Observation from Kurt Dittrich ofLinklaters Oppenhoff & Rdler
The German Finance Minister, Hans Eichel, has announced plans to clarify a tax issue that has negatively affected securitizations of bank receivables in Germany. Until now it was unclear whether foreign special purpose vehicles (SPVs) that purchase receivables originating from bank loans in securitization transactions are subject to trade tax (Gewerbesteuer) in Germany.
The German tax authorities had not taken a clear view whether or not companies (including banks) in their capacity as servicers of securitized receivables constitute a place of management or a permanent establishment (Betriebssttte) of the SPV in Germany resulting in a trade tax liability of the SPV in Germany. Although several internal meetings were held among the relevant tax officers, they could not agree on a resolution, and so the issue remained unresolved. Some tax officers argued that the servicer provides the day-to-day management of the SPV, so the servicer qualifies as a place of management (Geschftsleitungsbetriebssttte) or other permanent establishment in Germany.
This view was heavily disputed in German legal writing. Given the internal controversial discussions among tax officers, there was an order not to issue binding rulings if approached by a taxpayer. The situation was only mitigated by an unofficial statement by the Federal Ministry of Finance (MoF) pursuant to which the "mere" servicing by a German servicer does not constitute a permanent establishment of an SPV in Germany. Due to the uncertainty on this issue in Germany, the rating agencies took the view that a provision for the trade tax risk should be made for securitizations involving a foreign SPV and a German servicer.
In Germany, after corporate income tax, trade tax is the most important income tax levied on companies. Trade tax is due on any business carried on in Germany, whether by a resident or a non-resident. A business is deemed to be "carried on" in Germany particularly if the taxpayer has a permanent establishment in the country.
Trade tax is a local tax, the rates of which depend on the municipality in which the business is located. Because trade tax on income is deductible both from its own base and for corporate income tax purposes, effective rates generally range from 11% to 19%. Trade tax is based on the taxable income computed for corporate income tax purposes, as adjusted by certain add-backs and deductions.
The most important add-back in the context of securitizations is the add-back of 50% of the interest payable on "long-term debt" (Dauerschulden), i.e. debt with a term of at least one year. Interest payable on the financing raised by the SPV would often qualify as interest on long-term debt with the result that 50% of the interest would be added back when calculating the basis for trade tax of the SPV. This means that an SPV, if deemed to be resident in Germany, would be subjected to a significant trade tax burden although it may not have a significant profit.
Credit institutions licensed under the German Banking Act ("Kreditwesengesetz") are exempted from the aforementioned add-back of interest under long-term debt in accordance with Section 19 of the German Trade Tax Ordinance ("Gewerbesteuerdurchfhrungsverordnung") if certain criteria are met.
The MoF press release announced a plan to amend Section 19 of the German Trade Tax Ordinance so that SPVs buying loan receivables from banks in securitization transactions will be treated like the originator banks, i.e. will be exempted from the add-back.
According to the MoF, this move aims to expand the range of financial instruments available to the German banking sector - in particular, to facilitate the financing of mid-cap ("Mittelstand") companies; to further strengthen the appeal of obtaining corporate financing via the capital markets compared to traditional financing through loans; and to broaden the spectrum of financing facilities available in Germany.
The MoF expects that the amendment will further strengthen Germany as a financial center, given the fact that in other countries considerable funds are already being raised by way of securitization. According to the MoF, the initiative is specifically designed to help small to medium sized companies that, due to their size, are generally unable to raise finance directly through the capital markets. MoF expects that it will broaden the scope of banks in order to provide financing to such companies.
However, the MoF press release only refers to bank loan securitizations. As a consequence, the uncertainty remains whether SPVs purchasing receivables from German corporates - which then service these receivables - will be subject to German trade tax. German corporations will, therefore, only indirectly benefit from the amendment of the Trade Tax Ordinance as a result of changes that the banks might make in their credit policies. Banks may be more willing to consider "true sale" transactions instead of synthetic (derivative) transactions in order to securitize their loans.