Financial Times - December 24, 1999
GERMANY ANNOUNCES CORPORATE TAX CHANGES By Haig Simonian in Berlin
Germany has cleared the path to unprecedented and long-awaited corporate restructuring by deciding to abolish crippling tax barriers to companies selling equity stakes in each other.
The measures, to be confirmed in a draft bill next month, would take effect in 2001.
They would allow companies to divest free of tax the big shareholdings built up in rivals and industrial companies over the years, a pattern which critics say has stymied entrepreneurialism and handicapped German capital markets.
The potential impact triggered a 289.86 point, or 4.3 per cent, jump in the Dax index of leading shares to 6,782.39 as investors anticipated a wholesale unravelling of the system of cross-shareholdings which has tied together some of the country's biggest banks, insurers and industrial groups.
Stocks in banks and insurance groups, which have the biggest equity portfolios, climbed most steeply. Shares in Munich Re the big re-insurer, led the increases with a rise of almost 17 per cent to DM255.
Rainer Küppers, a senior official at the reinsurer Munich Re, said: "We always said the high taxes on realised gains were a big obstacle. This is a big step forward."
Peter Pietsch, a spokesman for Commerzbank, one of Germany's biggest banks, said: "Now we have the possibility to act much more freely. Whether we do so or not remains to be seen."
Although the stakes are worth billions of D-Marks, active management has hitherto been blocked by the approximately 50 per cent tax payable on capital gains.
The 12 per cent stake held by Deutsche Bank, Germany's biggest financial institutions, in DaimlerChrysler alone was worth almost DM20bn at the end of last year.
Critics have for years argued the holdings cemented banks' power and reduced the free float in companies' shares. However, the banks and insurers always replied their hands were tied by taxation.
Equity analysts saw the reform, which had long been sought but seemed unlikely ever to be delivered, as a vital step to improving Germany's competitiveness. The move is expected to boost capital markets by improving liquidity and giving big corporate shareholders the chance to re-invest the proceeds of their holdings in their core businesses, should they wish.
The government acknowledged the impact of the reforms. In a press release confirming the revision, first published on Tuesday but which had been largely overlooked until Thursday, it said: "This change will give an important impulse for the necessary modernisation and restructuring of business".
The corporate equity decision, along with unexpectedly bold cuts in income tax announced this week, should help to restore the reputation of Gerhard Schröder as a reform-minded chancellor. Doubts about Mr Schröder's electoral pledges to modernise the economy had increased after a string of poll defeats in recent months triggered fears he was being forced to appease his party's powerful left wing.
But the decision to bury the equity tax revision deep in the press release covering this week's corporate and income tax measures underlined the continuing conflicts within the chancellor's Social Democratic party (SPD).
One senior government official said the changes had been deliberately played down to focus attention on populist income tax cuts. But others admitted the decision - which had been expected to boost the stockmarket - had reflected concern in the government not to antagonise SPD left wingers.
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GERMANY: EARLY CHRISTMAS IN BOARDROOMS By Haig Simonian in Berlin
Caution was the watchword, but there was little hiding the fact that Christmas had arrived a couple of days early in German boardrooms on Thursday.
The government's surprise abolition of the crippling taxes on capital gains from selling equity stakes held by one quoted company in another was so unexpected that most officials wanted to confirm it was true before daring to comment.
No one is predicting an immediate unravelling of the complex web of holdings between well-known groups. Many of the links are within financial services, such as the tangled holdings between Allianz, the insurer, Dresdner Bank and Hypovereinsbank, or the 25 per cent cross holding between Allianz and Munich Re, the re-insurer.
Deutsche Bank, Germany's biggest financial institution, meanwhile, had between 9 and 10 per cent of Munich Re at the end of last year and has about 7 per cent of Allianz - worth around DM10bn (£3.2bn) today.
Changing the law will give owners much greater flexibility in dealing with the holdings. Says Diethart Breipohl, finance director of Allianz: "Should these plans be put into effect, they would be positive for the German economy. First, a restructuring of the German corporate landscape would be possible. Second, this signal of a more open Germany would strengthen the euro. And third, the stock markets would profit from a more active management of assets."
A welter of other participations involve stakes held by banks and insurers in industry. Best known is Deutsche Bank's share of DaimlerChrysler, estimated at about 15 per cent and worth almost DM20bn at the end of last year. Others include Commerzbank's 10 per cent of Linde, Munich Re's 5 per cent of Heidelberger Druckmaschinen, the printing machinery manufacturer, in which Commerzbank has 10 per cent, or the numerous stakes held by financial services companies in the diversified MAN industrial group.
For Deutsche Bank, the move would be welcome, says Walter Schumacher, an official. "It is a step in the right direction, especially in view of strengthening Germany's competitiveness as an industrial and financial centre."
Such responses are not surprising. The big corporate shareholders have for years been criticised for sitting on their assets. Such attacks have focused on issues of corporate governance stemming from the extensive boardroom representation the stakes have allowed - sometimes leading to accusations of conflicts of interests. But critics have also focused on performance, claiming the owners could greatly improve returns by selling their less profitable stakes and investing the proceeds in their core businesses to improve shareholder value.
The owners invariably responded that they welcomed greater freedom of action. But they claimed their hands were tied by the taxes of more than 50 per cent which would have been levied on any capital gains.
While the government's surprise move will provide the flexibility the shareholders have relished, any precipitate untangling is unlikely. The tax abolition will not start until January 1 2001. And many of the stakes are so big a quick sale would be impossible, even in today's markets of massive deals.
Some of the holdings may be maintained even after the new law takes effect. The reciprocal stakes between Allianz and Munich Re are such a fixed part of Germany's financial landscape it is hard to imagine their disappearance. Allianz's shareholdings in the banks may also be seen as vital strategic tools in wider business deals, such as a further sectoral consolidation.
Where stakes are considered non-essential, a gradual whittling down is more likely than a big disposal - unless that came in the context of a change of ownership. Some of the industrial holdings are big enough to be significant parts in potential takeovers.
Such transactions may not have occurred in the past because of the key shareholders' own reluctance to trigger transactions which would oblige them to crystallise capital gains.
Either way, changing the rules should accelerate the process of corporate restructuring which has already gathered pace this year - notably because of deregulation in sectors such as electricity generation and telecommunications.
That is certainly the aim of the "red-green" government of the Social Democratic party (SPD) and the Greens. Many observers on Thursday pointed to the irony that the changes had come from a centre-left coalition rather than the notionally more business-friendly Christian Democrat-led governments which ruled Germany for 16 years until the 1998 general elections.
Gerhard Schröder, the chancellor, and Hans Eichel, his finance minister, know they may have problems to convince SPD members that such a massive tax break for business is justified at a time of financial austerity and budget cuts. But they will stress the long-term impact on economic growth and jobs of restructuring German business.
Indeed, coalition unease with tax breaks for big business was apparent in the discreet style the tax change slipped out. Rather than drawing attention to a change of such magnitude, the proposal was buried inside a government press release outlining a series of big corporate and personal tax revisions this week.
The result was to cause immense confusion on Thursday morning, as the finance ministry in Berlin was besieged by callers wanting to know if the changes were for real. Only after a clarifying press release confirming the news did the stock market fly.
And rocketing share prices were, presumably, what the government wanted to avoid when unveiling its tax package on Tuesday to allow voters and SPD leftwingers to concentrate on tax cuts for working families rather than a Christmas bonanza for big business.