Court’s Order on Taxes Zaps German Shares

Shivers went through German financial markets Friday on concern that the government will tighten its tax grip on investment earnings in a response to a ruling by the Federal Constitutional Court.

German share prices slumped more than 2.5% to a five-week low. The DAX average of 30 blue chips fell 43.91 points to 1,622.18. German mark and bond prices also fell sharply.

The constitutional court ruled Thursday that Germany must introduce efficient controls on investment earnings by 1993 to ensure that all taxpayers are treated equally.

Bankers, recalling the government’s ill-fated decision of 1987 to introduce a 10% withholding on investment income, saw the possibility of a new exodus of German capital.

Bankhaus Bethmann’s chief currency dealer Werner Bauer said, “Traders are selling the mark because they think investors are going to take their money abroad.”

The Finance Ministry has ruled out a repetition of the withholding tax fiasco, and on Friday Finance Minister Theo Waigel again moved to calm nervous investors.

“Savers and suppliers of capital can rely in the future on favorable basic conditions on the German capital market,” he said in a statement released in Bonn.

In a bid to ensure that the small saver does not suffer unduly from any effects of the court’s ruling, the government has pledged a substantial increase in the ceiling for interest income that Germans can receive free of tax.

But bankers remained worried that, by ruling out a withholding tax, the government may have to bite into Germany’s banking secrecy laws.

“This is extremely negative news,” said Citibank trader Martin Wiedmann.