Six months after its introduction, the German tax policy that lets industry leaders sell company cross-holdings tax-free has yet to find many takers, writes Derek Scally, from Berlin

It was meant to be Germany's sale of the century but the customers have stayed away in droves and, for once, the euro isn't to blame.

The customers are the German industry leaders who rejoiced when the German government decided to let companies sell their cross-holdings in each other tax-free from this year. But six months on, few are interested in getting their piece of what was dubbed the biggest tax giveaway in German history.

The tax policy heralded as the death-knell for the cosy world of German business known as Germany Inc has flopped.

Germany Inc is a staid but sturdy institution and rumours of its demise are as frequent as they are exaggerated. The most recent obituary was written last year when Germany's third-largest bank, Dresdner, disappeared from the stock market, swallowed in a €12 billion takeover by insurance giant Allianz.

"Our merger is a very important step toward the dismantling of Germany Inc," said Dresdner chairman Mr Bernd Fahrholz at the time, referring to the half-century tradition of Germany's banks and insurance companies having cross-holdings in each other.

The system of overlapping interests, where the companies worked together for the common good, had served its purpose as the driving force behind Germany's post-war economic miracle. But in an age of globalisation and consolidation, the system was dismissed as out of step and a hindrance to growth. Then Mr Hans Eichel, the finance minister, cut corporate tax to 25 per cent and abolished capital gains tax for sales of company cross-holdings from January 2002.

Until then, the difference between sale and book value would have been fully taxed at 45 per cent. Dividends paid from after-tax profit would have been taxed yet again. Companies called it a punitive situation that forced them to sit on their investments.

The new policy was supposed to change all that. Last year, Allianz chairman Mr Henning Schulte-Noelle said the prospect of tax-free profits from the sale of shareholdings would have a knock-on effect in Germany. The Dresdner-Allianz merger would "release new energies that are just waiting for a chance to unfold", he said.

The Frankfurter Allgmeine Zeitung newspaper agreed, predicting in a headline a year ago: "Germany Inc is about to unravel amid corporate tax reform." But a study for the German newspaper Welt am Sonntag has shown that cross-holding sales have actually dropped, not risen, in the first six months of this year.

In the first six months of 2001 there were 1,005 sales of cross-company holdings in Germany worth more than €114.2 billion. In the same period this year, there were just 323 sales with a total value of €51.4 billion, a drop of more than 50 per cent.

"The possibility to sell cross-holdings tax-free has yet to lead to a wave of disposals," admitted Mr Hans Reckers, board member of the German Bundesbank. "Above all, the weak economy and the poor showing on the capital markets are to blame," he said.

Mr Christopher Dill, manager of mergers and acquisitions analyst A&M, blames the low uptake on the psychological effect of Germany's weak economic situation.

"Businesses would like to sell their shareholdings but they are not going to do it at any price. They're saying to themselves: 'It can't get much worse than this'," said Mr Dill. "They have sat on the shareholdings for 50 years, they can wait a few months more for the economic situation and their shareholding's value to improve."

In common with firms around the world, German firms are preoccupied now with cost-cutting and restructuring. But they may look again at the value of their shareholdings later in the year once things settle down, Mr Dill predicted.

The only firms bucking the trend are financial institutions, which planned well in advance and found a buyer willing to pay a price acceptable to both sides. Deutsche Bank recently earned €1.5 billion by reducing its stake in Allianz from 4 per cent to 3.66 per cent and its shareholding in Müncher Rück from 7.2 to 4.94 per cent. But compared to the value of its remaining cross-holdings, the value of the deals is minuscule.

"The taxes alone don't make a good deal out of a bad deal," said Mr Alexander Dibelius, German head of US investment bank Goldman Sachs. He is in favour of the tax-free deal but said "a purchasing decision will never depend on the tax benefits alone".

After a slow start, this particular tax benefit may have a short life. Mr Edmund Stoiber, the conservative challenger hoping to unseat Chancellor Schröder in September, has made no secret of his plans to reinstate the cross-holdings tax if elected.

For German companies who have sat on their shareholdings in other firms, that would put a stop to Germany's sale of the century before it even started.