The Europe Thread

Dec. 31 (Bloomberg) -- Governments across Europe are cutting taxes on personal income and corporate profits by more than 18 billion euros ($24.6 billion) next year to boost consumer spending and investment and spur growth.

The tax reductions are ``an important signal of government intentions to help, not hinder, the recovery in the big economies,'' said Eva Vorbauer, who helps manage the equivalent of $12 billion at HSBC Trinkaus Capital Management in Dusseldorf, in a telephone interview. ``Confidence-building is really welcome.''

An export-led recovery among the 12 nations that share the euro is faltering after a 33 percent surge in oil prices and an 8 percent increase in the common currency against the dollar this year. In Germany, the region's biggest economy, retail sales stagnated as unemployment rose to a six-year high of 10.8 percent.

Germany and Italy, the third-biggest euro-region economy, are among countries cutting income taxes from Jan. 1. Austria, Finland, Denmark and Greece are reducing corporate tax rates as they face increasing competition for investment from Eastern Europe, where the new Romanian government this week announced a flat tax rate of 16 percent.

The European Central Bank trimmed its 2005 growth estimate for the euro region to 1.9 percent from 2.3 percent, ECB President Jean-Claude Trichet said Dec. 2. That contrasts with the U.S., where the government is predicting 3.5 percent growth in 2005.

In Germany, Chancellor Gerhard Schroeder's government is cutting income taxes by 6.5 billion euros following reductions worth 15 billion euros at the start of this year. Five of the six state-funded economic institutes this month scaled back their forecasts for German growth, saying consumer spending won't rise enough next year to outweigh the effect on the economy of a slowdown in exports.

Italian Cuts

The Italian parliament this week gave final approval to Prime Minister Silvio Berlusconi's 2005 budget, which contains 6 billion euros worth of income-tax cuts. Berlusconi, who swept to power in 2001 on a pledge to reduce taxes, said the changes will give a ``jolt'' to an economy forecast by the International Monetary Fund to be the slowest growing among the Group of Seven leading industrial nations next year.

Total tax cuts in the 2005 French budget will amount to 2 billion euros, almost half aimed at boosting consumption. The tax on company profits is being reduced by 0.5 percentage point to 34.9 percent.

Following is a roundup of details of the tax changes and some of the other new legislation affecting companies and consumers around Europe in 2005. The changes take effect Jan. 1 unless otherwise stated.

Tax Changes

GERMANY:

The top income-tax rate falls to 42 percent from 45 percent and the bottom rate to 15 percent from 16 percent. A married wage- earner with two children who gets 50,000 euros will save 144 euros a year.

The government is phasing in the taxation of pensions at the time of payout, gradually abolishing taxes on pension contributions through 2025. Workers will save more than 1 billion euros in taxes on pension contributions in 2005.

Tax benefits are being abolished on life-insurance policies signed after Dec. 31, 2004. Payouts will be subject to personal income tax. People aged 60 and above who have invested for at least 12 years will get half the payout tax-free.

FRANCE:

The government is trimming the inheritance tax and increasing tax breaks for those who employ people at home, as well as for homebuyers.

It is also offering subsidies for companies in areas of high unemployment and tax breaks to those that relocate jobs in France.

The tax cuts will be offset by almost 3 billion euros in tax increases for companies and households aimed at reducing the shortfall in the welfare system. That will lift France's tax burden to 43.7 percent from this year's 43.6 percent.

ITALY:

Taxes are being cut in total by 6.5 billion euros, of which 6 billion euros will be in personal income taxes and the rest in incentives for businesses to hire new employees.

The top tax bracket will be cut to 43 percent from 45 percent for those who earn more than 100,000 euros per year. There will be a 39 percent tax bracket for those earning between 33,500 euros and 100,000 euros a year. The bottom two brackets of 23 and 33 percent will be applied to those making between 7,500 and 26,000 euros, and 26,000 to 33,500 euros a year respectively.

