Germany Destination News

Th e social security system of the FRG remained in place following 

unifi cation with the German Democratic Republic. However, 

the GDR system continued to apply on an interim basis within the 

former GDR territory. Th e two systems were merged eff ective 2 

January 1992. Th e social insurance system provides for sickness 

and maternity, workers’ compensation, disability, unemployment, 

and old age; the program is fi nanced by compulsory employee and 

employer contributions. Old age pensions begin at age 65 aft er fi ve 

years of contribution. Worker’s medical coverage is comprehensive, 

including dental care. Unemployment coverage includes all 

workers, trainees, apprentices, and at-home workers in varying 

degrees. Th e government funds a family allowance to parents with 

one or more children. 

Equal pay for equal work is mandated by law, but women continue 

to earn less than men. Women continue to be underrepresented 

in managerial positions. Sexual harassment of women in 

the workplace is recognized and addressed. Although violence 

against women exists, the law and government provides protection. 

Victims of violence can receive police protection, legal help, 

shelter and counseling. Children’s rights are strongly protected. 

Freedom of religion is guaranteed by the Basic Law in Germany, 

although there have been reports of some discrimination 

against minority religions. Extremist right-wing groups continue 

to commit violent acts against immigrants and Jews although 

the government is committed to preventing such acts. Th e Basic 

Law also provides for the freedom of association, assembly, and 

expression.

Germany describes its economy as a “social market economy.” 

Outside of transportation, communications, and certain utilities, 

the government has remained on the sidelines of entrepreneurship. 

Beginning in 1998, and in line with EU regulations, the German 

government began deregulating these fi elds as well. It has, 

nevertheless, upheld its role as social arbiter and economic adviser. 

Overall economic priorities are set by the federal and Land 

governments pursuant to the 1967 Stability and Growth Act, 

which demands stability of prices, a high level of employment, 

steady growth, and equilibrium in foreign trade. In addition to 

the state, the independent German Federal Bank (Bundesbank), 

trade unions, and employers’ associations bear responsibility for 

the nation’s economic health. With the advent of the euro in 1999, 

much of the Federal Bank’s authority in monetary matters was 

transferred to the European Central Bank (ECB). In the international 

arena, Germany has acted as a leader of European economic 

integration. 

Government price and currency policies have been stable and 

eff ective. Less successful have been wage-price policies, which 

have been unable to control a continued upward movement. Infl 

ationary pressures have increased and combined with a general 

leveling off in productivity and growth. Attempts to neutralize 

competition by agreements between competitors and mergers are 

controlled by the Law Against Restraints of Competition (Cartel 

Act), passed in 1957 and strengthened since then. Th e law is administered 

by the Federal Cartel Offi ce, located in Bonn. 

Unemployment remained at an average 9% in the early 2000s; it 

was twice as high in eastern Germany as in western Germany. As 

of the fi rst quarter of 2005, the unemployment rate stood at 12.4%. 

Although much eff ort has been expended to integrate the former 

East German economy with the West’s (infrastructure has improved 

drastically and a market economy has been introduced), 

progress in causing the two economies to converge slowed in the 

late 1990s and early 2000s. Annual transfers from West to East 

amounted to approximately $70 billion in 2005. Germany had the 

weakest GDP growth in the EU from 1994–2003, when Germany’s 

economy was moribund. 

Th e aging population, combined with high unemployment, has 

pushed social security outlays to a level exceeding contributions 

from workers. Corporate restructuring and growing capital markets 

are setting the foundations allowing Germany to thrive globally 

and to lead the process of European economic integration, 

particularly if labor-market rigidities are addressed. However, 

in the short run, rising expenditures and lowered revenues have 

raised the budget defi cit above the EU’s 3% debt limit.

All foreign investment must be reported to the German Federal 

Bank (Bundesbank), but there are no restrictions on the repatriation 

of capital or profi ts. Until the 1998 deregulation of Deutsche 

Telekom, telecommunications remained closed to foreign investment. 

Th ere is no special treatment for foreign investors. As of 

2005, incentives for investment in the former GDR deemed to be 

desirable included accelerated depreciation, loans at below-market 

interest rates, and cash investment grants and subsidies. Still 

applicable in all of Germany as of 2005 were cash grants; tax incentives 

such as capital reserve allowances and special depreciation 

allowances; investment grants; and credit programs, including 

low-interest loans. Foreign fi rms may also participate in government 

and/or subsidized research and development programs. 

