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German Bundesrat Approves Government Tax Cut Plans

by Ulrika Lomas,, Brussels

22 December 2009

Following weeks of intense speculation and political indecision, the first significant – and highly controversial – tax reform plans, drawn up by the newly elected German coalition government, have finally been adopted in the upper house of parliament.

With approval from the federal states for the country’s so-called growth acceleration law (Wachstumsbeschleunigungsgesetz) eventually secured at the eleventh hour, the law, containing tax relief measures estimated at around EUR8.5bn a year, is now due to enter into force from January 2010.

Among those due to benefit most from the government’s tax cut plans are families, businesses, heirs and hoteliers.

Despite a final – and significant – victory, the reform proposals have proven to be a very bad start to the government’s term in office, as the fate of the law remained very much in the balance for a long time. Indeed, key states Schleswig-Holstein and Saxony relinquished their opposition to the government’s proposals only hours before the final vote.

In order to pass the law, the government required backing from Christian Democratic Union (CDU) and Free Democratic Party lead states. Schleswig-Holstein’s CDU Prime Minister Peter Harry Carstensen had threatened to veto the law in parliament if his demands for compensation for the resulting shortfall in tax revenue for the states were not met.

Chancellor Angela Merkel has now made known, however, that she is prepared to compromise, and has not yet ruled out the possibility of granting a higher proportion of value-added tax revenue to the states by way of compensation.

The growth acceleration law contains initiatives designed to simplify the existing tax system in order to enable companies to offset losses against tax, and to relax regulations governing the deduction of interest expenditure.

The law also includes vital amendments to the country’s inheritance tax, and a measure designed to support the tourism industry, allowing hoteliers to benefit from the reduced VAT rate of 7% instead of the standard rate of 19%.

The government has also agreed to increase the child tax-free allowance from EUR6,024 to EUR7,008, and to raise the child allowance. For top earners, however, the child allowance will be included in the child tax-free allowance.

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