By Hans-Andreas Fein, Stuttgart, Germany

Over the last decade, Germany seemed to be unable to make major changes in its economical and political system. The "German disease" became almost a synonym for stagnation, the social net of grants and benefits for almost everything and everyone seemed to be untouchable. And the already unbelievably high tax rates had only been changed in one direction - upwards.

This was the status two years ago, when Social Democrats came to power in Germany. For business people it was a shock that the Social Democrats and the Green Party won the 1998 national elections against Chancellor Kohl and took over the government, first in Bonn and shortly after moving to the new (and old) German capital, Berlin. And indeed, they at first canceled some of the mild reform acts of the former conservative government. It was back to the four-to-six weeks mandatory notice period. Social taxes were placed as well on the $300 mini-wages, and so on. In addititon, the red-green coalition began to constantly increase fuel taxes with the so called "ecology tax" in order to bring down energy consumption. The revenue of the this "eco-tax" was directed to support the suffering mandatory public retirement funds of the social insurance system. These and a number of other things really frightened the business world.

The turn around: lower tax rates

Soon, however, business people could see light at the end of the tunnel. In summer 2000 the new finance minister and Socialdemocrat Hans Eichel passed his major tax reform program for 2001-2005 through both chambers of the German parliament. This program will bring a number major changes, if not an upheaval of the German economy. At the core of the program is a plan to reduce corporate taxes to a more competitive level compared to Germany's neighbor states. The key points are:

• Beginning in 2001, corporate tax, up to now at 40 percent for retained and 30 percent for disbursed profits, will be lowered step-by-step to a uniform 25 percent.
• The personal income taxes peak rate of 51 percent (plus 7 percent solidarity bonus for East Germany) will be reduced to 48.5 percent in 2001, then 47 percent with further decreases to a 42 percent level in 2005.

Although this sounds very promising, here are the major criticisms of the new law. Most family businesses are partnerships, and this includes pretty sizable manufacturing companies. Partnerships pay income tax, not corporate tax. So the reform is clearly in favor of public corporations - AGs (stock corporations) and GmbHs (limited liability companies) - while private companies like KGs (limited partnerships) or GmbH & Co.KGs (private limited companies) are facing a major disadvantage. You might have noticed with your German partners that many family businesses changed their legal form from a KG or GmbH & Co. into a pure GmbH since fall last year. It was done exactly for these tax reasons.

As a pure GmbH they now have to publish their balance sheet, as well as their profit and loss account in public newspapers. They also have to constitute a supervisory board with a minimum three members to control the executive committee on behalf of the shareholders.

. . . and a broader tax base.

Further changes included in the tax program are:

• The tax base is broadened by terminating many tax lowering and tax excluding exceptions. For example, depreciation of movable capital goods is limited to 20 percent max per year (formerly 30 percent) and the depreciation of buildings is lowered from 4 percent to 3 percent.
• For corporations but not for private companies the sale of assets in another corporation (when held longer than a year) is becoming totally tax free. On the other hand, losses of such sudsidiaries are no longer compensable with taxable profits as before.

With banks and insurance firms holding such a large stake in German industrial firms, this will lead to a new wave of releases, mergers and acquisitions. Europe's number one insurance group, Allianz, could easily finance its takeover of Dresdner Bank by just selling parts of its participation in the industry. Many bank-held industrial groups will probably soon be available on the market.

So the decade of stagnation in Germany in the 1990s might be followed by a decade of major restructuring in the entire business sector, including manufacturing, trade, and services. Best of all, not just that the aggregate tax burden for corporations will shrink from 50 percent to 38-40 percent. The really good news is German managers are believing again in a business-friendly political climate that promises attractive returns on their domestic investments. Economic analysts are estimating an additional 0.5 percent growth in the German economy stimulated by this tax reform. Maybe they finally got a taste of economic success from the U.S. _