Although few formal barriers exist, high labor costs have discouraged 

foreign companies from setting up manufacturing plants 

in Germany. Nevertheless, the German government and industry 

enthusiastically encourage foreign investment in Germany. German 

law provides foreign investors national treatment. 

Th ere are eight free ports in Germany operated under EU Community 

law. Th ese duty-free zones within the ports are open to 

both domestic and foreign entities. 

Across the 10-year period 1991 to 2001, total foreign direct investment 

(FDI) totaled $393 billion, the third highest total in the 

world. Half of this came in 2000, when FDI infl ow reached over 

$195 billion. Annual FDI infl ow had been $12 billion in 1997, 

rising to $24.5 billion in 1998, to $54.7 billion in 1999. With the 

bursting of the dot.com bubble in 2001, FDI infl ow to Germany 

fell to about $21.1 billion in 2001 and was estimated at $36.2 billion 

in 2002. 

According to the Bundesbank, FDI in Germany in 2003 (the latest 

fi gures available) had fallen to $12.9 billion, about two-thirds 

less than the 2002 high. In GDP terms, 2003 fl ows of FDI represented 

0.6% of Germany’s GDP, while the total stock of FDI in 

2003 equaled 26.1% of GDP. 

FDI outfl ows from Germany peaked at almost $106.5 billion in 

1999. FDI outfl ows were about $36.9 billion in 2001 and $8.7 billion 

in 2002. German fl ows of direct investment abroad plunged 

to $2.6 billion in 2003.

Germany is a member of the European Union and thus has a common 

import customs tariff and complies with trade agreements 

put in place by the EU. Germany is also a contracting party to the 

Harmonized System Convention. In regard to trade with non-EU 

countries, most raw materials enter duty-free, while most manufactured 

goods are subject to varying rates between 5% and 8%. 

Germany levies a 15% value-added tax on industrial goods.

In 2000, the German tax system underwent a major reform featuring 

a dramatic reduction in taxes on business (from a corporate 

income tax rate of 40% to 25%, and the elimination altogether of 

a 53% tax on investment profi ts), as well as a scheduled reduction 

in the top income tax rate to 42% by 2005 from 56% in the 1980s, 

and 53% in 2000. As of 2005, Germany’s corporate income tax rate 

was 25%, plus a 5.5% surcharge. Th ere is also a 5% basic trade tax, 

although rates in the main cities range from 20–25%. A nonresident 

corporation, whose headquarters and management are outside 

of Germany, does not have to pay the surcharge. Business related 

capital gains are taxed as income, with a 95% exemption on 

gains from the sale of most shareholdings by companies for tax 

years ending aft er 31 December 2003. Business activities are also 

subject to municipal trade taxes of 12–20.5%, depending upon the 

municipality. 

As of 2005, Germany’s progressive individual income tax had 

a top rate of 42%, plus a 5.5% surcharge. Although self-employed 

persons are subject to the country’s trade tax, the tax can be credited 

against a person’s individual income tax. In 2005 the progressive 

schedule of income tax rates saw an increase in the 0%, taxfree 

base to €7,665, with decreases in other brackets. However, 

the threshold for the highest tax rate decreased from €55,008 in 

2002 to €52,293 in 2003 to €52,152 in 2005. Rates and exemptions 

depend on the number of children, age, and marital status 

of taxpayer. Individuals also pay an 8–9% church tax, although 

non-churchgoers, and members of the Orthodox or Anglican 

Churches are exempt from paying any church tax. Other direct 

taxes include an inheritance and gift tax, a net worth tax, and a 2% 

real estate transfer tax. 

Th e main indirect tax in Germany is a value-added tax (VAT) 

introduced in 1968 with a standard rate of 10%. By 2003, the standard 

rate had risen to 16%. A reduced rate of 7% applies to some 

basic foodstuff s, water supplies, medical care and dentistry, medical 

equipment for disabled persons, books, newspapers and periodicals, 

some shows, social housing, agricultural inputs, social 

services, and public transportation. Items exempt from the VAT 

include admissions to cultural events, building land, supplies for 

new buildings, TV licenses, telephones and faxes, basic medical 

and dental care, the use of sports facilities, and some waste disposal 

services. Exports are also zero-rated.