Germany set for business tax cut

The average corporate tax in the EU is 25%

Germany's coalition government has reached agreement on slashing business taxes from 2008, in a bid to improve the country's competitiveness.

In future, the standard rate for firms will be cut from nearly 39% to just under 30%.

Changes to the business tax regime are being seen as a test of Chancellor Angela Merkel's ability to push through her reform agenda.

Some of the lost revenue will be made by taxing firms' interest payments.

Meanwhile, new data showed that the German government was set to receive nearly 40bn euros more in overall tax revenues in 2006 and 2007 - due to its economic upturn.

No obstacles

The government has pledged that cutting business taxes will not cost the country more than five billion euros.

The measure was agreed by a German government working group of tax experts led by Finance Minister Peer Steinbruck, a Social Democrat, and Hesse state premier Roland Koch, of Ms Merkel's Christian Democrats.

Mr Steinbruck described it as "an important piece of work" that would strengthen Germany as a tax location.

He added the working group was determined that "no obstacles should stand in the way of implementation".

A simpler tax system has long been sought in Germany.

Large companies pay corporation tax, as well as local taxes and a so-called "solidarity tax" to help fund the rebuilding of the former East Germany.

However, some of the proposals - including taxing interest payments - have been resisted by business leaders.