Small and Medium-Sized Companies at a Tax Disadvantage
ResearchZEW Mannheim measures the effective tax burden of small and medium-sized enterprises on behalf of the IMPULS Foundation of the VDMA
Small and medium-sized enterprises (SMEs) are considered the economic backbone of the German economy. However, they face tax challenges that affect their competitiveness. A new study conducted by ZEW Mannheim on behalf of the IMPULS Foundation shows that Germany has one of the highest corporate tax burdens in an international comparison. At the same time, the tax relief for SMEs is low in international comparison.
"This harbours the risk of a considerable disadvantage for companies that are neither small enough to take advantage of the relief for SMEs nor large enough to engage in international tax planning," explains Julia Spix, a researcher at the ZEW Research Department "Corporate Taxation and Public Finance". "This particularly affects companies in the mechanical and plant engineering sector, which cannot benefit from SME-specific tax relief due to their comparatively high taxable income."
Germany is becoming less attractive as an investment location
Countries with a high overall tax burden in particular tend to provide relief for micro and small companies, including Germany. Compared to other European countries, however, the tax incentives in Germany are low, meaning that Germany continues to lose its attractiveness as an investment location in international competition. The average tax burden on SMEs compared in the study is between 28% and 30%. In Germany, this burden is between 38% and 39%. The few regulations already in place in Germany to reduce the tax burden on SMEs are failing to have a positive impact, particularly with regard to industrial SMEs, such as those in mechanical and plant engineering. While Belgium, for example, reduces the effective tax burden for SMEs by up to 12.8 percentage points compared to large corporations, the difference in Germany is only 0.7 percentage points. Despite existing tax relief, Germany therefore remains a high-tax country - with negative consequences for competitiveness, particularly in the mechanical and plant engineering sector.
How Germany can become more attractive as a business location
The international comparison shows that industrial SMEs in Germany in particular would benefit from general tax reforms to improve the tax framework. Size-independent incentives in particular can provide important tax relief in a high-tax country like Germany. Especially in view of the current challenges such as falling sales, declining capacity utilisation and weak growth. "The general tax burden in Germany is too high and not competitive internationally. SMEs in particular are especially burdened compared to larger companies. There is a need for political action here!" emphasises Bertram Kawlath, President of the VDMA and Chairman of the Board of Trustees of the IMPULS Foundation.
The design of such tax incentives requires careful consideration. Unbureaucratic implementation is crucial in order to minimise the administrative burden for SMEs. Favourable tax rates reduce the tax burden for SMEs the most, but there is no clear empirical evidence that lower tax rates lead directly to higher investment. In contrast, positive effects on investment activity can be demonstrated for incentives such as special depreciation allowances.
