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The 1996 Tax Act contains a number of provisions relating to the New German States (Brandenburg including Berlin, Mecklenburg-Vorpommern, Sachsen, Sachsen-Anhalt, and Thuringen). Certain additional changes now appear likely in a separate law to be passed this year. The following is a summary of matters likely to be of interest.

1. Net worth tax and trade tax on capital

The Act extends through 1998 the current exemption from net worth tax for individuals resident in the new German States and for corporations whose principal place of management is located there (revised sec. 24c VStG). Business property held in a permanent establishment or attributable to a permanent representative located outside the new States is, however, not exempt.

Furthermore, the value of business property held in a permanent establishment or attributable to a permanent representative located inside the new German States is excluded from the standard assessed value of the business for the years 1996 through 1998. This likewise extends a similar provision currently in effect (sec. 136 BewG). The standard assessed value of a business is the base on which net worth tax is assessed and the starting point for determining the base for assessment of trade tax on capital.

Exclusion of business property located in the new German States from the standard assessed value is not itself sufficient to avoid assessment of trade tax on capital. Through 1995, application of the trade tax on capital in the new German States is suspended under sec. 37 GewStG. From public statements made by leading politicians of the major parties, it now appears likely that a new law will be enacted before the year is out extending the suspension of trade tax on capital in the new German States at least through 1998. This will allow politicians more time to consider proposals for abolishing the trade tax on capital entirely throughout Germany (see Handelsblatt of 18/19 August 1995, p. 1 and our article of September 1995 "German Tax Act of 1996").

2. Cash investment subsidies

A program currently exists under which cash subsidies are paid for purchase of new depreciable movable fixed assets used in business in the new German States. Neither gas and electric utility companies nor banking, insurance, or retailing enterprises are eligible for these subsidies.

The new bill makes the following changes in this area:

- Extension through 1998 of the basic 5 % investment subsidy for the manufacturing industry.

- Extension through 1998 of an increased 10 % subsidy for small and medium-sized manufacturing or artisanal enterprises (e.g. plumbers, carpenters, electricians). The 10 % subsidy is available on investment volume of up to DM 5 million if the enterprise has no more than 250 employees.

- Reinstatement of the preceding subsidy for West Berlin.

- Creation of a subsidy of for small wholesalers and retailers (up to 50 employees) with businesses located in areas zoned neither for commerce nor for industry, e.g. in urban centres. A subsidy of 10 % is available on investments up to DM 250,000 (new section 5 par. 4 InvZulG).

3. Special depreciation provisions

A special depreciation allowance of 50 % is currently permitted for depreciable fixed assets (e.g. buildings and machinery) placed in service in the new German States. The special depreciation can be taken entirely in the year of acquisition or spread as one wishes over the first five years.

The new bill extends the special depreciation allowances until 1998, but reduces their amount as follows:

- 40 % for moveable assets;

- 40 % for buildings owned and used by manufacturing enterprises, reduced to 20 % if the buildings are leased;

- 20 % for buildings in other industries;

- 25 % for residential buildings rented to third parties;

- 40 % for modernisation and overhaul of buildings.

For small and medium-sized manufacturing and artisanal businesses (up to 250 employees), the Act also reinstates the special depreciation allowances for West Berlin which expired at the end of 1994.

To qualify for the special depreciation allowances, certain requirements must be observed, particularly as to investment timing. These requirements are complicated and should be carefully examined by a tax expert.

Disclaimer and Copyright
This article treats the subjects covered in condensed form. It is intended to provide a general guide to the subject matter and should not be relied on as a basis for business decisions. Specialist advice must be sought with respect to your individual circumstances. We in particular insist that the tax law and other sources on which the article is based be consulted in the original, whether or not such sources are named in the article. Please note as well that later versions of this article or other articles on related topics may have since appeared on this database or elsewhere and should also be searched for and consulted. While our articles are carefully reviewed, we can accept no responsibility in the event of any inaccuracy or omission. Any claims nevertheless raised on the basis of this article are subject to German substantive law and, to the extent permissible thereunder, to the exclusive jurisdiction of the courts in Frankfurt am Main, Germany. This article is the intellectual property of KPMG Deutsche Treuhand-Gesellschaft AG (KPMG Germany). Distribution to third persons is prohibited without our express written consent in advance.