New developments on the VAT directive have brought German legislation a step closer to properly accommodating domestic true sale vehicles. A circular published by the German Ministry of Finance confirms that the receivables purchaser is not liable for VAT incurred by the seller in the origination of the receivables.

According to analysts at Deutsche Bank, under the VAT Act enacted at the beginning of this year, the purchaser of receivables may be held liable for VAT incurred by the seller in the origination of such receivables. At the time, the decision raised concerns on how it might impact potential cash liabilities for German cash securitization SPVs in the case of a seller's insolvency. The new tax guideline released at the end of May indicates that the VAT Act will not apply to transactions in which the seller retains the servicing functions. For transactions employing a third-party servicer, however, the purchaser/SPV will be liable to pay the VAT if the purchase price for the receivables is less than their nominal value and has not been paid at a prior date.

"There has been a significant effort to get true sale SPVs established in Germany but a number of tax and legal roadblocks have stopped issuers every step of the way," said one source familiar with the situation. "This achievement has certainly been an issue in the past, and I think now one of the last hurdles that needs to be resolved is the VAT issue as it pertains to

the servicer. There is some uncertainty on whether a fee is to be levied on the servicing of the transaction that would constitute a significant cost element for SPV structures going forward."

A question of timing

It's clear that a true sale outbreak on German soil is bound to happen, but market sources are less inclined to offer up a timeline. Last year, efforts to bring together the True Sale Initiative (TSI) were followed by perhaps overly optimistic predictions that German-based true sale structures would start infiltrating the market. But several delays in legislation have significantly slowed the process. Germany must first clear up all roadblocks before a true sale boom manifests.

The German TSI was successful in incorporating its True Sale International GmbH earlier this year (see ASR 5/17). Although the issuing platform should be completed by the end of this month, it's not certain when the market can expect to see the first deal emerge. Also in development is a new SPV-project via ABN AMRO that has seen some progress in recent weeks.

ABN's structure aims to allow European financial institutions to sell assets into domestic special purpose vehicles funded through ABS. In late May, it received proper authorization from the German regulator, BaFin, so that the structure would not require a banking license under the German banking law. "We submitted applications with BaFin in order to get a view that the structure would not fall under banking regulations, particularly in regard to insolvency rules that would have otherwise made it difficult to do securitizations," said one spokesperson at the bank.

The SPV structure is flexible with respect to the purchasing of various asset classes, including corporate, mortgage and consumer loans. It takes advantage of recent tax changes in Germany, providing trade tax exemption for securitized bank assets. Like TSI, ABN's SPV project is designed to be used for multi-issuance. A source said the structure could allow German issuers with non-German subsidiaries or assets access to the true sale market. He added that while True Sale International plans to be more focused on RMBS and

SME loans, the ABN SPV plans to complement this by focusing on consumer loans and corporate

loan receivables.

The structure has not yet been incorporated into a German company. "Some market participants have made the mistake in the past to predict when the market will exactly take off. It's not a mistake we want to make," said the source. "It's clear that the overall effort is to promote true sale deals but we have yet to clear all the necessary roadblocks."

But securitization happens anyways

The lack of a satisfactory framework to promote true sale deals doesn't mean German issuers have been inactive all this time. While synthetic issuance has dominated volume, a number of true sale deals have been underway. ABN said its Frankfurt-based securitization group has been executing deals over the past five and a half years via

foreign SPVs.

In some of these deals, note proceeds are used to make a loan to the SPV, which then uses the loan amount to buy the receivables from the originating subsidiary. The receivables, therefore, become the property of the SPV, and act as security for the notes. These companies typically employ a dedicated senior-ranking cash reserve account large enough to cover trade tax risks. The GACC Securitization 2004-1 issued by CC Bank earlier this year employed a structure not subject

to trade tax.

"The reason that this structure has been deemed not subject to trade tax is that the receivables held by the Irish trustee are only held in trust'," explained analysts at Merrill Lynch. "The relationship between the Irish trustee and the originator is only a trust relationship, meaning that the assets (receivables and titles) are held for the benefit of the originator. Therefore, for accounting and tax purposes, the assets remain on the balance sheet of the originator and there has been no sale. As such, there is no potential trade tax liability arising from a sale."

The structure was specifically tailored to the originator's need but could be modified to apply to other non-bank originators going forward. This, said analysts, would take the heat off of the trade tax liability issue on non-bank originated receivables.

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