Source: https://iclg.com/practice-areas/securitisation-laws-and-regulations/germany
Timestamp: 2019-02-19 03:48:08
Document Index: 156506208

Matched Legal Cases: ['§ 354', 'Art. 3', 'Art. 3', 'Art. 43', 'Art. 21', 'Art. 9', 'Art. 14', 'Art. 14', 'Art. 14', 'Art. 14', 'Art. 14', 'Art. 14', '§ 433', '§ 398', '§ 1192', '§ 406', '§ 354', '§ 354', '§ 354', '§ 354', '§ 305', '§ 130', '§ 131', '§ 132', '§ 133', '§ 133', '§ 133', '§ 133', '§ 134', '§ 133', '§ 130', '§ 131', '§ 131', '§ 130', '§ 132', '§ 138', '§ 138', 'Art. 405', 'Art. 406']

Securitisation 2018 | Laws and Regulations | Germany | ICLG
Home Practice area Securitisation Germany
Securitisation 2018 | Germany
As a matter of German law, a receivable arises from the underlying contract between the seller and the debtor. Certain types of contract and the conclusion of certain contracts with certain counterparties (such as consumers) are subject to a requirement of form, e.g., need to be in writing or comply with further requirements. However, German law does not stipulate a general form requirement on contracts. More particularly, for the sale of goods or the provision of services between merchants, there are normally no specific form requirements to comply with. Where no form requirements apply, a contract may be concluded orally or also by conclusive behaviour. In practice, however, written form is invariably used as evidence for enforcement purposes. An invoice evidences the payment obligation of the debtor, but is neither required, nor sufficient for the receivable to be originated.
German law does not specifically limit permissible interest rates on loans or other kinds of receivables. However, as a general principle of German law, transactions contra bonos mores (sittenwidrig) are void. Hence, a contract providing for interest rates which are considered unethically high may be invalidated. Pursuant to relevant case law, the limit is (as a general rule) twice the market interest rate or about 12% per annum above such market interest rate. This does also apply to consumer loans, but German courts would take the status of the borrower as a consumer particularly into account. Further, with respect to consumer loans the lender must meet certain information and documentation requirements in order for the specification of the interest rate to be effective.
In case of a payment default (Verzug), German law provides for a statutory default interest rate on unpaid principal equal to the base rate (Basiszinssatz) plus 5% per annum. The applicable base interest rate is published by the German Central Bank (Deutsche Bundesbank). In case of receivables (not loans) and if the obligor is not a consumer, a base rate of 9% per annum applies. Under German law, the parties can generally not agree in advance to pay compound interest (Zinseszins).
Consumer loans (and transactions closely connected to consumer loans) are subject to special consumer protection rules. In particular, the lender is obliged to disclose, in writing, important information about the loan directed to support the consumer to understand its future payment terms. Additional disclosure obligations apply with regard to consumer real estate loans, i.e., inter alia, a possible assignment of the loan without the borrower’s consent. In case the lender does not fulfil such disclosure obligations, enforcement issues may arise. Further, such consumer protection rules entitle the borrowers to revoke the loan within 14 days from the day on which they entered into the loan.
Borrowers may generally terminate loans at the end of any fixed interest period, in case such interest period expires prior to the maturity of the loan and no new rate of interest has been agreed to by the parties. In addition, borrowers may terminate loans with six months’ prior notice at the end of the tenth year of the disbursement date of the loan. Further, the borrower of a floating rate loan has a statutory termination right entitling it to, generally and depending on the type of floating rate loan, terminate either with one month’s prior notice at the end of each interest period, or with three months’ prior notice.
Additional consumer protection laws apply where loans and related transactions are entered into at the residence of the consumer, by means of long distance communication or on the basis of general business conditions.
There are no special requirements and rules for the sale or collection of receivables under receivables contracts entered into with the government or a government agency. If the public-sector debtor is a legal person under public law, § 354a HGB (see question 4.4 below) will always apply so that a contractual prohibition on assignments for the benefit of such debtor is always overcome. Tax credit and similar claims are subject to specific assignment limitations and notice requirements, and the German tax authorities can enforce previously assessed taxes without first obtaining an enforceable court judgment. Enforcement against public law debtors follows certain special rules and is subject to certain limitations.
Unless the parties have made an (explicit or implicit) choice of law in the receivables contract, pursuant to Regulation (EC) No. 593/2008 on the law applicable to contractual obligations (Rome I Regulation), the contract is governed by the laws of the country to which it is most closely connected. Several presumptions are set out in the Rome I Regulation in order to identify such relevant country. If these presumptions do not apply or lead to ambiguous results, the contract shall generally be governed by the law of the country where the party required to effect the characteristic performance of the contract has his habitual residence. However, if the contract is manifestly more closely connected with another country, the law of that other country shall apply. In case of carriage contracts, consumer contracts, insurance contracts and individual employment contracts more specific provisions of the Rome I Regulation apply.
No, there is no such reason preventing a German court from applying German law in such case.
In these circumstances, a German court will, on the basis of Art. 3(1) Rome I Regulation, typically give effect to the choice of the non-German law of the jurisdiction of the obligor or the seller, respectively.
This is subject to certain limitations, such as that the effect of a choice of law under Art. 3(1) Rome I Regulation is limited to contractual rights and obligations and has no effect with respect to other legal issues such as dispositions (e.g., transfers or pledges) of in rem rights (cf. Art. 43 of the Introductory Act to the German Civil Code (EGBGB)) and may not be upheld as a valid choice of law by the courts of Germany if any contractual obligation arising is outside the scope of the Rome I Regulation. Further, German courts may refuse the application of a provision of the law of the seller/obligor chosen if such application is manifestly incompatible with the public policy (ordre public) of Germany (Art. 21 Rome I Regulation) or if the law was chosen intentionally in order to avoid the application of mandatory German law provisions which is, however, unlikely to be the case if the law of the seller or the obligor is chosen due to the factual connection of the seller and the obligor to such jurisdiction. Moreover, giving effect to the choice of non-German law will not restrict German courts from applying overriding mandatory provisions of German law (Art. 9(2) Rome I Regulation) and overriding mandatory provisions of the law of the country where the obligations arising out of the receivables contract are to be performed.
No, German law does not require the sale of receivables to be governed by the same law which governs the receivables. Rather, the freedom of choice of law under the Rome I Regulation also applies to a contract on the sale of receivables. Hence, the seller and the purchaser may, subject to the general limitations applying to the choice of law (see question 2.3 above), freely choose the law governing the sale of receivables.
Moreover, as German law distinguishes between the (contractual) sale of the receivables and the in rem transfer (i.e., the property aspects) of the receivables, it is noteworthy to clarify that such freedom to choose the governing law extends, as explicitly provided for in Art. 14(1) Rome I Regulation (together with recital 38), to the in rem transfer.
However, in order to take into account the interests of the debtor, the choice of law is limited by Art. 14(2) Rome I Regulation, pursuant to which the law governing the receivables shall determine its assignability, the relationship between the assignee and the debtor and the conditions under which the assignment can be invoked against the debtor and whether the debtor’s obligations have been discharged. Further, the freedom of choice of law under the Rome I Regulation may arguably not extend to the enforceability of the sale/assignment against third parties, the question of which is, as per the prevailing opinion under German law, not addressed in the Rome I Regulation. Consequently, it is disputed which laws are relevant for this question. In application of general German conflict of law rules and case-law, a prevailing opinion points to the law governing the receivables on this question. Other authors favour the law chosen in accordance with the Rome I Regulation or the law of the seller jurisdiction. A minority view points to the law of the debtor jurisdiction in this regard.
