International Trade

Germany Sharpens Competitive Edge

April 2007
Dr C. Bleschke, International Trade Today

On the basis of plans from a working group – set up by the governing German coalition between Christian and Social Democrats – a first draft of the Business Tax Reform Bill was presented by the Federal Ministry of Finance in February, with the intention that it will take effect from the beginning of 2008.

Its purpose is in particular to relieve German enterprises from relatively high tax burdens compared with other EU countries and to encourage overseas investments.

German corporations are currently subject to corporation tax, a solidarity surcharge and a local trade tax, which, together, amount to a tax burden of approximately 39 per cent. This combined tax burden would be reduced to less than 30 per cent when the reform takes place. It is also planned that partnerships should pay tax of only about 30 per cent on retained earnings.

In addition, from the beginning of 2009, private capital income, such as dividends received from corporations, private capital gains and interest from capital investment will be taxed at a flat rate of 25 per cent.

In relation to the financing of business, German capitalisation rules currently provide for certain restrictions on the deduction of interest payments paid for shareholder loans by a German corporation. Under these current rules, such interest payments are not tax deductible if the entire remuneration exceeds a tax-exempted threshold in the amount of € 250,000 a year and the debt-to equity-ratio exceeds 60 per cent/40 per cent (the so-called ‘safe haven’).

These rules would be replaced by a general limitation on the deductibility of interest payments, applicable to both corporations and partnerships.

Thereafter, interest on borrowed capital, which is provided by shareholders, related parties or... continued on page two >

 

 

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