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German Lawmakers Approve Corporate Tax Reforms

by Ulrika Lomas,, Brussels

11 July 2007

German lawmakers have given their approval to a key corporate tax reform that will reduce the overall corporate tax burden on companies in Germany by almost 10%, placing the country in the middle of the European corporate tax league table.

The legislation, due to go into effect in 2008, was approved last week by the majority of the upper house of parliament, or Bundesrat, which represents the country's 16 states and is controlled by Chancellor Angela Merkel's grand coalition parties. The bill was passed in the lower house, or Bundestag, in May.

In urging the lawmakers to approve the bill, Peer Steinbrueck, German Finance Minister, argued that the tax cut represents "an investment in Germany as a business location", making domestic and foreign investments more attractive.

Steinbrueck noted that with the reforms, Germany will "finally get into the midfield of tax burdens compared with other European countries".

Germany currently has one of the highest corporate tax burdens in the world, and the business community has long called for rates to be reduced to help breathe life into Germany's stagnating economy. The new law effectively cuts the corporate tax rate from the current 38.65% to 29.83%. This is to be done through a cut in the headline corporate tax rate paid by large companies to 12.5% from 25%, with regional corporate taxes, which average about 13%, remaining unchanged.

The reforms are expected to cost EUR5 billion (US$6.85 billion) in the first year and EUR30 billion overall, but EUR25 billion of this will be clawed back through efforts to widen the tax base.

One offsetting measure is the controversial decision to restrict the amount of interest that German companies can deduct from loans received from overseas units. Many business leaders worry that this measure will restrict companies' ability to invest.

The ruling coalition parties have also agreed to introduce a 25% capital gains tax from January 1, 2009. This will replace the current system, whereby capital gains are subject to personal income tax, which can be as high as 42%. This will apply to income from earned interest and dividends, and private investors' share sales.

Small companies, which are also taxed under the personal income tax system, will receive preferential treatment on retained profits.

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