A court in Germany will, as a matter of German law, recognise such sale as being effective against the seller, the obligor and other third parties.
For the sale and transfer by a German seller under German law of a German law governed receivable, German courts will, as a rule, not have regard to foreign law requirements of the obligor’s country or the purchaser’s country (or both). Hence, a court in Germany will, as a matter of German law, generally recognise such sale as being effective against the seller, the obligor and other third parties. One limitation is that, under German conflict of law rules, it is disputed how the third party effect is to be determined and a minority opinion points to the debtor jurisdiction (see question 3.1 above).
Subject to the limitations applicable to the choice of law (see question 2.3 above), a German court will generally uphold the choice of law of the obligor’s country to govern the receivables purchase agreement (such choice also extending to the in rem aspects between the seller and the purchaser in accordance with Art. 14(1) Rome I Regulation) and, as the sale complies with the requirements of the law of the obligor’s country, recognise the sale and transfer as being effective between the seller and the purchaser.
On the third party effect, if a German court applied the requirements of the law of the obligor’s country to also govern this question – either by applying the traditional (i.e., before the enactment of the Rome I Regulation) German law view (which pointed to the law governing the receivable) or by extending the scope of the choice of law under Art. 14(1) Rome I Regulation to this question – there would be no need to comply with German law requirements. However, if the German court applied the law of the seller’s jurisdiction to this issue (as suggested by certain authors, see question 3.1 above), it would only recognise the sale and transfer as being effective vis-à-vis third parties if German law requirements are also complied with.
A court in Germany would consider such sale as being effective against the seller, the obligor and other third parties, because, as described in question 3.1 above, the law of the seller’s jurisdiction would apply to all such questions only provided that the minority view pointing to the law of the obligor’s jurisdiction for determining the third party effect would require German law requirements to be complied with.
Assuming that German law requirements are complied with, a court in Germany will consider such sale as being effective against the seller, the obligor and other third parties. This is because the German court will, with respect to the relationship between the seller and the purchaser, apply the law chosen by the seller and the purchaser (pursuant to Art. 14(1) Rome I Regulation) and the requirements of such law are complied with. Further, the German court will, vis-à-vis the obligor, apply German law (in accordance with Art. 14(2) Rome I Regulation) and, with respect to the third-party effect, also apply German law (as the law governing the receivable or of the seller’s jurisdiction) or the law chosen between the seller and the purchaser – all of which laws are complied with. With respect to the third-party effect, the minority view pointing to the obligor jurisdiction might again stipulate requirements of such jurisdiction here.
German law distinguishes between the law of obligations (Schuldrecht) and property law (Sachenrecht). Further, pursuant to the so-called “abstraction principle” (Abstraktionsprinzip), which is a fundamental principle of German private law, the obligations of the parties under the law of obligations (such transaction referred to as the “underlying transaction” – Verpflichtungsgeschäft) and the title transfer effected by a party in order to fulfil its respective obligation (such transactions referred to as the “implementing transactions” – Verfügungsgeschäfte) form separate transactions which are to be considered independently. The Rome I Regulation describes such a concept in its recital 38, as the “separate treatment of property aspects from the aspects under the law of obligations”. Consequently, a sale of receivables under German law involves, from a legal standpoint, the following transactions: first of all, the sales contract under which the seller undertakes to sell, and the purchaser undertakes to purchase, the receivables, the transfer of title to the receivables by the seller to the purchaser and, strictly speaking as a third transaction, the transfer of the purchase price by the purchaser to the seller. Under German legal terminology, a sales contract constitutes a Kaufvertrag within the meaning of § 433 of the German Civil Code (Bürgerliches Gesetzbuch – BGB) and the transfer of title to the receivables is effected by way of an assignment (Abtretung) within the meaning of § 398 BGB. Among many other possibilities, one wording reflecting these separate transactions (which is, however, not necessary in order to create binding obligations), would be: “the seller sells (verkauft) and assigns (tritt ab) the receivables”.
Strictly speaking, under German law no concept of a perfection of a sale exists, the closest equivalent being the effectiveness of the assignment (see question 4.1 above) and, in order for the assignment to be effective, the mere agreement between the seller and the purchaser on the assignment is generally sufficient. Giving notice of the assignment to the obligor is not legally required. However, if the obligor is not notified of the assignment, the obligor may continue to be entitled to raise certain objections (see question 4.4 below). German law generally does not recognise a good faith acquisition of receivables.
Promissory notes in other jurisdictions are often compared to German law Schuldscheine (certificates of indebtedness). A Schuldschein evidences an underlying loan agreement but does not constitute a security (in a sense of a transferable debt instrument) as a matter of German law. Schuldscheine are transferred by assigning the underlying loan claim and, hence, no additional or different requirements apply to their assignment (unless provided otherwise in the instrument). As a practical matter, the purchaser requires delivery of the debt certificates with regard to the assignment of the underlying loan.
Security interest on German real property can be granted in the form of either (i) an “accessory” mortgage (Hypothek) (mortgage), or (ii) a “non-accessory” land charge (Grundschuld) (land charge). Both kinds of security interest can be granted either in certificated or in non-certificated form. Mortgages have no practical significance.
A land charge can be transferred by written assignment of the land charge and, as applicable, (i) in the case of a certificated land charge, delivery of the land charge certificate, or (ii), in case of a non-certificated land charge, registration of the transfer with the competent land register. According to § 1192(1a) BGB, defences to which the owner is entitled with regard to the land charge on the basis of the security purpose agreement with the previous creditor, or which emerge from the security purpose agreement, may also be imposed on any assignee of the land charge.
Most land charges in Germany nowadays, are in non-certificated form. The required registration of the transfer with the land register may trigger significant costs. Further, a seller may want to avoid a registration with the land register in order to prevent the obligors from obtaining knowledge of the sale. Therefore, the seller sometimes holds the land charges as a trustee for the purchaser. However, whether such trust agreement will be recognised in case of insolvency of the seller is not clear. For that reason, the German Banking Act (Kreditwesengesetz – KWG) contains special provisions for refinancing register transactions which allow for the creation of insolvency remote trust arrangements.
Unless a seller shall continue to exclusively deal with the relevant consumer borrower, such seller is generally obliged to notify the consumer borrower of an assignment (providing certain details).
Bearer securities are transferred by way of an agreement between the seller and the purchaser to transfer ownership and the delivery of the securities to the purchaser. Registered securities are transferred by way of assignment of the rights evidenced by them. Instruments made out to order are transferred by an agreement between the seller and the purchaser to transfer ownership, endorsement and delivery of the instrument to the purchaser. To the extent that debt securities are certificated in global form and deposited with a clearing system, delivery of the securities is evidenced by a corresponding book-entry.
In order for the sale/assignment to be effective against the obligor and/or creditors of the seller, it is not legally required that the obligor is notified of the assignment (silent assignment). However, prior to a notification of the assignment to the debtor (and also, but generally speaking to a lesser degree, where the obligor was previously notified) statutory debtor protection provisions apply which give the debtor, inter alia, a set-off right in relation to claims it has against the assignor. In addition, the purchaser will be subject to any amendments of the underlying receivables contract or other transactions relating to the receivable, such as a waiver or deferral of payments entered into by the seller and the obligor. Furthermore, prior to a notification, the debtor may fully discharge its payment obligation by way of payment to the assignor. In practice these risks can be mitigated to a certain extent by introducing mandatory debtor notifications upon the occurrence of certain trigger events (such as an originator rating downgrade) and/or dilution reserves.
