Dhe German economy is weakening. The attractiveness of the investment location is increasingly being questioned. Is the traffic light missing an opportunity with its tax law, which the Bundestag wants to decide on in mid-November?
There are hints as to what the answer might be. This includes a study by Deborah Schanz, head of the Institute for Business Taxation at the Ludwig Maximilians University in Munich, for the Bavarian Business Association, which will be presented at a congress this Friday. In addition, the first statements are available for the hearing on the “Growth Opportunities Act”, which the Bundestag Finance Committee has scheduled for next Monday.
“Tax law is one of the location factors that can be adapted most quickly by the legislature,” writes the professor of business administration. She sees a need for reform for two reasons: Firstly, compared to other countries, Germany has very high nominal tax rates and low tax support for research.
Secondly, there are additional tax barriers for international activity. As an example, Schanz cites “the excessive burden caused by the low tax limit of the German additional taxation of 25 percent, which exceeds the German corporation tax by 10 percentage points and, in conjunction with the trade tax, also leads to an additional burden on foreign business activities.”
The burden should be “no more than 25 percent”.
As the study shows, the tax burden for both corporations such as GmbHs or stock corporations (which pay corporate tax) as well as partnerships and sole proprietorships (for which income tax is relevant) is quite high compared to what their competitors have to pay abroad. “Measured in terms of the nominal tax rate, Germany represents a country with the highest taxes for corporations in an international comparison,” says the study. Schanz recommends a load “of no more than 25 percent”.
For some time now, private companies have been able to request that profits not withdrawn (retained) be taxed at the special rate of 28.25 percent, but the withdrawal that is necessary to pay this tax is not included. The actual rate is therefore higher than 28.25 percent.
The problem of the final tax burden remains
In addition, in this case, the tax authorities take action again, similar to dividends, if profits with reduced taxation later flow to the owners. The tax deferral “ultimately results in a total tax burden of 48.0 percent,” she writes. The Growth Opportunities Act stipulates, among other things, that the tax payment on the retained amount is no longer viewed as a withdrawal of profits.
As a result, the tax rate with full retention drops to 29.8 percent (28.25 percent plus solidarity surcharge). However, she criticizes the fact that the problem of the high final tax burden remains unsolved. At 48.3 percent, it is even above the nominal burden.
The comparison to research funding for Germany is ambivalent. According to the study, up to the maximum eligible expenses of 4 million euros, it is attractive because of “the comparatively high German funding rate” of 25 percent. After that, the attractiveness gradually decreases.
With the Growth Opportunities Act, the assessment basis is to be tripled to 12 million euros and expanded to include depreciation on wearable movable assets. In addition, small and medium-sized companies should be able to apply for an increase in the allowance by 10 percentage points. But in Schanz’s opinion that’s not enough. “German funding of innovations – together with Italy and Luxembourg – continues to be at the bottom of the list in an international comparison,” she says.
Germany lags far behind in comparison
Bertram Brossardt, General Manager of the Bavarian Economic Association, urges the legislature not to leave the lever of tax law unused as a location factor. “Particularly in comparison with our largest non-European trading partners, China and the USA, Germany is in a bad position when it comes to the level of taxation.” When it comes to nominal tax rates for corporations, Germany is in last place and when it comes to top tax rates for partnerships, it is in the middle.
Eight leading German business associations certify that some measures can improve the tax framework. However, there is still “some considerable need for corrections and additions”. There are also tightening measures that run counter to the objective. Furthermore, even the positive measures did little to change the fact that Germany still has one of the highest tax burdens for companies in an international comparison.
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