Bloomberg News

Merkel Targets Leveraged Buyouts in Fiscal Convergence Tax Plan

February 15, 2012

Feb. 14 (Bloomberg) -- German Chancellor Angela Merkel’s coalition plans to limit the capacity of private equity companies to offset the cost of leveraged buyouts in a step it says is in line with fiscal convergence in Europe.

The proposal, unveiled today by coalition lawmakers in Berlin, is part of a 12-point plan to change corporate taxation that may become law as early as next year, said Free Democrat lawmaker Volker Wissing. If implemented, the measures will alleviate companies’ tax burden by about 1.8 billion euros ($2.37 billion) per year from 2016, Wissing said.

In targeting LBOs, the coalition seeks to eradicate an “undesired” takeover model, Wissing told reporters in Berlin. “We don’t want to weaken private equity in Germany, just a certain model of finance.”

The step seeks to limit the capacity of takeover firms to offload part of the costs of their leveraged investments onto the companies they purchase, exploiting tax rules, according to a statement released by the coalition.

The rule change will apply only to cases where a fund has been established to buy a specific company and is able to pass on a large part of the investment costs to the purchased company, Wissing said.

This was the case when TPG Capital bought German bathroom equipment maker Grohe Holding GmbH with Credit Suisse’s private equity unit in 2004. “We don’t want to hamper start-up finance or private equity investments in ailing companies,” he said.

Fiscal Pact

When implemented, the changes will support the European Union’s “Fiscal Pact,” Christian Democrat lawmaker Klaus-Peter Flosbach said. The pact, a set of rules tying signatories to stringent budget practices, “requires 25 countries to work together toward a common goal, and tax policy is part of this.”

While diverse, the 12 steps outlined today focus on tax compensation affecting company losses, Flosbach said. The proposals include changes to per diem rules, taxation of dividends and taxation rules for company groups.

Private equity companies have became some of the biggest private landlords in Germany in the last decade. In 2005, the former Social Democratic Party Chairman Franz Muentefering said in a Stern magazine interview that private-equity funds are “locusts” that harm the German economy, stripping companies of assets before selling them on.

--Editor: Chris V. Nicholson, Frank Connelly

To contact the reporter on this story: Brian Parkin in Berlin at bparkin@bloomberg.net

To contact the editor responsible for this story: James Hertling at jhertling@bloomberg.net


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