However, even where the obligor was previously notified, it may generally raise against the purchaser all the objections it had against the seller at the time of the sale. Where the sold receivable is a consumer loan, the seller generally has an obligation to notify the consumer of the assignment and to provide certain information about the purchaser; any violation of such obligations does not affect the effectiveness of the sale and assignment of the receivable, but may entitle the consumer to claim damages.
Where the obligor was not notified (and is not otherwise aware) of the assignment it may, in such a scenario, satisfy its obligations vis-à-vis the purchaser by making payment to the seller. Furthermore, under § 406 BGB, an obligor may set off against the assignee an existing claim which the obligor has against the assignor. An obligor cannot, however, effect such set-off where (a) the obligor knew of the assignment at the time of acquiring its claim against the assignor, or (b) where such claim of the obligor (i) did not become due until after the obligor had acquired such knowledge and (ii) matures after the claims of the assignee. On this basis, even where the obligor is aware of the assignment where either (a) it acquired its counterclaim against the seller before it obtained such knowledge, or (b) such counterclaim against the seller is due before the receivable owed by the obligor is due, it may continue to offset the assigned receivable against its counter-claim against the seller.
Accordingly, although the notification of the assignment of a receivable to the obligor is not required for an effective assignment of a receivable under German law, such notification has the benefit (from the purchaser’s perspective) of preventing the obligor from being able to raise certain objections and exercising certain rights it may have against the seller vis-à-vis the purchaser.
Receivables governed by German law can generally be sold and assigned without the consent of the obligor, except where the underlying receivables contract contains a prohibition on assignments. Such a prohibition will usually be explicit, but can also be implied in the underlying receivables contract. According to a 2007 decision by the German Federal High Court (Bundesgerichtshof – BGH), neither German data protection laws nor general bank secrecy obligations constitute an implied prohibition on assignment. However, according to a 2013 decision of the German Federal High Court, an implied prohibition on assignments does exist where the confidentiality of the data to which the receivables in question relate is protected by criminal law (e.g., a doctor’s patient data); accordingly, a valid assignment of any such receivables requires the obligor’s consent.
Under certain circumstances and if the purchaser is prepared to assume a certain amount of additional risk, a securitisation of receivables containing a prohibition of assignment clause is also possible without consent if the requirements of § 354a of the German Commercial Code (Handelsgesetzbuch – HGB) are satisfied. Pursuant to § 354a(1) HGB, a receivable can be validly assigned despite any contractual prohibition of assignment if (i) the underlying agreement between the contracting parties constitutes a commercial transaction (Handelsgeschäft) for both parties, or (ii) the debtor is a public law entity (juristische Person des öffentlichen Rechts) or a separate estate governed by public law (öffentlich-rechtliches Sondervermögen). Please note that there are exceptions to this rule for (loan) receivables where a credit institution is the creditor, i.e., in such case any assignment without the contractually required consent would be void (§ 354a(2) HGB). Although an assignment of receivables with prohibition of assignment clauses can be valid pursuant to § 354a(1) HGB, some additional risks exist because the underlying debtor will always be entitled to effect a payment with discharging effect to the assignor, even in cases where the underlying debtor has been notified of the assignment.
Pursuant to German law, as described in question 4.4 above, there is generally no need to notify the obligor of the assignment in order for the assignment to be effective, but a notification may exclude certain defences and counterclaims of the obligor. There are generally no specific form requirements regarding the notice. However, specific requirements may be contractually agreed or may apply, in specific circumstances, by statutory law.
The first alternative prohibits the transfer of receivables by the seller to the purchaser. In case of the second alternative, the term “agreement” might well be interpreted to include all “rights and claims under the agreement” which would, again, result in a prohibition of assignment. While less likely, the prohibition in the third alternative may also be interpreted (e.g., due to the use of the word “assigned”) to extend to the assignment of rights and claims.
Contracting parties may enter into binding prohibitions on assignments under German law, with the exception that the parties are merchants in respect of commercial transactions (see question 4.4 above). Sellers, in general, will be liable to the obligor for any financial damages in case of any violation of such assignments.
According to German law, the receivables to be sold and assigned must be sufficiently identifiable (bestimmbar). This can be achieved by referring to each sold/assigned receivable specifically (by way of criteria allowing for an unequivocal identification of the relevant receivables, e.g., invoice number, invoice date, debtor, etc.) in a list or email attachment or other electronic submission.
The sale of “all of the seller’s receivables” or the sale of all of the seller’s receivables other than receivables owing by one or more specifically identified obligors would generally also be possible. However, referring to “all eligible receivables” will often be problematic due to the complexity (and, hence, uncertainty) involved in case of complex or extended eligibility criteria.
Generally, a sale and assignment will qualify as “true sale” and will not be recharacterised as a “secured loan” if it is a valid sale and does not contain the creation of a security interest in relation to the receivables which is granted to secure an underlying obligation of the seller vis-à-vis the purchaser.
The “true sale” analysis under German insolvency law requires a more substantive analysis than under English law since, under German law, there exists no specific judicial or statutory authority on the question as to the nature of a “legal true sale”. The prevailing view is to apply the principles that have been established by German courts for distinguishing true or genuine factoring from untrue or non-genuine factoring. Pursuant to German case law, true sale factoring requires that the credit risk relating to the debtor of a receivable must be transferred to the purchaser who must not have the right to take recourse to the seller if such credit risk materialises. For this purpose, it is important that the transaction in substance (substance over form) is structured as a sale and is not recharacterised as a secured loan whereby it is decisive that the purchaser of the receivables can be considered the legal and economic owner of the receivables sold which requires that the purchaser assumes the risk of the underlying debtors defaulting on their payment obligations (transfer of credit risk/del credere risk).
A retention of the credit risk that might affect the true sale treatment can result, in particular, from corresponding repurchase obligations, automatic re-assignments, variable purchase price concepts (discounts), liquidity and/or credit enhancements granted by or on behalf of the seller or a first loss tranche position taken by the seller in the securitisation. However, as a general rule, a seller may retain some part of the credit risk corresponding to historical default rates and enforcement costs without triggering potential recharacterisation risks.
A discount and a deferred purchase price element can be incorporated into the purchase price paid for the relevant receivables without disturbing the true sale nature of the transaction, considering, however, that the discount and/or deferred element must be either reasonable (based on historical default rates plus a certain margin) or (according to a strong view in legal literature) fixed at the time of sale so as not to endanger the removal of the receivables from the transferor’s balance sheet.
It is recognised that a certain limited level of credit enhancement may be provided by the seller but there is no definitive guidance as to what level of retention of credit risk is still acceptable.
The seller can agree in an enforceable manner to a continuous sale/assignment of receivables. However, such agreements will not survive the insolvency of a seller. Hence, the transfer of receivables will not be continued.
