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By Stephan Eilers, Cyril Valentin and Bertrand Lacombe, lawyers, Freshfields Bruckhaus Deringer LLP

Presented by the French government as a source of inspiration for the tax reform it wishes to undertake, the German tax system is bound to raise questions when the time comes to make proposals.

The first area of divergence is the weight and structure of compulsory taxation. France stands out for its high taxes (representing 43.5% of GDP in 2007, according to public revenue statistics published by the OECD, compared with 36.2% in Germany), which weigh more heavily on businesses, with obvious consequences in terms of competitiveness. Consideration of convergence should at the very least lead France to rethink, if not the overall amount, then the distribution of the tax burden.

As far as business taxation is concerned, the first task of convergence should be to eliminate ‘small taxes’: in theory, German companies may be subject to around 15 different taxes, while their French counterparts may be subject to more than 80… More generally, with sometimes broader tax bases and often lower rates, German corporate taxation offers an interesting alternative model. Since the reduction in 2008, corporation tax has been levied at a maximum rate of 15.83%, compared with 34.43% in France. And if the tax base is broader in Germany, this is largely due to the absence of taxes that are disconnected from income but necessarily reduce it. For example, the French local authorities levy a territorial economic contribution based on the assets and added value of companies, excluding any profits, whereas the Länder levy a percentage (varying from 7 to 17.5%) of company profits. There is also the question of the French tax consolidation system, which is only open to companies that are more than 95% owned. French companies, which have long been calling for this threshold to be lowered, will be able to invoke the German system (Organschaft), which is satisfied with a 50% holding. Without attempting to list all the paradoxical situations, it is also worth noting a number of curiosities with regard to the taxation of capital gains on equity holdings and dividends relating to these holdings: the benefit of these exemption schemes, even though they stem from the same European directives, is subject in France to compliance with thresholds and holding periods that the Germans do not have to comply with, at least for corporation tax.

Another area of divergence is personal taxation, although this is perhaps the area where rapprochement seems likely to be achieved quickly. The French government has expressed its intention to emulate Germany, which abolished the symbolic wealth tax in 1997. However, as the loss of tax revenue cannot be offset by the abolition of the tax shield alone, convergence will have to go further. The middle classes would suffer from the addition of an extra bracket to the income tax scale or the replacement of the current bracketed scale by a tiered scale. Any comparison should also include social security contributions: up to 12.3% of income in France, compared with just 5.5% in Germany. The same applies to income from transferable securities (interest, dividends, etc.) received by individuals: in 2011, this income will be subject to an aggregate rate of 31.3% in France, compared with 26.38% in Germany. So there is little room for manoeuvre. This is all the more true given that local taxation should not be excluded from the debate: Germany does not levy taxe d’habitation, a tax based neither on income nor on taxpayers’ assets, and its property tax yield is almost three times lower than that of its French counterpart.

Germany has gradually developed a tax system that raises some pertinent questions, while keeping its budget on track and preserving the competitiveness of its businesses. Let’s hope that on this side of the Rhine, the answers are not put off until after 2012.

Bertrand Lacombe

Lawyer, lecturer in tax law.

Experts de premier plan en droit fiscal