Statement by the German Federal Finance Minister, Peer Steinbrück, in Response to BIO Deutschland’s Criticism of the Tougher Regulations for Taxation on Investments

In the middle of June, BIO Deutschland wrote to the German Federal Finance Minister, Peer Steinbrück, to give its views on the planned tougher measures to be included in Paragraph 8 of the Corporate Tax Law. In a letter to Steinbrück, the President of the Board of BIO Deutschland and CEO of MediGene AG, Peter Heinrich, stated that an increase in the tax burden on investors dramatically contradicted the earlier promises of solidarity with small and medium-sized enterprises (SMEs) made by the Federal Government.

The Federal Ministry of Finance introduced the draft on the tighter measures a short notice as a supplement to the Draft Annual Tax Law of 2009. According to the draft, Paragraph 8 of the Corporation Tax Law is to be amended so that in corporations (for example, incorporated, joint stock and limited companies), dividends from free floats and profits from the divestiture of free float holdings in corporations will no longer be exempt from taxation but will instead be subject to corporation tax. The free float consists of all holdings of less than 10 per cent of the capital. This would fundamentally change corporate tax legislation as this type of dividend and profits from divestiture have been exempt from tax to date (five per cent of the dividends and profits from divestiture are regarded as non-deductible operating expenses). Corporations with free floats would thus be taxed significantly more highly or possibly even more than once in the future. Investors who keep their free float holdings in limited companies would be certain to change their investment strategy in the short or medium term as a result of further tougher measures affecting conditions for investments in Germany.

Commenting on the planned limitation of the German affiliation privilege as a result of the tightening of Paragraph 8 of the Corporation Tax Law, BIO Deutschland board member and tax specialist Jan Schmidt-Brand explained that "The legislators would specifically reduce profits to institutional investors, should the latter choose an investment form that is typical of the venture capital financing of innovative SMEs." Schmidt-Brand added that the state would also reduce its tax revenue in the long run.

Using EU regulations as an argument is not acceptable, according to Dirk Honold, who co-chairs BIO Deutschland’s Working Group on Finance and Taxation with Schmidt-Brand. Honold said, "In the light of the favourable innovation conditions in other EU member states, it would be preferable to remove the disadvantages facing innovative foreign investors rather than making conditions for German investors worse." He added that this would lead investors to Germany, who would make innovations possible.

The Finance Minister answered BIO Deutschland’s letter at the beginning of July. He wrote that the suggested amendment was a response to a breach of treaty case against Germany, in which the EU Commission disapproved of Germany’s unequal taxation of foreign and domestic dividends. According to the Minister, the aim of taxing income from free floats is to ensure equal treatment. In this way, the tax deduction on returns on capital investments from foreign dividends would be ensured in the future and tax deficits of around €1 billion per year would be avoided.

In his reply, Peer Steinbrück added that the regulation did not specifically apply to recently founded companies financed by risk capital. He pointed out that "the Federal Government consistently (provides) support to precisely this type of company" and gave the legislative proceedings on the Law on the Modernisation of the Conditions for Capital Investments (MoRaKG) as an example. BIO Deutschland welcomed the passing of this law in the Lower House (Bundestag) at the end of June. At the time, Peter Heinrich commented that the law was not ideal for the sector’s needs but that it at least showed that Germany was not completely forgetting about innovative entrepreneurs. However, as Heinrich went on to explain, it is vital to active SMEs in advanced technologies that the government keeps its promise to monitor the effect of the law and, if necessary, to improve it.

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