Germany

Germany has high corporate income tax rates and has never been considered a tax-efficient financial center. Nonetheless it offers significant fiscal concessions to corporates through co-ordination centres, holding companies and a number of special corporate income tax regimes.

In November 2006, Germany's coalition government arrived at an agreement over key company tax reforms which will reduce the overall corporate tax burden, currently one of the highest in the world.

Finance Minister Peer Steinbrueck told reporters after a working group meeting that the reforms will cut the overall corporate tax burden to a little under 30% from the current level of almost 40%.

This will be brought about largely 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 at an average of about 13%.

The reforms are expected to cost EUR5 billion (US$6.4 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 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.

However, in March 2007, it emerged that the German government may not be able to deliver the promised programme of company tax reforms agreed by the coalition cabinet, as members of the Social Democratic Party (SPD) grow increasingly uneasy over the cost of the tax cuts.

According to reports, regional members of the left-leaning SPD - a key partner in Chancellor Angela Merkel's 'Grand Coalition' - were unhappy that the Finance Ministry had revised up estimated company tax relief during the first years of the new tax regime.

It was also said that some SPD politicians had 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.