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On 31 March 1995 the German Government published its Draft 1996 Tax Reform Act. A brief description follows of the intended changes in the taxation of businesses. Since some of these, especially regarding the trade tax, are very controversial and may never in fact be enacted into law, it is in our opinion premature to base tax planning decisions on the draft legislation.
1. Abolition of the trade tax on capital from 1 January 1996 on (effective for all fiscal years commencing 1 January 1996 and later)
2. Reduction of the trade tax on earnings (e.g., reduction of the basic rate by 10%, which would reduce the tax burden from a range of approx. 13% to 20% to a range of approx. 11.7 to 18%)
3. Retroactive reversal of a constructive dividend distribution under certain circumstances
4. Reduction of the rate for declining balance depreciation on movable property from 30% to 25%
5. Non-recognition for tax purposes of write-downs on shares under certain circumstances. This would restrict the use certain devices often used in connection with share deal business purchases to increase the depreciation base to the amount of the purchase price. The devices affected are the so called "internal asset deal" and the "step-up model" under the new Tax Reorganization Act.
6. Extension of certain tax incentives in connection with investments in the new German States ("Neue Bundeslander"), e.g.
- suspension of net worth tax until the end of 1998
- extension of special depreciation allowances, however at rates reduced from the present 50% to either 40% or 20%
- extension of a 5% investment subsidy for investments in manufacturing businesses ("verarbeitendes Gewerbe") made in the period from January 1997 through December 1998.
Items 3 and 5 above are discussed in greater length in separate articles (see Article no. 15, "Retroactive Reversal of Constructive Dividend Distributions" and Article no. 16, "Share Deal Purchases: Existing and Proposed Anti-Avoidance Legislation").
This article is intended to provide a general guide to the subject matter. Specialist advice should be sought with respect to specific questions.
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.