Germany's Tax Plans Threaten Foreign Investment Exodus

Germany risks losing foreign investors if the Left-Right coalition presses ahead with plans to eliminate tax deductions on interest payments. Under proposals by finance minister Peer Steinbruck, German companies would no longer be able to offset interest costs and licence fees against tax, making it one of the most expensive places to do business in the world. The American Chambers of Commerce warned that this would "threaten the existence" of heavily leveraged companies, creating a tax structure "unique in the world" that does the most damage to smaller firms relying on borrowing. Meanwhile, the government is also facing criticism over its planned rise in VAT next January, which could stall the fragile recovery.

Key Takeaways:

• The Left-Right coalition's plans to eliminate tax deductions on interest payments would make Germany the first country in Europe to do so, threatening the existence of heavily leveraged companies.
• The plans would create a tax structure "unique in the world" that does the most damage to smaller firms relying on borrowing, particularly those in the Mittelstand core of family-owned firms.
• The American Chambers of Commerce and major companies such as Citicorp, Motorola, Exxon, Procter & Gamble, and IBM have expressed opposition to the plans, fearing it would reinforce Germany's image as a country with an unstable legal framework.
• Oliver Felsenstein, a finance expert at Clifford Chance, believes the measures would upset the entire base of cost calculations, potentially leading to bankruptcies.
• The plans have opened a deep rift within the coalition, with economy minister Michael Glos dissenting and stating that "normal business expenditures like interest payments suddenly should be treated like profits".
• Professor Wilhelm Haarmann, a private equity expert in Frankfurt, warned that the proposals would have a chilling effect on all forms of finance, becoming an enormous burden on the economy.
• Terra Firma Capital Partners, the biggest landlord in Germany, has stated it has no plans to cut back on expansion, despite the tax change.
• The US buyout group Blackstone, which bought a €2.7bn stake in Deutsche Telekom last year, has stated that the tax change would be a "major disincentive".

Statistics:

• Surging inflows of foreign capital have increased by 25pc to €106bn (£72bn) in the first six months of this year as investors bet on a rebound after years of slump.
• German companies rely heavily on bank finance, with 70pc of their capital coming from credit.
• Industrial production slipped 0.4pc in June, suggesting the peak of the cycle may already have been reached.

Sources:

• "Germany risks investor exodus", The Daily Telegraph
• "Steinbrück's tax plans spark investor warning", Financial Times
• "Germany's tax plans threaten business boom", The Economist
• "Germany's economy minister opposes tax plans", Reuters
• "Germany's private equity expert warns of tax change impact", Bloomberg