Under German law it is possible to assign receivables prior to the time they come into existence (future receivables) by way of a corresponding sale and assignment agreement between the seller and the purchaser. Special care must be taken to ensure that an assignment of future receivables complies with the German principle of specificity (Bestimmtheitsgrundsatz). Pursuant to case-law, this requires for future receivables that, at the time a receivable comes into existence, it is sufficiently identifiable (bestimmbar), i.e., it can be ascertained whether such receivable at such time is covered by the assignment or not (Bestimmbarkeit). If a receivable comes into existence after the opening of insolvency proceedings against the seller, the seller is no longer entitled to dispose of its assets, including by way of a transfer of receivables. In practice, it can be difficult to determine whether or not a receivable actually constitutes a future receivable (e.g., a claim for future rental payments) to which the above rules are applicable, or rather an existing receivable that is not yet due (e.g., a repayment claim under a loan agreement).
To the extent that related security can be transferred by way of mere agreement between the seller and the purchaser, there are generally no additional formalities to be complied with. However, e.g. insurance claims may require the notification to, and sometimes the prior consent of, the insurer in order to be transferred. If inventory or other movable objects are transferred as collateral by way of a security transfer (Sicherungsübereignung) the purchaser needs to obtain at least indirect possession. So-called accessory security interests (akzessorische Sicherheiten) – which are, as a matter of German statutory law, linked to the existence, extent and enforceability of the secured receivable – such as a pledge (Pfandrecht) or a surety (Bürgschaft), are automatically transferred together with the sold receivable.
With respect to any waiver of set-off rights (and of other defences) by the obligor, the enforceability of such waiver needs to be considered. In practice, set-off waivers will often qualify as general business conditions (Allgemeine Gechäftsbedingungen) within the meaning of § 305 BGB in which case the waiver will be ineffective (in its entirety) if it does not contain carve-outs for undisputed claims of the obligor against the seller and such claims which have been determined by non-appealable judgment. The impact of an assignment on the obligor’s defences is subject to protection rules of the BGB (see question 4.3 above). Without prejudice to such statutory protections which may entitle the obligor to set-off against the purchaser, the seller or the purchaser would generally not be liable to the obligor for the termination of the obligor’s set-off rights as a result of the assignment.
Similar to other jurisdictions, inter alia, tax and true sale consequences (the latter generally being more problematic than in other jurisdictions – see question 4.9 above) of the profit extraction method need to be considered. Profit may be extracted, e.g., via equity, subordinated instruments or in the form of certain fees.
It is not customary in Germany to create such back-up security.
It is not customary in Germany to create such back-up security (see question 5.1 above).
The general rules of the creation of security interests under German law also govern the security interests granted in the purchased receivables by a purchaser. Such granted security interests must be sufficiently identified or identifiable and can be granted in a form of a pledge or a security assignment.
The pledge of a receivable is created by an agreement between the pledgor and the pledgee. In addition, the underlying obligor must be notified. The security assignment is created by an agreement on the transfer of the receivable for security purposes between the assignor and the assignee. With the effect of such assignment, legal ownership to the receivables is transferred. Although there is no requirement for notification to the obligor, certain objections (such as rights of set-off or counterclaim arising from its relationship with the assignor) may be raised by the obligor prior to notification of the security assignment.
An assignment for security purposes is generally adopted in practice. This is because the requirement for a notification to the obligor can be avoided. However, inter-company receivables and bank accounts are the exceptions thereof since the notification to the obligor in this case does not cause any significant issues.
Security interests over inventory and other movable assets are usually granted by means of security transfer (as opposed to a pledge which is impracticable as it would require the transfer of actual possession of the assets to the secured party). See also question 4.3 above for additional requirements, as well as question 4.12 above.
The grant of security is generally subject to the same conflict of laws rules as the assignment of receivables (see question 3.1 above). According to these rules, vis-à-vis the purchaser and the secured party, a security interest would be treated as valid and perfected in Germany if the requirements under the chosen law were satisfied and the respective receivables are permitted to be assigned pursuant to the law governing such receivables. Vis-à-vis the obligor, the question whether a security interest is valid and perfected is determined by the law governing the receivables. Where the receivables are governed by German law, the purchaser and the secured party need to take any additional steps as may be required under German law to grant a valid and perfected security interest vis-à-vis the obligor. This also applies to the issue whether such a security interest is valid and perfected vis-à-vis third parties in case a German court, in line with prior case law, applies the law governing the receivables to this issue and not, as suggested by some legal commentators, the law of the seller’s jurisdiction (see question 3.1 above).
Security interests over such assets can also be granted by way of a formal pledge or a security assignment of receivables. Security interests over debt securities (which are treated as movable assets under German law) booked to a custody account are normally created by way of a pledge. The additional requirements described in question 4.3 above also apply to the grant of security over these types of assets. The specific terms of the underlying assets may stipulate additional transfer requirements, which will have to be satisfied regularly for the creation of security interests as well. For example, the creation of security interests over claims arising from insurance policies will often require the consent or at least the notification of the insurer.
The English and U.S. law concepts of trusts differ substantially from the fiduciary instruments available under German law. The German Federal High Court (Bundesgerichtshof – BGH) has held in one instance that (foreign law) trusts over German law assets may not be compatible with German law. A mere trust agreement would also not be sufficient to separate the assets from the seller’s insolvency estate and would likely not be recognised by German insolvency courts in the seller’s insolvency. However, depending upon the law applicable to a trust, it is not inconceivable that German courts might recognise trusts over assets that are not governed by German law to segregate the assets from the seller’s insolvency estate.
To achieve a separation of incoming collections from the seller’s insolvency estate, it is accepted practice and the safest route under German law to ensure that collections are paid directly into an account over which a security interest has been created in favour of the purchaser. Typically, a pledge of the collection account will be used to create such security interest. Usually, the obligor will not be notified of the assignment and the seller is authorised to continue collecting the receivables. The seller should be required to ensure that all collections will be directly paid into such collection account pledged in favour of the purchaser. In cases of payments from such collection accounts being made to the purchaser, clawback rules will apply (see question 6.3 below).
Where it is not possible to use accounts separately to set up for the transaction, the seller should pledge its “general” collection account to the purchaser. However, often such a pledge will be junior to other security interests created over such account, as account pledges are customary in Germany. In such a scenario, a purchaser would need to ensure that cash transfers to the purchaser account occur as frequently as possible and the collection authority of the seller is revoked as early as possible (collections can then be redirected to an account of the purchaser after notification of the assignment and new account details to the underlying obligor).
German law recognises escrow accounts. In order to create a security interest over a bank account located in Germany, the account is typically pledged in favour of the collateral taker. It is not recommended to establish a foreign law security interest over a German bank account as it is very uncommon and creates unnecessary difficulties from a conflicts of law perspective (especially where the foreign law security does not meet the requirements of a pledge under German law) and German account banks (which need to be notified of a pledge) will likely try to refuse to participate in any cash sweep mechanism in this context.
German account pledge agreements often contain arrangements pursuant to which a pledgee can take control of the account prior to actual enforcement of the pledge. Such arrangements are permissible under German law and can take the form of a mere account blockage (i.e., stopping the ability of the pledgor to continue disposing over the account) and/or an agreement pursuant to which the pledgee is granted a unilateral right to dispose over the account (including by way of (daily) cash sweep to a purchaser account). If insolvency proceedings have been opened with respect to the pledgor, the account agreement between the pledgor as account holder and the account bank will automatically terminate by statutory law. In order to gain access to the monies standing to the credit of the account, the pledgee will need to enforce the account pledge. In the insolvency of the pledgor, an account pledge will generally give the pledgee a right of separate satisfaction with respect to the monies standing to the credit of the account at the time of opening of insolvency proceedings.
