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SPD Discontent Threatens To Derail German Corporate Tax Reform

by Ulrika Lomas, Tax-News.com, Brussels

01 March 2007


It has emerged that the German government may not be able to deliver the promised programme of company tax reforms agreed by the coalition cabinet last year, as members of the Social Democratic Party (SPD) grow increasingly uneasy over the cost of the tax cuts.

According to a report in the Financial Times, regional members of the left-leaning SPD - a key partner in Chancellor Angela Merkel's 'Grand Coalition' - are unhappy that the Finance Ministry has revised up estimated company tax relief during the first years of the new tax regime to EUR8 billion annually from EUR5 billion per year.

It is said that some SPD politicians have met with increasing opposition from their constituents to the plans to slash taxes for companies while individual tax breaks and subsidies are disappearing to help the government balance its books. The cabinet is due to debate the business taxation draft bill on March 13, but with a growing ideological rift within the coalition, the legislation may not receive enough support from members of the lower house of parliament, the Bundesrat, to emerge in its present form. What's more, some speculate that in any event, the split between the SPD and the centre-right Christian Democrats could force fresh elections before the government's present mandate expires in 2009.

The German government is currently treading a fine fiscal tightrope by attempting to encourage investment and business growth with tax breaks on the one hand while also increasing revenues and curbing expenditure to placate the European Union on the other.

Last November, the coalition finally arrived at an agreement that would cut Germany's corporate tax burden - one of the highest in the industrialised world - by reducing the overall corporate tax rate to a little under 30% from the current level of almost 40%. This will be brought about by a cut in the 25% headline corporate tax rate, paid by large companies, to 15% in 2008. Companies will continue to pay corporate tax at the local level, which averages about 13%.

While Finance Minister Peer Steinbrueck hailed the agreement as "an important piece of work" that will strengthen Germany as a centre for business, the proposals have been given a mixed reception from business, with many accusing the government of giving with one hand while taking away with the other.

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

The ruling coalition parties 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.


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