11. Income Taxes

In December 2004, the German government enacted new tax legislation (“Gesetz zur Umsetzung von EU-Richtlinien in nationales Steuerrecht und zur Änderung weiterer Vorschriften”) effective January 1, 2005. This legislation does not include any significant changes, which are of relevance for the Company. Therefore the effect of this and other changes in tax laws on the Consolidated Statements of Income in 2004 was not material.

The effects of the German tax law changes that were enacted prior to 2004 are as follows: New tax legislation enacted in December 2003, and effective January 1, 2004, did limit the exemption from tax for domestic dividends and certain gains from the sale of shares in affiliated and unaffiliated companies. Beginning January 2004, only 95 % of such dividends received and gains realized are tax-free while 5% are treated as nondeductible expenses. The impact of this tax law change in the Consolidated Statements of Income 2003 was not material.

Income before income tax, minority interest and extraordinary gain (see Note 12) consists of the following:

The effective income tax rate for the years ended December 31, 2004, 2003, and 2002, was 36.5 %, 39.0 % and 53.8 % respectively. The following table reconciles the expected income tax expense computed by applying the Company’s combined German corporate tax rate of 36.20 % in 2004 (2003: 37.71 %; 2002: 36.39 %) to the actual income tax expense. The Company’s 2004 combined German corporate tax rate includes a corporate income tax rate, after the benefit of deductible trade tax, of 21.66 % (2003: 22.91 %; 2002: 21.60 %) plus a solidarity surcharge of 5.5 % thereon and trade taxes of 13.35 % (2003: 13.54 %; 2002: 13.60 %).

On December 31, 2004, certain foreign subsidiaries of the Company had net operating loss carryforwards amounting to €65,907 thousand (2003: €90,854 thousand), which may be used to offset future taxable income. Of this amount €19,129 thousand relates to state net operating loss carryforwards in the United States, of which €17,299 thousand expire during the years 2021 and 2024, if not used earlier. The remaining amount is available to be used to offset state taxable income, if any, over the next 16 years. Further €18,950 thousand relates to other net operating loss carryforwards that will expire if not used within three to seven years. The remaining €27,828 thousand relates to other net operating loss carryforwards that do not expire and therefore can be utilized indefinitely.

Deferred tax assets as of December 31, 2004 and 2003, relating to net operating loss carryforwards have been reduced by a valuation allowance of €1,448 thousand and €1,504 thousand, respectively, to a net amount that management believes is more likely than not to be realized.

The decrease of this valuation allowance in 2004 from €1,504 thousand to €1,448 thousand is mainly caused by currency effects.

The Company recorded tax liabilities of €3,240 thousand (2003: €872 thousand) for taxes on future dividend distributions from foreign subsidiaries, which is based on €179,000 thousand (2003: €48,000 thousand) of cumulative undistributed earnings of those foreign subsidiaries because such earnings are intended to be repatriated. The Company has not recognized an income tax liability on €1,824,340 thousand (2003: €1,716,116 thousand) of undistributed earnings of its foreign subsidiaries that arose in 2004 and prior years because the Company plans to permanently reinvest the undistributed earnings. It is not practicable to estimate the amount of unrecognized tax liabilities for these undistributed foreign earnings.

Total income taxes for the years ended December 31, 2004, 2003, and 2002, including those not affecting the Consolidated Statements of Income (charged or credited to Other comprehensive income) were allocated as follows:

See Note 22 for the income tax impact of the components Accumulated other comprehensive income.