The account pledge agreement may provide that the pledgor as account holder may continue to dispose over the funds in the account prior to the occurrence of a trigger event without affecting the pledge itself. However, any funds debited from the account by the pledgor will no longer be available to the pledgee.
There is no general stay of action in relation to receivables effectively sold and transferred to the purchaser. However, during preliminary insolvency proceedings (vorläufiges Insolvenzverfahren) the insolvency court may, as a preliminary measure, order that assets in respect of which a segregation right (Aussonderungsrecht) or a right for preferential treatment (Absonderungsrecht) would exist if insolvency proceedings were opened, may not be realised or collected and may be utilised to continue the debtor’s business provided that they are of material importance for its continuance. Although this is not reflected in the wording and there is no case law on point, it appears to be the prevailing view in legal literature that this provision should not apply in relation to receivables which had been effectively sold and transferred by the seller to the purchaser by means of a proper true sale.
Moreover, upon the opening of (final) insolvency proceedings, the purchaser of the receivables may only collect the receivables if the transaction is not recharacterised as a secured loan transaction. In case of a recharacterisation, the assignment of the receivables could be treated as a security assignment (secured loan). In such a case, the purchaser would not have a segregation right (Aussonderungsrecht) but only a right for preferential treatment (Absonderungsrecht) in which case the insolvency administrator would be entitled to collect the respective receivables and to deduct a certain haircut from the collection proceeds (see question 4.9 above and question 6.2 below).
In relation to a potential order a stay of action during preliminary insolvency proceedings see question 6.1 above. Moreover, German insolvency courts may have the right to issue an order entitling a preliminary insolvency administrator to collect receivables over which security was granted by way of a security assignment (which might also be relevant in case the transaction was recharacterised as secured loan).
After the opening of (final) insolvency proceedings, no stay of action is possible if the sale of receivables qualifies as a true sale. In case of recharacterisation of a transaction as a secured loan transaction, no formal stay of action is required as only the insolvency administrator would have the right to collect the respective receivables (see question 6.1 above).
Under the German Insolvency Code (Insolvenzordnung – InsO) an insolvency administrator of the seller (the originator) may rescind or reverse transactions (clawback) in relation to the assignment of rights of the receivables during the applicable suspect period – its length can be from one month to 10 years prior to the insolvency filing. Similar to many other jurisdictions, any clawback under these rules is not at the discretion of the insolvency court, but is governed by statutory rules.
Transactions voidable pursuant to these rules in particular (without limitation) include the following:
(i) Pursuant to § 130 InsO, a transaction shall be voidable which gave or made possible to an insolvency creditor, security or satisfaction if:
■ it was effected in the last three months prior to the filing of a petition for the opening of insolvency proceedings, if the debtor was insolvent at the time of the transaction and if at such time the creditor had knowledge of such insolvency or of the relevant facts supporting a compelling conclusion with respect to such insolvency; or
■ it was effected after the petition for the opening of insolvency proceedings and the creditor at the time of the transaction had knowledge of the insolvency or of the petition or of the relevant facts supporting a compelling conclusion with respect to such insolvency or petition.
(ii) Pursuant to § 131 InsO, a transaction shall be voidable that gave or made possible to an insolvency creditor, security or satisfaction to which such creditor had no right or no right in such manner or at such time if:
■ the transaction was effected in the last month prior to the petition for the opening of the insolvency proceedings or after the filing of such petition;
■ the transaction was effected during the second or third month prior to the petition for the opening of the insolvency proceedings and the debtor was insolvent as at the time of such transaction; or
■ the transaction was effected during the second or third month prior to the petition for the opening of the insolvency proceedings and the creditor, as at the time of such transaction, had knowledge that it has adverse effects on the insolvency creditors or of the relevant facts supporting a compelling conclusion with respect to those adverse effects.
(iii) Pursuant to § 132 InsO, a transaction shall be voidable that had a direct adverse effect on the insolvency creditors, if:
■ the transaction was effected during the last three months prior to the petition for the opening of the insolvency proceedings and, as at the time of such transaction, the debtor was insolvent and the creditor had knowledge of such insolvency or of the relevant facts supporting a compelling conclusion with respect to such insolvency; or
■ the transaction was effected after the petition for the opening of the insolvency proceedings and, as at the time of such transaction, the creditor had knowledge of the insolvency or the petition or of the relevant facts supporting a compelling conclusion with respect to such insolvency or petition.
(iv) Pursuant to § 133(1) InsO, a transaction shall be voidable that was effected during the last up to 10 years prior to the petition for the opening of the insolvency proceedings or thereafter, if such transaction was entered into by the insolvent debtor with an intention to damage its (other) creditors, provided that the other party had actual knowledge of such intention, which knowledge is presumed to exist in the case that he/she had knowledge of the imminent insolvency of the debtor and the adverse effects caused thereby to the position of the insolvent debtor’s creditors. Pursuant to § 133(2) InsO, the suspect period of up to 10 years is reduced to a maximum period of four years in case the transaction gave or made possible to the other party security or satisfaction. Further, pursuant to § 133(3) InsO knowledge of the intention to damage is only presumed if the other party had knowledge of the actual inability of the debtor to make payments when due, instead of knowledge of the imminent insolvency of the debtor in case the transaction gave or made possible to the other party security or satisfaction. In case the other party has agreed to a payment agreement with the debtor or granted any other form of payment facilitation, it will be presumed that it did not have knowledge of imminent insolvency at the time of the transaction.
(v) Pursuant to § 133(4) InsO, a contract with consideration between the debtor and a related person by which the insolvency creditors are directly harmed shall be voidable. Voidability is excluded if the contract was concluded more than two years prior to the petition for commencement of the insolvency proceedings or if the other party had no knowledge of the intention of the debtor to harm creditors.
(vi) Pursuant to § 134 InsO, a transaction made without consideration that was effected during last four years prior to the petition for the opening of the insolvency proceedings or thereafter, shall be voidable.
As some of the most relevant statutory provisions on challenge of transactions require that the counterparty of the assignor had knowledge of the fact that the assignor was unable to make payments at the time the legal act (e.g., an assignment of receivables) takes place, the risks of challenge could to some extent be mitigated by the delivery of a solvency certificate.
With the exception of directly harmful transactions (cf. § 133(4) InsO) the length of the suspect periods, generally, is independent of whether the transaction was entered into with a related party or an unrelated party. Instead, § 130 InsO and § 131 InsO provide that in case of related parties it will be presumed that the respective related party had knowledge that the transaction has adverse effects (§ 131(2) second sentence InsO) or had knowledge of the insolvency or of the filing of a petition for the opening of insolvency proceedings (§ 130(3) InsO and § 132(3) InsO).
The term “related party” is defined in § 138 InsO. According to § 138(2) InsO related parties of legal entities are: general partners, persons holding more than 25% of the insolvent debtor’s capital, members of the insolvent debtor’s management or supervisory bodies or person who, on the basis of a comparable corporate or service relationship with the debtor, have the opportunity to inform themselves of the insolvent debtor’s economic circumstances. Accordingly, in case an entity (directly or indirectly) holds more than 25% of the insolvent debtor’s share capital, such entity would be considered as a related party. A comparable corporate relationship would exist, if the insolvent debtor is controlled by the other party. In case of control the controlling entity will in practice also be deemed to have had the opportunity to inform itself of the debtor’s economic circumstances and accordingly will be considered as a related party. Whether this is also the case for an affiliate of the other party does have to be determined in each individual case. As a general rule, the granting of a guarantee by a party that is a related party of the insolvent debtor (seller) should generally not render a true sale transaction between seller and purchaser into a related party transaction.