Funding will include higher taxes on cigarettes, cutting spending by ministries and state-owned companies, a higher share of state lottery sales, and an extension of a tax amnesty on the proceeds of illegal construction work.

SWEDEN:

The government will scale back the wealth tax to amount to 1.5 percent of net assets exceeding 3 million kronor ($450,000) for families from the current threshold of 2 million kronor. It will also scrap a tax on gifts and inheritance.

The tax cuts and increased spending will in part be financed by gasoline taxes and energy taxes amounting to 3.8 billion kronor.

AUSTRIA:

Austria is slashing its corporate tax rate to 25 percent from 34 percent, after neighboring Slovakia, one of the 10 new EU members, introduced a rate of 19 percent.

Tax cuts will amount to about 3 billion euros next year as the country also lowers income taxes. New tax rules for holding companies will also allow corporations to pay lower taxes by offsetting profits made in Austria against losses abroad.

NORWAY:

The general rate of value-added tax will be raised to 25 percent from 24 percent, while VAT on food will be cut to 11 percent from 12 percent on Jan. 1. A lower VAT rate that applies to services including passenger transport will be raised to 7 percent from 6 percent and will be expanded to include cinema tickets and infrastructure services for railway and air traffic. The maximum customs tariff on clothing will be cut to 10.7 percent.

Norwegian income-tax changes for 2005 include a removal on tax paid on owning one's own home and a reduction in the value set on equities and funds for wealth-tax purposes.

TURKEY:

The government will cut corporation tax to 30 percent from 33 percent and reduce the top rate of income tax to 35 percent from 40 percent.

DENMARK:

Denmark is cutting its corporate tax rate to 28 percent from 30 percent and closing a loophole on joint taxation that has allowed companies to include only unprofitable foreign units, cutting their tax payments.

POLAND:

A 50 percent top income-tax rate for people earning more than 600,000 zloty ($176,196) a year is being introduced. The previous top rate was 40 percent.

GREECE:

The government is cutting the 35 percent corporate tax rate to 32 percent, as part of plans to reduce it by 10 percentage points over three years. It is also expanding the number of companies that qualify for state subsidies and boosting incentives for new investments to offset a slowdown in government spending after the Athens Olympic Games. It has set aside 150 million euros in the 2005 budget for investment subsidies and made tax deductions for new investments more generous.

FINLAND:

The corporate tax rate is being cut to 26 percent from 29 percent, while the tax on capital gains goes down to 28 percent from 29 percent.

Tax is being abolished on gains made by companies when they sell stakes that they've held for a year of at least 10 percent in other businesses. At the same time, any losses from similar sales will no longer be tax-deductible.

IRELAND:

A tax levied on second-hand property will be reduced to help buyers purchase their first home. First-time buyers will no longer have to pay the stamp duty levied on property transactions up to a value of 317,500 euros. A reduced rate will apply to purchases up to 635,000 euros.

Currently, a tax of 3.75 percent is applied to all purchases up to 317,500 euros. First-time buyers purchasing property above that price will have the duty reduced by up to one-third.

The threshold before workers begin paying income tax at a higher 42 percent rate is being raised by as much as 5 percent. For a single person, the 42 percent rate will apply to annual earnings above 29,400 euros compared with 28,000 euros currently. Earnings below 29,400 euros will continue to be taxed at 20 percent.

A tax levied on alcoholic products will be halved for beers produced by microbreweries, defined as producing less than 2 million liters of beer a year. The tax is levied at a base of 19.87 euros per 100 liters and varies depending on the strength of the beer.

A measure to refund 50 percent of vehicle registration tax when buying a car with a dual electric and gasoline engine is being extended until Dec. 31, 2006. So-called ``hybrid'' cars are designed to reduce pollution by shutting down the gasoline engine with stationary or driving at slow speeds.

PORTUGAL:

The government will cut the income tax rate to 10.5 percent from 12 percent for the lowest wage earners. The maximum rate will remain at 40 percent for people earning 54,388 euros or more.

