In its decision dated 26 August 2010 (I R 17/09), published on 1 December 2010, the Federal Fiscal Court ruled on the recognition of the transfer of ownership in receivables as part of an ABS transaction from the originator to the SPV for tax purposes. Only if the transfer of ownership is recognized tax-wise the transaction will qualify as true sale rather than a loan. The treatment as true sale is critical in order to avoid certain adverse tax consequences which would follow from the tax treatment of the default discount and/or fees (e.g. conception fee, program fee) under the German earnings stripping rules and the rules on the addback of interest for trade tax purposes which would eventually make the ABS transaction more expensive than in case of a treatment as a true sale.
In its ruling the Federal Fiscal Court states that the receivable must be attributed to the beneficial owner. According to the view of the court the beneficial owner is to be determined on the basis of who bears the solvency risk of the relevant debtor. In order to answer this question in the case underlying the ruling the Federal Fiscal Court analyses the contractual relationship. On that basis the court comes to the conclusion that from an economic perspective the solvency risk, and thus the beneficial ownership, was not transferred to the SPV.
The relevant contractual regulations provided for a default discount of 4 percent (although the originator guaranteed that the historical bad debt ratio amounted to 0,1 percent or even less). In addition, if and to the extent the actual bad debt felt below the default discount the originator was entitled to receive a payment in the respective amount from the SPV.
In this respect the Federal Fiscal Court upholds the ruling of the lower fiscal court according to which the seller would not have sold the receivable if the default discount had been finally agreed between the parties, i.e. without the compensation in case of a shortfall of the actual bad debt below the default discount. The Federal Fiscal Court follows the lower fiscal court’s argument that a transfer of the economic ownership would require an “appropriate” discount to the extent that such discount is determined on the basis of the historical bad debt ratio including a realistic risk surcharge. Neither the lower fiscal court nor the Federal Fiscal Court deemed this requirements to be satisfied on the basis of the facts and circumstances described above (taking into account that the originator had entered into a credit insurance for the benefit of the purchaser). Rather, the courts held that from an economic perspective the mechanism provided in the contracts qualified as an adjustment of the (preliminary) purchase price; the solvency risk and the economic ownership therefore remained with the originator and were not transferred to the purchaser.
With his ruling the Federal Fiscal Court, in principle, confirms that the view of the German Institute of Chartered Accountants (IDW) as set forth in IDW RS HFA 8 for (commercial) balance sheet purposes applies for tax purposes as well. In particular ABS transactions with comparable patterns, i.e. where the default risk materially exceeds the historical bad debt ratio and where the purchaser receives compensation payments (e.g. by way of set-off or otherwise) in case of a shortfall of the bad debt below the default discount, should thus be reviewed and — if necessary — adjusted in order to provide for a tax efficient structure. Also, the principles stipulated by the Federal Fiscal Court need to be taken into account when structuring ABS transactions going forward in order to avoid unnecessary tax costs.