No consolidation of assets and liabilities of the purchaser, with those of the seller or its affiliates, exists under German insolvency law. While under general German corporate law, there may be exceptional cases where a liability under the “piercing the corporate veil” principles may arise, those are rare in practice due to the stringent requirements under applicable German law and such liability will in any case not result in a consolidation of assets and liabilities.
In April of 2018, the German Act to Facilitate the Handling of Group Insolvencies (Gesetz zur Erleichterung der Bewältigung von Konzerninsolvenzen) has entered into force and introduced special provisions for group insolvencies, potentially such provisions could also become applicable in scenarios where the purchaser is owned by the seller or an affiliate of the seller. These recently introduced provisions are, however, limited to procedural questions, such as improving and requiring coordination between insolvency officials of the various group companies, and mainly aim at increasing the chances of a successful restructuring of the group companies. A consolidation of assets and liabilities is not provided for under this or any other applicable German law.
As a general rule, an insolvency administrator may elect whether to accept or reject the performance of so-called executory contracts, i.e., contracts which have not been fully performed by at least one party. Where the receivables purchase agreement has not been fully performed by at least one party, it may be subject to the insolvency administrator’s election right. This may affect transactions involving the sale of future receivables. However, term deals are generally not subject to the insolvency administrator’s election right as the seller (by assigning the receivables) has fully performed its respective obligations. In order to prevent such cherry-picking risk for revolving securitisations, each sale under a master agreement should be structured as an independent transaction.
If the insolvency administrator elects performance of the underlying executory contracts between the (insolvent) seller and its debtors (obligors), any future payments by such obligors would fall into the insolvency estate and could not be segregated or collected by the purchaser. If the insolvency administrator rejects the performance of the underlying executory contract, future receivables would not become due. In order to exclude such risks the securitisation transaction would generally have to be structured such that the insolvency administrator would not have an election right in relation to the underlying contracts.
Moreover, any assignment of future receivables coming into existence after the opening of insolvency proceedings (künftige Forderungen) (as opposed to an assignment of previously existing receivables which only become due after the opening of the insolvency proceedings (betagte Forderungen)) is not enforceable.
Leases and leasing agreements over movable assets entered into by the seller (originator) as lessor are not subject to the election right of the insolvency administrator if the acquisition of the leased movable assets was financed by a third party and that third party has been granted security by way of a security transfer of the leased movable asset. There is no clear guidance for scenarios in which the lessor is not identical to the owner of the leased movable asset, which is not uncommon in the German leasing market. Whether or not the receivables under such lease agreements qualify as future receivables depends on the facts and circumstances in the individual case, in particular the terms of the applicable lease agreements. Instalments due under so-called “financial leasing” contracts are generally considered not to constitute future receivables but to come into existence upon the conclusion of the leasing agreement and are due from time to time.
Leases with regard to real estate are not subject to the insolvency administrator’s election right but may be terminated by the insolvency administrator subject to certain statutory notice periods. In addition, lease receivables under real estate leases constitute future receivables and cannot be validly assigned vis-à-vis the seller’s/lessor’s insolvency estate in case they fall in the period after the month in which the insolvency proceedings are opened (or, if the opening date is later than the 15th day of a month, the following month). However, any such lease receivables can be covered by a land charge over the real estate which is generally enforceable in the seller’s insolvency.
In relation to fully disbursed loans (advanced by the seller as lender), the insolvency administrator’s election right does not apply. Moreover, receivables being due from time to time under loans are not considered future receivables, but existing receivables that are not yet due.
In Germany, special purpose entity debtors are generally established in the form of a limited liability company (Gesellschaft mit beschränkter Haftung – GmbH or Unternehmergesellschaft – UG). The managing directors of such companies are required by law to file a petition for the opening of the insolvency proceedings if the debtor has become unable to pay its debts as they are due or it is over-indebted. Where the creditors have validly agreed to a limited recourse provision (see questions 7.4 and 7.5 below), such agreement would prevent the debtor from becoming over-indebted or illiquid, as the respective payment obligations would not come into existence to the extent the debtor has insufficient assets. However, in case the debtor has insufficient funds to pay all of its obligations that are not subject to a limited-recourse provision, it could still become over-indebted or illiquid and would therefore not be insolvency-remote. In addition, where a limited-recourse provision provides for the conditional cancellation of the obligations of the debtor that are not covered by its assets, additional tax considerations need to be taken into account for such contingent payment obligations in order to avoid adverse tax consequences.
There is neither a special securitisation law nor any special provisions in other German laws that would establish a comprehensive legal framework for securitisation transactions in Germany. German securitisation transactions are subject to the general legal framework in Germany, in particular the German civil law regime under the German Civil Code (Bürgerliches Gesetzbuch – BGB) and the insolvency law regime under the German Insolvency Code (Insolvenzordnung – InsO) as well as the relevant banking and financial services regulatory laws, in particular under the German Banking Act (Kreditwesengesetz – KWG). However, certain aspects specifically relevant to securitisations are addressed in special statutes and regulations. For example, the German Legal Services Act (Rechtsdienstleistungsgesetz – RDG) contains an exemption from licensing requirements for the provision of legal services and debt collection activities for the servicing of securitised receivables by the originator of the receivables. The German Banking Act contains special provisions for refinancing register transactions (Sec. 22a et. seqq. KWG) aimed at facilitating true sale securitisations in Germany.
In addition, several European Directives and Regulations provide for special rules for securitisations and parties involved in securitisation transactions, namely originators, sponsors and certain regulated investors. These rules provide, inter alia, that credit institutions and investment firms are prohibited from investing in securitisation transactions if the originator does not retain on an ongoing basis a net economic interest in the transaction of at least 5% (so-called “skin-in-the-game” requirements; Art. 405 of the EU Capital Requirements Regulation (Regulation (EU) 575/2013 – CRR)). Moreover, such institutions are subject to special investor due diligence requirements; they must have comprehensive and thorough knowledge of the securitisation positions (and the underlying assets) and establish formal due diligence and monitoring procedures (Art. 406 CRR). Comparable provisions apply in relation to insurance companies and pension funds under Solvency II (Directive 2009/138/EC) and the related Delegated Regulation (EU) 2015/35 and in relation to alternative investment funds (AIFs) and their managers (AIFMs) under the Alternative Investment Fund Managers Directive (Directive 2011/61/EU – AIFMD) and the related Delegated Regulation (EU) 231/2013. Currently, these rules only impose obligations on the regulated investors but they indirectly also affect the originators who have to structure the transactions in compliance with the risk retention and investor due diligence rules in order to enable regulated investors to invest in securitisation positions.
Under the revised European framework for securitisations, the regulatory regime will change significantly. On 17 January 2018, the EU Regulation setting out a new regulatory framework for securitisation transactions (Securitisation Regulation) took effect. The Securitisation Regulation introduces the concept of simple, transparent and standardised (STS) securitisation into European law. It sets out detailed criteria which a securitisation transaction must satisfy in order to qualify as STS. Moreover, the amended European capital requirements rules (CRR Amendment Regulation) will introduce a preferential capital regime for investments in STS securitisations by credit institutions and investment firms. The Securitisation Regulation will generally apply from 1 January 2019 to new securitisation issuances or the creation of new securitisation positions after that date (subject to certain transitional provisions). Whilst the 5% risk retention requirement is generally maintained, the new rules impose risk retention requirements directly on originators, sponsors and original lenders.
