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Insurance
companies can set off against current profits contributions
to a fund to cover future liabilities. The fund can
cover liabilities that will arise between 15-30 years
in the future. Actuarial principles are used to determine
the liability and the fund can only cover those classes
of losses which insurance industry experience shows
fluctuate unpredictably, and that cannot be covered
by retrospective contributions or re-insurance. This
provision has the effect of considerably reducing taxable
profits and therefore the amount of corporate tax payable.
Shipping
Tax
Shipping
companies resident in Germany and who have most
of their ships registered in the German shipping
registry may elect to be taxed under a tonnage system
of rules rather than on trading income. The measure
was introduced on January 1, 2000, and once a ship
submits to this regime of alternative taxation it
is bound by its election for a period of 10 years.
Clearly a company would not elect this system of
taxation and be bound by its election for 10 years
unless it represented a significant fiscal incentive.
The ships so taxed must be engaged in international
transport.
Tax
Free Investment Grants in West Berlin & former
East Germany
Manufacturing
firms, craft industries and urban wholesale &
retail businesses may be entitled to a tax free
investment grant in respect of "qualifying"
new movable fixed assets subject to wear and tear
and purchased or manufactured in West Berlin or
the former East Germany. The qualifying goods must
remain in former East Germany or West Berlin for
at least 3 years after their purchase or manufacture.
The concession now also applies to companies involved
in providing services to and in close contact with
both manufacturing production and newly built business
premises. The amount of the grant depends on the
time of the investment the size of the business,
the economic sector to which the business belongs
and the type of investment. For the years 1997-1998
the grant stood at 5-10% of the cost of the purchase
whereas in 1999-2004 it stood at 10%-20%. In 1997
the cost to the exchequer was 1.76 billion DEM whereas
in 1998 it stood at 1.26 billion DEM.
In 2004 the
government introduced the Investment Grant Act 2005
to continue the regime. Grants under the new rules
are limited to first-time
investments and, unlike under old rules, replacement
investments will no longer qualify for grants. The
Act defines "first-time investments" as
(i) the creation of a new permanent establishment
(PE); (ii) enlargement of an existing PE; (iii)
fundamental redesign of a product or manufacturing
process; and (iv) continuation of an entity which
had been shut down or was to be shut down had the
new investor not taken over its activities. The
new rules offer grants of between 10% and 15% of
the total investment, depending on the location
and type of investment (i.e. first time, enlargement
etc.).
In
Germany roll over relief has the following characteristics:
Land & Real Estate: As of the year 2000 it
was limited to land and real estate purchases
and sales.
6 year holding period: The relief only applies
if the assets have been held for a minimum period
of 6 years.
Level of Relief: 100% of any capital gains made
on profitable sale of land & buildings may
be deducted from the replacement cost of "qualifying
replacement assets" meaning that no capital
gains tax is payable on land and real estate re-sold
at a profit. If the gain is not used immediately
it may be carried forward for 4 years as a tax
free reserve until such time as it can be debited
from the cost of replacement assets. For depreciation
purposes the replacement asset is deemed to be
valued at its replacement cost less any untaxed
capital gain. This is in fact quite a considerable
fiscal concession especially given the appreciations
in land values. Where funds are not used to obtain
a replacement asset there is a sanction by which
taxable business profits must be increased by
6% for each year the tax-free reserve has existed.
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