Germany’s Corporate Tax Reform 2008
On July 7th 2007 the German Federal Council approved the Corporate Tax Reform Act 2008 (“Unternehmenssteuerreformgesetz 2008â€, the “Actâ€) which includes a package of substantial changes and amendments of the current tax laws and regulations regarding corporations. The new Act will become effective on January 1st, 2008.
The Act will fundamentally change Germany’s tax law environment regarding corporations. The changes will be of particular interest to foreign investors. One of the main objectives of the Act was to make Germany a more attractive place to do business.
Under the Act, the corporate tax rate will be decreased from 25% to 15% which means that the average overall tax burden of corporations will be decreased from currently 38.8% to approximately 29.8%. The combined tax relief for corporations resulting from these changes amounts to approximately € 5 billion.
The Act also provides relief for SME’s. For instance, companies are permitted to increase the so called investment reserves (“Ansparabschreibungâ€) which gives companies the possibility to reserve funds which will not be considered as taxable profits if the company plans to invest these funds for the acquisition of certain assets and equipment within a certain period of time.
Furthermore, the Act not only provides for certain tax reliefs, but also includes regulations to eliminate certain tax loopholes. Internationally active companies are no longer permitted to transfer profits to tax havens. However, under the Act companies are permitted to prove that such a transfer was done not primarily for tax purposes, but rather for other valid business reasons.
A new concept introduced by the Act is the “interest thresholdâ€ (Zinsschranke). The interest threshold is broadly comparable to the “earnings stripping ruleâ€ under U.S. tax law which imposes a cap on the amount of interest expenses that may be deducted by a foreign-owned domestic corporation. The interest threshold implemented by the Act provides that interest and similar financing costs will now only be deductible up to 30% of the gross profit of the company.