Moreover, there are specific tax rules and regulations in Germany dealing with certain tax aspects of securitisations (see also question 9 below). In addition, the predecessor of the Federal Financial Services Supervisory Authority (Bundesanstalt für Finanzdienstleistungsaufsicht – BaFin) had published regulatory guidelines for securitisations originated by banks in its circular 4/97 which still serve as important regulatory guidelines (see also question 8.3 below).
In Germany there is no special authority responsible for regulating securitisations. Securitisations are supervised as part of the general regulatory supervision regime through BaFin and the European Central Bank (ECB).
No, there are no laws in Germany that specifically provide for the establishment of special purpose entities for securitisations.
From a legal perspective, it is generally possible to use German or foreign special purpose entities for German securitisation transactions. However, the tax implications have to be analysed depending on the type of securitisation and assets securitised (see question 9.6 below). Due to the German taxation system, securitisation entities are usually located abroad in offshore jurisdictions such as Jersey, Guernsey or the Cayman Islands or in other European jurisdictions which provide for a more favourable tax treatment and double taxation treaties such as Luxembourg, The Netherlands and Ireland. German special purpose entities are frequently used for securitisations of bank loans for which an exemption in relation to trade tax applies.
Even for bank loans there are no specific legal or tax reasons for using a German special purpose entity. From a practical perspective, one advantage of using a German special purpose entity may be the reduction of costs for implementing the transaction given that no foreign corporate services providers or specific foreign law legal advice may be required when structuring a German bank loan securitisation transaction. On the other hand, foreign jurisdictions such as Luxembourg, which enables compartment structures which can be used for several transactions, may offer more flexibility to originators frequently refinancing through securitisations.
If the special purpose entity shall be a German law entity, it usually takes the form of a German limited liability company (Gesellschaft mit beschränkter Haftung – GmbH), including in the form of a so-called “small GmbH” (Unternehmergesellschaft/(haftungsbeschränkt) – UG) which can be established very quickly and with a minimal share capital of one Euro. There is a recognised way for establishing orphan securitisation entities in Germany, which builds on the infrastructure provided by TSI GmbH, a company which has been established to promote (true sale) securitisations in Germany. The shares of the German special purpose entity established under the TSI platform will be owned by three existing charitable foundations which have obtained the required formal recognition by public authorities (so-called orphan structure). Setting up orphan German securitisation entity outside of this structure may be more costly and time-consuming.
See question 7.5 below.
Although there is no securitisation specific case law on the point, limited-recourse and non-petition clauses are generally considered valid and enforceable under German law, and German courts would generally give effect to such arrangements notwithstanding the governing law, provided that the parties have validly chosen such law (see question 2.3 above). If governed by German law, limited-recourse and non-petition clauses should generally be valid and enforceable unless the underlying claim is based on wilful misconduct or, if the clause is considered as general business conditions (Allgemeine Geschäftsbedingungen), gross negligence of the purchaser.
If the special purpose entity does not have enough funds available to meet its obligations that are not subject to effective limited-recourse provisions, it could still become insolvent. Moreover see question 7.7 below with respect to the obligation of the management of certain German companies to file for insolvency upon illiquidity or over-indebtedness.
Priority of payments (“waterfall”) provisions may generally be validly agreed among creditors and with the debtor, and German courts would generally give effect to these in an agreement notwithstanding the governing law, provided that the parties have validly chosen such law (see question 2.3 above). However, in case of insolvency of the purchaser, customary contractual waterfall provisions found in securitisation transactions would generally not alter the statutory order of priority provided for by German insolvency law. Rather, the creditors would generally be treated as equal ranking for German insolvency law purposes and would only be contractually obligated to distribute any amounts received by them pursuant to the agreed priority of payments.
A German court would generally give effect to such a contractual provision in an agreement notwithstanding the governing law, provided that the parties have validly agreed to such choice of law (see question 2.3 above). However, for German special purpose entities, there is a statutory obligation for the directors to file for the opening of insolvency proceedings in case the company becomes unable to pay its debts as they come due (illiquidity) or over-indebted (over-indebtedness). Non-compliance with such filing obligation may lead to personal liability for damages and even criminal liability for the company’s management.
As a general rule, the purchase and ownership of receivables by a special purpose entity under a securitisation transaction does not trigger any licence requirements for the purchaser. As long as the purchase of the receivables is structured as a true sale and, in case of loans, does not encompass the acquisition of any undrawn commitments or other funding obligations, the purchaser generally does not require any licence under the German Banking Act, in particular no licences for lending business or factoring business are required. Likewise, the collection and enforcement of the receivables do not trigger any licence requirements for the purchaser in Germany (see question 8.2 below in relation to servicing licences).
Loan servicing may in principle trigger licence or registration requirements under the German Legal Services Act (Rechtsdienstleistungsgesetz – RDG) as debt collection generally qualifies as legal service under the RDG. Where a third party services the receivables on behalf of the purchaser, such party generally must be registered under the RDG. An important exemption applies in relation to the servicing by the seller, i.e., no licence or registration requirement under the RDG will be triggered if the seller (originator) acts as servicer. If, however, the servicer is different from the seller (originator), the licence/registration requirement under the RDG could be triggered. In particular, alternative servicing structures such as master servicer structures or replacement servicer features in the transaction documents would have to be analysed in more detail so as to ensure that no licence/registration requirements will be triggered under the RDG.
Yes. In Germany, the Federal Data Protection Act (Bundesdatenschutzgesetz – BDSG) restricts the use and dissemination of personal data about or provided by obligors. If (some of) the underlying debtors are natural persons or enterprises operated by a sole trader (Einzelkaufmann) or a partnership (Personengesellschaft) where a natural person is a partner, data protection legislation needs to be complied with. If the relevant persons have not expressly consented to the transfer of their personal data in connection with the securitisation transaction, the use of a data trustee structure under which data is only transferred in encrypted form, is normally recommended. The current provisions of the Federal Data Protection Act will be replaced or modified by the new EU General Data Protection Regulation (and related German transposition laws) which will enter into force on 25 May 2018.
Further restrictions apply in the case of a securitisation of German bank loans where the originating bank will generally need to comply with German banking secrecy rules (Bankgeheimnis) which apply to all types of debtors including natural persons, partnerships and corporations. There are established procedures, such as the appointment of a data trustee, for ensuring that banking secrecy and data protection issues are complied with.
In a securitisation of bank loans by German banks, specific servicing requirements set out in circular 4/97 (see also question 7.1) need to be complied with, pursuant to which, inter alia, each replacement servicer generally needs to be a credit institution licensed in the European Economic Area (EEA) or a notary.
In the first instance it is the seller as originator of the receivables who is responsible for compliance with any applicable German consumer protection laws. A violation of consumer protection laws may affect the validity or enforceability of the receivables and the underlying agreements and may give the obligors rescission rights. Compliance with applicable consumer protection laws will therefore be checked by the purchaser by conducting a legal due diligence. In addition, it is market practice, that the seller (originator) will give representations and warranties as to compliance with applicable consumer protection laws. Special consumer protection laws apply, for example, in case of consumer loans or receivables agreements entered into at the obligor’s place of residence or by means of long distance communication and/or if receivables contracts are based on the seller’s general business conditions.