HUNGARY:

Hungary is abolishing its middle personal income-tax rate of 26 percent and raising the income threshold for the lower 18 percent bracket to 1.5 million forint ($8,200) from 800,000 forint.

To help recoup some of the revenue lost, banks will have to pay either a 6 percent tax on net interest income or an 8 percent extraordinary tax on overall profit on top of the 16 percent corporate tax. Tax on dividends will also rise to 25 percent from 20 percent and the government has restricted tax breaks for high- income taxpayers.

The measures will cut overall tax receipts by 80 billion forint, according to Zoltan Saghy, a deputy state secretary in the Finance Ministry.

ROMANIA:

Romania is introducing a 16 percent flat tax on corporate profit and personal income to cut tax evasion, spur foreign investments and encourage the middle class.

The country's highest income-tax bracket is currently 40 percent, with corporate tax at 25 percent.

ESTONIA:

Flat corporate and personal income-tax rates will be cut to 24 percent from 26 percent as part of a gradual reduction to 20 percent from the start of 2007. The standard personal income-tax deduction is being raised to 21,600 kroons a year ($1,850) from 16,800 kroons.

Other Legislation

GERMANY: Labor market:

Germany's 2.2 million long-term jobless face benefit cuts during the first two years of unemployment. Extra labor-agency staff will improve support for the long-term jobless. Those under the age of 25 will either be offered a job, training or work experience with training elements.

The long-term jobless will face benefit cuts should they reject job offers and have to draw on their own assets and those of their dependants before becoming eligible for aid, though allowances apply.

A single person in western Germany who earned 2,800 euros a month before becoming unemployed will face a cut in benefit to 811 euros from 851 euros in the first year, a reduction to 731 euros in the second year and a drop to 651 euros thereafter. Benefit would have remained at 851 euros under the old rules.

Transport:

Germany's delayed highway truck-toll system, developed by DaimlerChrysler AG, Deutsche Telekom AG and Cofiroute SA, will start Jan. 1. Truckers will have to pay an average rate of 12.4 euro cents a kilometer.

UNITED KINGDOM: Information:

The Freedom of Information Act will require about 100,000 public officials to respond within 20 working days to requests for information; for no charge in most cases. Non-sensitive documents will be available from such bodies as public companies, government departments, local authorities, National Health Service staff, schools, police, the armed forces, and even Parliament. Information on issues related to such areas as defense, law enforcement, court records, and security services won't be available.

Hunting:

It will be illegal to hunt foxes with dogs beginning Feb. 18. Opponents of the ban have vowed to defy it. Shooting foxes will still be legal.

FRANCE:

Patients will be liable for a 1-euro increase in consultation and hospitalization fees. Incentives to use generic drugs will be increased, together with steps to fight undue sick leave. The government will also allow specialist doctors to raise consultation fees when individuals fail to consult a general practitioner first.

SWITZERLAND: Motoring:

Laws on drink-driving are being tightened. The maximum blood- alcohol level is being to 0.5 per thousand units from 0.8, bringing Switzerland into line with neighboring countries including Germany.

Young drivers will also receive their license for a three- year probationary period in a bid to cut the number of traffic accidents.

Banking:

Switzerland will gradually impose a duty from July on the savings of EU residents in Swiss bank accounts to help crack down on tax evasion. Under the measure, Switzerland will hand over some of the interest income earned by EU residents to their home tax authorities, without revealing the identity of the holder. The tax will start at 15 percent, rising to 35 percent by 2011.

SWEDEN

Companies will be forced to pay 15 percent of social-security payments when employees are on sick leave. The change is designed to reduce sick leave by pushing employers to actively work with health issues.

TURKEY: Currency:

Turkey will introduce a new currency into circulation on Jan. 1, removing six zeroes from the old unit. One new lira will be equal to 1 million liras in old currency. Existing banknotes and coins will remain in circulation alongside the new ones throughout 2005.

Fuel markets:

New rules will allow gasoline retailers to set their own prices, ending the government's right to determine pump prices. The changes will also remove a requirement for 60 percent of the fuel to be bought locally.