This document deals with specific legal considerations in relation to securitisation of claims in Germany (or governed by German law), and should be read in conjunction with the Norton Rose Securitisation brochure. The following issues arise in relation to German assets:
Method of transfer
The common method of transfer of claims governed by German law (ie, claims arising from any agreement governed by German law, either expressly or implied) is by way of assignment. This is achieved by an agreement between the assignor and the assignee, which can also be created by way of a written offer from the assignor and payment of the relevant price by the assignee by way of acceptance (the “Offer and Acceptance Method”). A valid assignment is constituted without the need for notice to be given to the underlying debtor/obligor.
Both a discount (for the purpose of covering funding costs) and a deferred element (to cover overcollateralisation levels) can be incorporated into the purchase price paid for the relevant German claims without disturbing the “true sale” nature of the transaction. This is, however, subject to the proviso that the discount and/or deferred element is either “reasonable” (ie, based on historical default rates plus a certain margin) or is fixed at the time of sale so as not to endanger any removal (if intended) of the claims from the transferor’s balance sheet (see under Accounting Treatment below).
There are, generally speaking, no withholding or other taxes imposed on payments made by German debtors with regard to claims which are assigned in the course of a securitisation transaction. As a rule, this position is no different if these payments have an inherent element of interest in them. Stamp duty There is no stamp duty or any similar charge in Germany which would be levied on the assignment of claims, irrespective of the method of transfer chosen.
Tax on German source income
For a typical securitisation transaction the buyer will be incorporated and based outside the EU, mainly for tax reasons (corporate income tax, trade tax and VAT). It will then be subject to limited corporate income and trade tax only if the originator, in its capacity as seller and/or servicer, would be regarded as either the buyer’s “permanent establishment” or “permanent representative” in Germany. This can, however, be avoided by structuring the transaction carefully. In spring 2003 the German government has started a legislative initiative to promote the establishment of special purpose vehicles (SPV) in Germany by lifting at least one of the major tax hindrances to SPVs based in Germany: Pursuant to the draft bill German SPVs shall be exempt from trade tax if they exclusively purchase claims from banks. Currently a number of market participants are trying to achieve to extend the exemption to claims bought from nonbanks and to VAT.
Under German law, there are no specific rules setting out the accounting treatment of a German securitisation transaction. Accordingly, Germany’s generally accepted accounting principles have to be applied. Under these rules, the transfer of claims shown in the seller’s balance sheet results in a removal from the balance sheet if the transfer can be qualified as a “true sale”. This is the case if the so-called “economic ownership” is transferred: the transfer of legal title only is not sufficient. Generally, the conditions for a true sale are that:
- There is no recourse to the seller
- The purchaser has no option to sell the claims back to the seller
- The seller has no remaining interest in principal, interest or analogous payments under the claims
Any remaining risk that the seller retains could jeopardise offbalance sheet treatment and has to be analysed very carefully. The key to achieving off-balance sheet treatment is the actual transfer of bad debt risk to a party other than the originator. An obligation of the originator to repurchase claims which are subject to misrepresentation, however, will not jeopardise a “true sale”. Where the actual dividing line between these two extremes falls, and how best a transaction can be structured to achieve off-balance sheet treatment, would need to be addressed in detail, but, off-balance sheet treatment can often be achieved.
As an alternative to conventional “true sale” securitisation, the financial industry has developed a wide range of synthetic securitisation models by combining credit derivatives with securitisation structures. Broadly speaking, the originator maintains the securitised claims on its balance sheet and transfers the credit risk to investors, utilising either credit linked notes or credit default swaps or a combination of both. Where credit risk is transferred by intermediation of an SPV collateral will have to be posted since, unlike conventional securitisation, the SPV will have no recourse to the securitised assets. Such collateral usually consists of highly rated debt securities such as covered bonds (Pfandbriefe) or securities issued by Kreditanstalt für Wiederaufbau.