Business in Germany
The Federal Government of Germany is building on Germany’s present strengths as a location for business activities: German companies are very competitive and successful internationally. Measured by patent registrations Germany is in the top group for technological development in Europe. The German economy has excellently trained and skilled personnel. By international comparison the infrastructure in Germany is extremely efficient and labour relations are good. All this helps to put German companies among the leading exporters worldwide. A considerable part of Germany's gross domestic product is earned in foreign trade. The Federal Government supports the German export industry by working for open markets and competition throughout Europe and worldwide. In future it will focus its foreign trade instruments even more on the SME sector.
The SME sector is the main pillar of the German economy. Promoting the potential for growth and innovation in small and midsize companies is therefore a major concern of the Federal Government. Germany's aim is to give companies more scope for innovative product ideas and services. Among other things, therefore, the Federal Government will relieve SMEs and new businesses of bureaucratic regulations in a Small Companies Act, and further improve loan and venture capital financing through an SME Initiative.
Tax Reform in Germany
The German tax system has been reformed recently, and income tax rates were reduced in three steps. The peak tax rate for personal income was reduced from 50 % to 42 % in 2005. The corporation tax applicable to corporations was also considerably reduced from 45 %, and currently stands at 25 %. Tax law has been further simplified and rates reduced.
Value added tax (VAT) is not a tax on companies, because it is only paid by the end user of a product or service. The current rate of VAT of 16 percent is clearly below the European average, and even after the increase to 19 percent, it will still be below the EU average. A lower rate of seven percent is charged for goods and services needed on a day-to-day basis, such as food or newspapers. Some services such as banking services or non-profit making work are VAT-exempt. The official German name for VAT is Umsatzsteuer, but it was originally called Mehrwertsteuer and is still often referred to by this name.
Recent Economic Situation in Germany
The German economy grew 2.5 percent in 2006, the biggest increase it has shown since the year 2000. This did more than just create a good basis for a continuation of the current economic trend. It also reversed the downward spiral seen for so long on the labour market. The size of the active workforce rose by 260,000, an increase of 0.7 percent for the year, the biggest advance since 2000.
All sectors except agriculture and forestry are contributing to the current expansion of the economy. This is also true of the building industry, which showed the highest growth rates after manufacturing industry, following years of stagnation and decline. These two sectors are trailed by the wholesale-and-retail trade, the hotel-and-restaurant trade, the transportation sector, as well as financial services, rentals, and corporate services.
Despite impressive double-digit growth rates in foreign trade (exports 12.4 percent, imports 12.1 percent), and in contrast to preceding years, domestic trade accounted for 1.7 percent of overall growth, making a much larger contribution to the current expansion of the economy than foreign trade (0.7 percent).
The reason for this is that the recovery seen in the labour market triggered a 2.0 percent rise in consumer spending. There was also a considerable increase in investments in plant and equipment, with gross fixed capital formation reaching a volume not seen since the reunification of Germany.
For the first time since 2001 the government budget deficit (2.0 percent) was back in compliance with EU rules on deficit limits established under the Maastricht Treaty.
Unit wage costs declined and worker productivity rose. This serves the international competitiveness of German products.
The current economic upswing has brought Germany back to the fore internationally, in contrast to its standing just a year ago. According to estimates released by the European Commission, Germany currently accounts for 28 percent of gross domestic product in the euro zone.