Steinbrueck Proposes To Slash Germany's Corporate Tax Rate

by Ulriak Lomas, Tax-News.com, Brussels

16 June 2006

Germany's Finance Minister Peer Steinbrueck has finalised plans for important corporate tax reforms which, if approved, will bring about a substantial cut in one of the most onerous company tax burdens among developed nations.

Under the proposals presented by Steinbrueck to Chancellor Angela Merkel, which have been leaked to the German media, the headline rate of corporate tax paid by Germany's largest companies, currently set at 25%, will fall to a rate of between 12.5% and 16%.

While Steinbrueck intends to leave the local corporate tax system in place, which adds on average an additional 13% to a company's corporate tax bill, the aim is to bring the overall burden below 30%, thereby making Germany a much more attractive country in which to locate a company. Currently, the combined corporate tax rate paid by big companies in Germany is almost 40% - one of the highest in the world.

These proposals could save businesses an estimated EUR7 billion ($8.8 billion) in the first year, although the revenue impact on the government will be offset somewhat by a 3% hike in value added tax to 19%, set to take place on Janaury 1, 2007.

The left-right coalition which currently governs Germany has targeted January 1, 2008 as the date when the new corporate tax laws will go into force.

However, recent reports have suggested that the government has no plans to alter the system of taxation for small companies in Germany, which effectively pay income tax rather than corporate tax at rates of up to 42%. Instead, Financial Times Deutschland reported last month that each partner in a small firm will be granted a tax-free profit allowance of up to EUR100,000, provided the money is spent on future investment in the business.

Some 85% of all German companies are smaller companies that are run by one person, or by a limited number of partners.

The coalition parties are due to begin discussing the corporate tax reforms on June 25.

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