The reforms will lower the corporate tax rate from currently 38.6 per cent to then just under 30 per cent. The reform, aiming at further stimulating Germany’s economy and preventing businesses from moving abroad, will lead to estimated tax losses of roughly 5 billion Euros per year. The core elements of the reform which is supposed to come into effect in 2008 are as follows: retained company profits of corporations will in the future be taxed at 29.8 per cent compared to currently 39 per cent. With the deduction of nearly 10 percentage points, Germany’s corporate tax rate will not be Europe’s highest corporate tax rate anymore. Distributed company profits are subject to an additional tax. If making a profit of 100 million Euros, the company will have to pay roughly 30 million euros in taxes. If deciding to distribute the remaining 70 million Euros, an additional tax of 25 per cent of the remaining 70 million Euros plus the so called solidarity surcharge (a tax surcharge payable and exclusively used for the territory of the former East Germany) must be paid. This leads to an additional tax burden of another 18 million Euros so that the overall tax burden amounts to some 48 million Euros.

Business that are not organised as corporations but as partnerships (Personengesellschaften) also profit from the planned tax reform. These partnerships are not subject to the corporate tax but to the income tax. It is planned that these partnerships shall be given the opportunity to opt for paying 29.8 per cent taxes on their retained profits with the consequence of the distributed earnings being subject to an additional taxation. This option will only attract partnerships making substantial profits which is due to the German tax system. Since there is no fixed income tax rate but a gradient income tax starting at zero and increasing in correlation with the partnerships’ profits, the effective tax rate of  as many as 80 per cent of the partnerships lies below 20 per cent.

A third core element of the reform shall become effective on 1 January 2009. All interests, dividends, investment earnings and earnings resulting from the selling of private bonds having been acquired after 2008 will be subject to a 25 per cent flat tax.