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Germany Still Scares Off Investors, Say U.S. Firms

Finance Minister Eichel's much-heralded tax reform has just come into effect but Germany will still be hard pressed to sell itself as a prime location for business according to tax experts at the US Chamber of Commerce.


Clouds on the horizon

Despite the much-heralded corporate-tax reform, Germany is still hard pressed to sell itself as a prime location for business.

The new tax legislation, which makes it cheaper for corporate Germany to unravel its complex web of shareholdings, went into effect on Jan. 1, 2002, but foreign investors say it won't make Germany more attractive for them. "

The high tax burden of over 40% (of revenue) means a clear disadvantage for foreign investors, compared with other EU states," according to Rainer Mueck and Bernd Linke, members of the tax committee at the American Chamber of Commerce.

Mr. Mueck and Mr. Linke say that German Finance Minister Hans Eichel's attempt to remedy Germany's lingering location problem hasn't fundamentally changed anything. "

Germany still loses billions (of euros) a year in (potential) U.S. investment,"; they said. In cutting the corporate-tax rate to 25%, Mr. Eichel has done little to create more favorable conditions for investment, according to Mr. Linke.

"Once U.S. firms realize that companies in Germany pay four categories of tax – corporate, trade, investment-income and solidarity – adding up to a combined-tax rate of 42%, investment plans are scrapped in a hurry."

U.S. firms are also decrying the fact that the tax reform will bring about a reduction of the allowable amount of outside capital companies can use to finance their overseas activities.

Germany is still the single biggest market in Europe for U.S. firms, Mueck points out.

But the first question is always, "What will it cost us?"; To make itself attractive to U.S. investors, Germany should aim to bring its entire corporate-tax burden below the U.S. level of 35%, argues the chamber. "

Overseas investments are only interesting from a tax viewpoint if they're taxed at under 35% to entirely offset U.S. tax," said Mr. Linke. "

But a bigger reduction resulting from European tax competition would be a good thing".

That competition is already underway, according to a new study by the University of Mannheim. Nine member-states of the European Union have carried out tax reforms since 1998, but Germany still has the second-highest tax percentage for businesses, with France in the top spot.

The European Commission's rankings agree with that assessment. Alternatives to France and Germany aren't lacking. Banks are drawn to London, where the corporate-tax rate hovers at 30%, and production sectors are trending primarily toward eastern Europe.

Countries such as Poland and the Czech Republic offer generous tax breaks and "there's no longer a lack of qualified workers," according to Mr. Mueck.

The U.S. chamber's views are being echoed by German companies. Handelsblatt's most recent survey of Germany's business leaders showed that 78% expect Germany's attractiveness as a location for big business will continue to decay through 2002.

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