German tax break for failing companies illegal, EU says

Jan 26, 2011, 11:17 GMT

Brussels - A German tax break for companies which are in financial difficulties amounts to illegal state aid and must be stopped, the European Union's executive said Wednesday.

EU states are only allowed to grant state aid to private companies under strict conditions and with the permission of the European Commission, to make sure that governments do not interfere with business competition.

Germany's so-called 'Sanierungsklausel', which allows an ailing company to offset losses in a given year against profits in future years despite changes in its shareholder structure, 'is tantamount to a subsidy to companies in difficulty,' EU Competition Commissioner Joaquin Almunia said.

That is because the state effectively 'foregoes tax revenues that would otherwise be due by the companies concerned or their new owners,' Almunia said.

After a year-long investigation, commission experts decided that the clause was unfair because it allowed companies which are in financial trouble a privilege denied to better-off firms.

The German government will now have to claim back any tax breaks granted under the policy since it came into force on January 1, 2008.

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