In relation to consumer loans the lender is required to inform the obligor three months before an agreed interest rate expires or the loan matures, stating whether it is willing to agree on a new interest rate or to extend the loan. Such obligation generally also applies to the purchaser in a securitisation transaction unless the seller and the purchaser have previously agreed that the seller shall exclusively continue to deal with the consumer obligor. In addition, there are certain restrictions (acceleration trigger levels) for a lender (and the purchaser of a loan) to accelerate an annuity loan in case of payment defaults of the consumer.
There are no general laws in Germany restricting such exchange of currency or the making of payments other than those implementing United Nations, EU or other international sanctions in respect of transactions with certain countries and persons. Moreover, if a German resident receives from, or makes payments to, any non-German resident, it will have to notify the German Central Bank (Deutsche Bundesbank) in certain circumstances. Such notification, however, serves for statistical purposes only and non-compliance does not affect the validity of the payment or the underlying obligation.
See question 7.1 above for the European risk retention rules for credit institutions and investment firms, banks, insurance companies and pension funds and AIFs that apply in Germany. Securitisation transactions in Germany can be structured in any way that is compliant with the applicable European risk retention requirements, such as the following CRR risk retention options:
(i) retention of no less than 5% of the nominal value of each of the tranches sold or transferred to the investors;
(ii) in case of securitisations of revolving exposures, retention of the originator’s interest of no less than 5% of the nominal value of the securitised exposures;
(iii) retention of randomly selected exposures, equivalent to no less than 5% of the nominal value of the securitised exposures;
(iv) retention of the first loss tranche, so that the retention equals in total no less than 5% of the nominal value of the securitised exposures; or
(v) retention of a first loss exposure not less than 5% of every securitised exposure in the securitisation.
Regulatory change in the field of securitisation is mainly driven by new European legislation which forms part of the European financial reform agenda. The new Securitisation Regulation and the revised European capital requirements framework have the greatest impact (see question 7.1 above). See also question 8.3 above in relation to the new EU General Data Protection Regulation.
As a general rule, payments on receivables (including interest payments) are not subject to withholding tax in Germany. However, certain exceptions may apply, in particular in relation to certain hybrid debt instruments such as profit-participating loans if the debtor is tax resident in Germany or in relation to interest payable on loans which are secured on German real estate or German registered ships (regardless of the debtor’s tax residence). If Germany is entitled to tax such income from interest payments under an applicable tax treaty, tax withheld may be credited or refunded upon tax assessment on the purchaser, which requires a tax filing of the purchaser.
Interest payments made by a bank or financial services institution as obligor may be subject to withholding tax on interest unless the recipient is itself a bank or financial services institution or is not subject to tax in Germany (subject to certain formal requirements being met).
The sale of trade receivables at a discount generally does not create a risk that the calculated discount may be recharacterised as interest in whole or in part, provided that the sale qualifies as true sale for tax purposes. Otherwise the sale may be recharacterised as a secured loan in the form of a profit-participating loan.
No, there is currently no specific accounting policy for tax purposes in Germany in the context of a securitisation. As a general rule, German GAAP is also applicable for German tax law. The key question will be whether the economic ownership (wirtschaftliches Eigentum) in the underlying receivables is transferred to the purchaser which basically requires that the transaction qualifies as a true sale and is not recharacterised as a secured loan. There is a risk that economic ownership of the receivables stays with the seller and no true sale can be achieved if the seller continues to bear the default risk which is, in particular, the case if the retained purchase price portion covers or compensates for any credit risk exceeding the expected default rate (see also question 4.9 above). The accounting treatment under IFRS or US GAAP, which may differ from German GAAP, is not relevant from a German tax perspective.
Germany currently does not impose any stamp duty or other documentary taxes on the sale and transfer of receivables. This might change in the near future in relation to the sale of securitised receivables which might become subject to financial transaction tax (Finanztransaktionsteuer) once the new rules have been introduced in Germany as one of the 10 EU Member States that have announced to participate in the new European financial transaction tax concept.
Germany generally imposes value added tax (VAT) (at a rate of 19%) on the sale of goods and services. However, as a general rule, the sale of receivables is not subject to German VAT but the seller can elect to waive this VAT exemption as long as the purchaser is considered an entrepreneur.
Fees for collection agent services would generally be subject to VAT. However, from the German tax authorities’ perspective an important exception applies where the seller continues to collect the receivables. Such servicing of receivables by the seller (originator) is customary for securitisation transactions in Germany. In these cases, the collection of the receivables by the seller is not considered as a separate service but as a mere ancillary service which is VAT exempt. If, by contrast, the purchaser itself or a third-party servicer is acting as collection agent, VAT may become payable by the purchaser or the third-party servicer.
The purchaser can be held secondarily liable for VAT included in the amount of the receivables assigned to it to the extent it collects payment on them and provided further that the seller (originator) does not pay VAT on the underlying sale of goods or services when due. If the special purpose entity further assigns or transfers the receivables, it will be deemed to have received full payment on the receivables. This will also hold true for any further assignment or pledge of the receivables to a third party (including a security assignment or pledge of the receivables to a security trustee).
However, the receivables are deemed uncollected if, and to the extent, the purchaser pays consideration for these to the seller without any particular restrictions. As a consequence, the risk for secondary liability of the purchaser is generally limited to the VAT included in the difference between the face value of the receivables sold and the purchase price paid by the seller (taking into account discounts and cash reserves).
As a general rule, the mere purchase of receivables should not give rise to tax liability of the purchaser in Germany. This may be different if the purchased receivables give rise to income from German sources such as in case of interest payments on hybrid debt instruments or on loans secured by German real estate or German registered ships (see question 9.1 above). In most of its tax treaties, Germany has waived the right to tax interest on such loans.
Moreover, the appointment of the seller as the purchaser’s servicer and collection agent, or the purchaser’s enforcement of the receivables against the obligors, should generally not give rise to tax liability of the purchaser in Germany. However, the German tax authorities indicated that the purchaser may be treated as a German tax resident if it qualifies as a corporate entity without any substantial presence (office space, infrastructure, staff, etc.) outside of Germany. In this case, the purchaser’s effective place of management could be considered to be in Germany due to the fact that the commercial activities of a servicer and collection agent require decisions relating to the day-to-day management of the purchaser’s business such as the enforcement of the receivables against the obligors in Germany. As a consequence, in such a case, the purchaser may be subject to German corporate income tax and trade tax. By carefully structuring the transaction (e.g., enough substance for the non-German purchaser, main business decisions and functions of the purchaser other than the debt collection only taken in its country of incorporation, no further services performed in Germany other than the servicing, etc.), it should be possible to mitigate the risk that the purchaser is considered to have its effective place of management or a permanent establishment in Germany.
Even where the purchaser’s business is effectively managed from outside of Germany, the seller (originator) servicing and collecting the sold receivables on behalf of the purchaser could be considered a permanent representative of the purchaser. This depends mainly on whether the seller is bound by the purchaser’s instructions. If the purchaser agrees that the seller continues the collection in accordance with pre-agreed servicing principles on basically the same terms as before and the purchaser is not permitted to intervene, there are good arguments to consider that the seller is not a permanent representative of the purchaser.
As a general rule, a debt relief may be subject to German corporate income tax as well as trade tax, as it may be seen as extraordinary profit. When structuring a securitisation transaction involving a German purchaser, it will be important to discuss the specific wording of the limited recourse clause with the tax advisers in order to reduce related tax risks.