ZEW Welcomes Modifications of Interest Barrier Rule and Regulations of Tax Relief

The Centre for European Economic Research (ZEW) welcomes the tax relief for companies, which is implemented in the Citizens Relief Act (Bürgerentlastungsgesetz). The tax benefits were passed by the finance committee at the end of May and will be available only for a limited period of time to help companies, which are affected by the financial crisis and facing decreasing profits and liquidity problems. The German government reacts on the just criticism of certain parts of the 2008 business tax reform, which isolates a company’s tax burden from the actual profit situation and thus intervenes in the company’s substance.

For the fiscal years 2008 and 2009, within the Citizens Relief Act, two measures regarding company taxation are planned. Firstly, the exemption threshold, to which the interest barrier rule introduced in 2008 does not apply, will be increased from EUR 1 million to EUR 3 million. The German government wanted to fight the cross-border transfer of profits by means of the interest barrier rule. Secondly, firms wanting to restructure are now able to account losses of newly bought firms to their own profits. Thus the rule for shell company acquisition is overruled in certain cases.

As ZEW analyses on the company tax reform of 2008 have indicated, interest barrier rule and the rule for shell company acquisition are problematic with regard to the taxation system and economy. Concerning the company tax reform of 2008, ZEW already mentioned that these rules could become an intensifier of crises in economically bad times. They could also be the reason why economically useful transactions were not made.

The federal government in Germany has recognized these weaknesses. In the new Citizens Relief Act, the government has adjusted the rules and introduced a time limit. The increase of the exemption threshold within the interest barrier rule is useful for medium-sized firms, but not for firms in affiliated groups. Firms of all sizes can benefit from the rule for restructuring. Firms that have losses from previous years and are facing problems can now find a buyer more easily. With a company takeover, the buyers gain an additional tax saving potential for the future in form of losses carried forward.

Especially against the background of the tense overall economic situation, both adjustments can be seen as urgent and necessary corrections. Taxes on non-income values are avoided, acquisitions and restructuring are becoming easier. "These adjustments are welcomed, they give medium-sized firms advantages and help many companies in difficult times," says Prof. Dr. Christoph Spengel, ZEW and University of Mannheim. He continues: "However, they also make clear that the company taxation system in Germany still requires more reforms."

Considering the current situation, the fast reaction combined with a time limit of two years for both new regulations seems to be appropriate. However, the new regulations should not hide the fact that in the medium term both the interest barrier rule and the regulations on fiscal use of losses need to be revised. Another construction side is the missing integration of withholding tax into the company taxation system. This causes fiscal disadvantages of equity capital financing and, according to the opinion of ZEW experts, the government should clearly tackle this problem.

Contact

Dr. Timo Reister (ZEW), E-Mail: reister@zew.de

Prof. Dr. Christoph Spengel (University of Mannheim), Phone: +49/621/181-1705, E-Mail: spengel@uni-mannheim.de