NCPA - National Center for Policy Analysis

Germany Promotes Competition with Shift to Territorial Taxation System

November 28, 2012

The Tax Foundation looks at the example of Germany and its shift to the territorial tax system in its continuing effort to show the benefits the United States can derive from shifting to such a system.

  • In 2001, Germany fully terminated international expense allocation requirements and allowed deductions for all expenses related to exempt foreign income.
  • The government reduced the exemption for foreign income to 95 percent.
  • Active and passive incomes that are subjected to tax rates over 25 percent in the original jurisdiction are eligible for exemption.
  • In addition, any income generated by foreign branches of a German company is exempt if it resides in a treaty country.
  • And to make its companies more competitive internationally, Germany reduced the combined tax rate on corporate income from 56 percent to 30.2 percent in 1998.

To prevent the tax base from eroding, the government has limited the deductibility of interest surplus, ensured that losses on the sale of subsidiary corporate stock are not deductible, and has levied taxes on all passive income in low-tax jurisdictions.

As a result of its shift, Germany has ranked at the top when it comes to gross domestic product per capita and has also become the third-leading exporter in the world. Moreover, the unemployment rate has been cut by more than half since 2005, registering at 5.4 percent now.

Corporate tax revenue was not a primary factor in Germany's decision to pivot to a territorial system because it has not relied heavily on it in past years.

Source: "Germany Promotes Competition with Shift to Territorial Taxation System," Tax Foundation, November 15, 2012.


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