Germany's upper house approves tax relief for companies in 'first step' of turnaround

Germany's upper house of parliament passed on Friday a 3.2 billion euro ($3.46 billion) tax relief package for small and medium-sized companies, aimed at unleashing new investment amid weak foreign demand and high interest rates.

Germany's upper house of parliament passed on Friday a 3.2 billion euro ($3.46 billion) tax relief package for small and medium-sized companies, aimed at unleashing new investment amid weak foreign demand and high interest rates. The government's Growth Opportunities Act passed the lower house of parliament in November but then faced opposition in the Bundesrat, the legislative body that represents the 16 German states at the federal level.

The states and municipalities would have had to shoulder the bulk of the expected tax revenue shortfall and opposed the law, which was referred to a parliamentary mediation committee. As a result, the annual 3.2 billion euros size of the tax relief package is less than half the 7 billion euros ($7.57 billion) a year from 2024 that the German government had originally planned through the Growth Opportunities Act.

"The Growth Opportunities Act can only be a first step towards an economic turnaround," German Finance Minister Christian Lindner said on Friday, noting that more needed to be done to stimulate the anaemic growth of the German economy. "Further steps must now follow at a fast pace and with great ambition to improve our economic competitiveness," Lindner said, citing the lack of skilled labour, bureaucratic red tape and a high tax burden among the problems holding back the economy. He said the government was working to solve those issues but that it was "still too early" to outline its measures to tackle them.

FARMERS' PROTESTS The opposition CDU/CSU conservatives made approval of the Growth Opportunities Act in the Bundesrat conditional on the government reversing its decision on agricultural diesel.

German farmers took to the streets in December to protest against a cut to diesel subsidies, part of a wave of action across Europe in the past several months over issues ranging from EU environmental policies to what they say is unfair competition from abroad. The government said reversing the decision on diesel subsidies was not an option but it offered other concessions, such as income smoothing. The proposal would let farmers spread their earnings over several financial years to help reduce their taxes.

The act was approved with backing from the conservatives. But the state premier of Hesse, Boris Rhein of the CDU, spoke of a "Black Friday" for the agricultural sector due to the abolition of the agricultural diesel subsidies. The real estate industry welcomed the law, which, among other things, tweaked the method of accounting for depreciation of buildings to provide companies with more liquidity.

The property sector in Germany and elsewhere in Europe boomed as interest rates were low and demand strong. But a sharp rise in rates and costs has put an end to the run, tipping developers into insolvency as bank financing dries up and deals freeze. Construction Minister Klara Geywitz said that 5% of the investment costs could now be written off for six years. "This is a really big boost for housing construction," she said. 

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