Savers flee from new German tax

THE FLIGHT of capital out of Germany in an effort to beat the introduction in January of new regulations on taxing interest from savings has accelerated dramatically, according to the Bundesbank.

In the first eight months of this year, Germans have shifted more than DM26bn ( pounds 11.2bn) into investment funds and fixed deposits with banks abroad. This is double the outflow in the whole of 1988, before the first introduction of a tax at source on savings interest.

But because it had proved so unpopular, the government scrapped the so-called quellensteuer, only to find itself forced to reintroduce it by order of the German constitutional court. The court argued that sparing the interest on bank savings from being taxed undermined the principle of equitable taxation, and prejudiced those holding shares.

The new tax will amount to 25 per cent on interest earnings, with the first DM6,000 of savings tax- free for a single person, and DM12,000 for a couple. The main country to benefit has been Luxembourg and particularly the investment arms of Germany's big banks that are based there.

Industry sources say that during July and August alone, the funds managed by German banking subsidiaries in Luxembourg rose from DM48bn to DM59bn.

The heavy publicity by German banks for their Luxembourg- based funds - with full-page advertisements in newspapers saying 'Luxembourg is just around the corner' - has provoked angry protests by the German Finance Ministry to the Luxembourg government, which has demanded that the banks are brought to heel. The Luxembourg authorities have replied that their attempts at moral persuasion have so far had little effect.