M&A advisers in the Netherlands and Germany are banking on a further upturn in commercial activity as both countries gear up to slash corporate taxes to attract foreign investment.

The moves – which have been received as a direct response to European Union (EU) enlargement – will see dramatic cuts in headline corporate tax rates in both countries, which fear losing investment to lower tax EU nations.

Corporate tax in the Netherlands will be cut from 29.6% to 25.5% from 1 January, 2007, which will establish the country as one of Western Europe's lowest tax jurisdictions.

Draft legislation was published by the Netherlands' ministry of finance in May this year after a lengthy consultation. While tax lawyers have already reaped the rewards as companies seek to exploit the tax shake-up, corporate partners are confident that the cuts will attract more foreign companies and bolster corporate activity.

Linklaters Amsterdam-based corporate partner Peter Goes said: "The intention is to stop a lot of the business we have here leaving for places such as Luxembourg, where they have a more generous tax regime, and hopefully encourage more foreign investment."

The Dutch move comes amid a period of mounting tax 'com-petition' within the EU in the wake of enlargement in 2004 and the dramatic economic expansion of Ireland after it slashed corporate taxes to 12.5%. NautaDutilh head of tax Chris Warner said: "Dutch tax rates will be now be even more competitive compared with others in Western Europe. It is definitely a beneficial move for tax advisers and lawyers in the Netherlands."

The Dutch shake-up comes as Germany's ruling coalition announced plans last week (2 November) to dramatically cut corporate tax from 38.7% to about 29% from 1 January, 2008.

The move from Europe's largest economy marks a major shift by the administration of German Chancellor Angela Merkel, who has warned of a "race to the bottom" of EU tax rates as a response to enlargement.