The German government has released a draft statute that would amend various provisions of German tax law, particularly with regard to smaller businesses (Kleinunternehmerfrderungsgesetz). The draft includes provisions that clarify certain tax issues affecting securitizations in Germany.
The trade tax (Gewerbesteuer) treatment of special purpose entities used in true sale securitizations has been a major issue. Although offshore SPEs have not yet been subjected to German trade tax in practice, there has always been a certain risk that German tax authorities could assess trade tax against them, causing rating agencies to request coverage for the risk in many securitizations.
The draft now expressly excludes SPEs from trade tax if their business is exclusively the direct or indirect purchase of loan receivables (Kreditforderungen), bills of exchange (Wechsel) or guarantees from credit institutions licensed under the German Banking Act (Kreditwesengesetz). It also excludes certain other public agencies listed in the Trade Tax Act by way of true sale or synthetic transactions when the SPEs refinance these activities by issuing securities or taking out loans from such institutions.
Unfortunately, the draft statute has not removed the uncertainty with regard to SPEs that purchase trade receivables from companies that are not credit institutions. The draft statute is intended to take effect retroactively to Jan. 1, 2003. In the published background materials to the draft statute, the Federal Ministry of Finance states that the clarification about the trade tax treatment of certain SPEs will not affect actual tax revenues, indicating that the clarification may also guide the German tax authorities in their treatment of such SPEs for previous years.
Although the Christian Democratic opposition, which controls the second chamber of the German legislature, has expressed serious concerns about other tax reforms proposed by the German government, they have not yet raised concerns about this particular proposed statute, so there is a chance that the statute could be passed in the next few months.
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