Corporate tax in Germany will fall from 39 per cent to just under 30 per cent after a major tax reform was approved yesterday by the upper parliamentary chamber, the Bundesrat.

The new tax rate, effective from January 1st next, puts Berlin - a long-time critic of Ireland's low corporate tax regime - into the EU tax middle ground. Until now, its corporate tax rates were around 25 per cent higher than the EU average.

"This is an investment in Germany as a business location," said Social Democrat (SPD) finance minister Peer Steinbrück. "In particular, it aims to strengthen the tax base and makes domestic and foreign investments more attractive."

The new tax bill introduces a 25 per cent capital gains tax from 2009, replacing the current practice of taxing gains at income tax rates of up to 42 per cent. It's a move the government hopes will end the common practice of taxable income being transferred to countries with lower tax rates.

The radical tax reform is one of the more ambitious and, in its implementation, successful projects of the coalition government of Social Democrats and Christian Democrats.

It only passed the lower house, the Bundestag, in May after huge political wrangling. Left-wing MPs from Mr Steinbrück's SPD said the tax cuts unfairly benefitted well-off business people.

Business leaders complained that the reform complicated rather than simplified Germany's already labyrinthine tax law and thus made the country less attractive as a business location.

Christian Democrat (CDU) politicians rejected that criticism yesterday. "Cut company taxes and you make an important step to making a country more attractive for investment," said Roland Koch, CDU state premier of the state of Hesse, home to Ger-many's financial capital of Frankfurt. "That the one or the other company may quibble over a loss of tax breaks is no reason to reject the law," he added.