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Europe

EU warns Germany that special tax breaks for troubled firms are illegal

The European Commission says that a German tax break for companies deep in debt or short on cash is unfair and illegal. The EU executive has demanded the practice be stopped and money owed be returned to the government.

A pharmaceutical factory in Germany

The tax breaks were meant to help struggling businesses recover

A clause in German tax law that allows companies in financial difficulties to claim tax breaks, even if there is a change to their shareholder structure, breaks European competition laws, the European Commission said on Tuesday.

The rule allows companies to offset losses in one year against taxes on profits in future years, even if the owners change. According to the Commission, corporate tax law in Germany and other countries does not permit such a carrying forward of losses to prevent potential owners from taking over a company just to take advantage of the coming tax break.

The Commission said the clause amounts to illegal state aid. "If a company is in trouble and the state considers its rescue in the national interest, the support should be granted through the Rescue and Restructuring guidelines," said EU Competition Commissioner Joaquin Almunia in a statement.

Time to pony up

The German clause was adopted in July 2009 and covered businesses retroactively from the beginning of 2008.

EU Competition Commissioner Joaquin Almunia

Almunia wants Germany to get the money back

EU governments can only award state aid under strict guidelines and must receive permission from the European Commission, which determines if the measure is anti-competitive.

The Commission said it had not been informed of the introduction of the tax break by the German government, but only found out about it from media coverage.

The Commission gave Germany two months to provide Brussels with a list of the companies involved and to determine the total amount of aid that will now need to be recovered.

'A tough lump to swallow'

A spokesman for the Finance Ministry said the government would wait to evaluate the Commission's explanation of the decision before taking any action. An unnamed EU diplomat, however, told the German news agency DPA that "it was a tough lump for Germany to have to swallow."

The German Association of Tax Advisors said the Commission's decision could make things difficult for investors. "It's a heavy blow for German businesses," said its spokesman. "This measure has at times been used quite a lot."

Germany has played a prominent international role in the global economic recovery, steering the debate over Europe's response and helping fund massive bailouts for indebted eurozone members.

Author: Holly Fox (AFP, dpa, Reuters)
Editor: Nancy Isenson

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