Germany Considers Limiting Tax Deductions for Executives

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By Jabeen Bhatti

The limitation of tax deductions for executive compensation is among a package of measures under consideration by lawmakers from Germany’s co-ruling Christian Democratic Party (CDU).

CDU parliamentarian Heribert Hirte, author of a position paper on executive pay, told Bloomberg BNA March 6 that his proposals will be discussed by the CDU’s working group for legal affairs in a March 7 meeting in the Bundestag, the lower house of the German parliament.

Hirte also proposed a restriction to prohibit executive pay earned and taxed abroad from being a tax-deductible expense if the executive primarily works outside Germany.

“It would apply to managers that work in Germany for less than 183 days per year,” said Hirte. “So these expenses would only be tax-deductible if the corresponding income is also taxed in Germany.”

While the position paper itself has no immediate impact on policy, such documents frequently form the basis of bills in Germany.

“It’s a typical way to introduce new laws in Germany, where a paper is drafted and put up for public comment,” Thomas Busching, a partner at Squire Patton Boggs in Frankfurt, told Bloomberg BNA in a March 6 telephone interview.

“All kinds of industry associations will comment on its implications or point to deficiencies.”

Proposals on Pay Conflicts

The proposals in Hirte’s position paper include strengthening the competencies of annual shareholders’ meetings to approve proposals for executive pay and increasing the transparency of executive compensation in Germany.

Hirte also suggested that an external regulatory body, such as Germany’s Federal Financial Supervisory Authority (BaFin), intervene in conflicts over executive pay.

“From my point of view, there needs to be a supervisory body that can counteract these indisputable abuses of pay,” Hirte told Bloomberg BNA. “It could be BaFin, but it could be something else—like if an advisory panel presents itself before a higher court.”

Excessive Compensation

But even if these measures do become law, Busching said, they’re unlikely to have a substantial impact on tax revenues.

“The tax effect is probably close to zero,” said Busching. “It would affect about 500 people here, so that is really not going to make a huge impact on tax revenues in Germany.”

Instead, lawmakers are bringing up the issue as part of a wider discussion in Germany on excessive compensation in select sectors of the economy.

To contact the reporter on this story: Jabeen Bhatti in Berlin at correspondents@bna.com

To contact the editor responsible for this story: Penny Sukhraj at psukhraj@bna.com

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