" on economic policy, and won't water down regulations that limit employers' freedom to hire and fire:
"Employees are not a mass to be moved around by capital, that can just be put out on the street in a downturn," Schroeder said.
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