Is the Party Over for Germany’s Little Monaco?

Norderfriedrichskoog makes an unlikely tax haven. The small German village, 200 kilometers north of Hamburg, consists of just 17 farmhouses which provide shelter from the bitter North Sea wind for the 45 inhabitants. It would have definitely been very low on Boris Becker’s list when he was considering locations to hole up in while he saved on taxes. There’s no restaurant, no bar, no promenade, not even a bus station. Just farms, two streets and lots and lots of cows.

However, despite its rural surroundings and slower pace of life, Norderfriedrichskoog is a tax paradise for companies such as Deutsche Bank, Lufthansa and power giant E.On who have subsidiaries there. Unlikely, yes, but thanks to the fact the local authority does not charge business tax -- the levy placed on company profits -- some 500 companies are located in Norderfriedrichskoog. As well as the big names which moved north looking to avoid the business tax, smaller companies also founded their headquarters in the little village and experts estimate that these businesses have saved about €300 million in the last decade.

Accusations of fake businesses

However, the party may be coming to a close for those who have moved their investments to the village. The German Finance Ministry is accusing the village of supporting so called “Briefkastenfirmen” or companies which simply exist as a letter box without any real business running, just in order to save taxes. If Finance Minister Hans Eichel and colleagues can prove this, the loophole which allows companies to exclude themselves from the business tax will be closed and the boom times will be over.

The companies in Norderfriedrichskoog conduct deals worth millions of euros, paying nothing into federal business tax coffers. The Finance Ministry, desperate to gather any extra funds together in such dire economic times, is now trying to reform local authority finances. According to Eichel’s plans, all local authorities must set a minimum rate for local business taxes.

Bundesrat vote could signal end

The reform has just been passed by the Bundestag, the German parliament, but it also has to be approved by the Bundesrat, the opposition-dominated chamber that represents the countries 16 federal states. This may happen on Friday and if the reform goes through, the good times will be over for the Little Monaco on the North Sea Coast.

However, the companies and the locals who benefit from the presence of the companies maintain that everything is above board and that, if the government wishes to change its rules, then it will have a fight on its hands. “The authorities watch and control us here very carefully,” says Hans Kremer, who manages five companies in Norderfriedrichskoog. “So, something like the ‘Mailbox companies’ does not exist here. I am just coming from work for one of these companies. They are real.”

Zero percent tax

No one has ever paid business taxes in Norderfriedrichskoog but it wasn’t until 1978 that the decision to forgo taxes became official. At that time, the villagers had bought land freshly reclaimed from the sea, paying the price for it in small installments until 2008. As the village does not have any school or county hall to maintain, there were no further revenues necessary to run its business. So the former mayor fixed the business tax at zero percent. It took 15 years, for German companies to discover this tax loophole. But in 1992, the first company moved to Norderfriedrichskoog.

“I don’t remember exactly,” says Hinrich Thiesen, the village’s 68-year-old mayor, looking back. “But I think it was a real estate company combined with a financial services provider, as far as I can recollect.”

Hans Kremer believes that the companies that came to Norderfriedrichskoog changed the face of the landscape and the lives of the people who lived there. “One should not forget that these companies did a lot for the infrastructure of the region,” he said. “The managers of these companies rented apartments up here, so the landlords in the region have made their income out of this.”

“People go for lunch and dinner, they order food. The butcher in Oldeswort, the neighboring village, profits from the managers, who order the buffet in his store when they hold conferences. Luxury hotels that would have been closed now thrive. And don’t forget the building trade -- villagers painted their houses or repaired the roofs."

Village profits in many ways

It wasn’t just the surrounding area which profited. The village itself, as the hub of the tax haven, made sure that it did well from its generosity. The farmers of Norderfriedrichskoog turned parts of their farmhouses and stables into offices and rented them out. Margret Diercks, a farmer’s wife, is a prime example of how the tax law has changed lives. She now runs an office service. In addition to renting out rooms in her big traditional farmhouse, she is also the manager of several companies.

The local economy is still doing very nicely in what is now a precarious situation in Germany. While 130 jobs have been created in Norderfriedrichskoog alone during the last few years, as many could be at risk if the government closes the tax loophole and the companies start looking for other tax-free sanctuaries.

“This is a simple arithmetical problem for the companies. If they are able to save taxes here, they will stay. If not, they are gone. I guess, their luggage is already packed and they have even looked for the right addresses abroad,” says Mayor Thiesen.