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Lesson Learned: Germany Introduces National Bank Levy

Germany
29 Sep 2010

Following the failure of the G20 countries to agree on a global bank levy in the wake of one of the worst financial crisis since the 1930's, Germany joins the UK in taking steps towards the introduc-tion of its own national bank levy. In furtherance of this goal, the German Cabinet adopted a dis-cussion draft of the Act on the Restructuring and Orderly Liquidation of Credit Institutions, for the Establishment of a Restructuring Fund for Credit Institutions and for the Extension of the Limita-tion Period of Management Liability Under Corporate Law (Entwurf eines Gesetzes zur Restruk-turierung und geordneten Abwicklung von Kreditinstituten, zur Errichtung eines Restrukturier-ungsfonds f?r Kreditinstitute und zur Verl?ngerung der Verj?hrungsfrist der aktienrechtlichen Or-ganhaftung (Restrukturierungsgesetz)) on August 25, 2010. In accordance with the current lan-guage of the draft, the Act is expected to enter into effect on December 31, 2010. The following article will summarize the most interesting aspects of the national bank levy introduced by the Act.

The purpose of the Act is, inter alia, to increase bank accountability. If a system-relevant bank should find itself in financial straits, the Act is meant to ensure that credit institutions are restruc-tured and reorganized without jeopardizing or endangering the stability of the German financial market. Unlike the government bail-outs of banks undertaken with taxpayers' monies during the recent global financial crisis, the restructuring and reorganization of system-relevant banks should no longer be a burden on the public purse but are to be financed primarily by the financial sector itself.

In order to financially support the restructuring and reorganisation procedures introduced by the Act, a restructuring fund will be established. This restructuring fund will be financed out of contri-butions from the banking industry, the so-called bank levy. The German Federal Agency for Financial Market Stabilization (Bundesanstalt f?r Finanzmarktstabilisierung, or "FMSA") will be in charge of administering the restructuring fund. The Act states that credit institutions subject to the levy will be required to make their annual contribution on 30 September of each year.

The bank levy will apply to all German-domiciled credit institutions as defined in Section 1(1) of the German Banking Act (Kreditwesengesetz, or "KWG"). This means that any institution in Ger-many that undertakes regulated banking activities, such as the taking of deposits or lending, will be subject to the levy. It is currently unclear whether the Act also applies to foreign credit institu-tions with subsidiaries or branches located in Germany. Please note that the Act will not take the extent of a German-domiciled bank's activities abroad when imposing the bank levy. The bank levy will be determined and collected on an individual basis and not on a group basis.

According to the Act, the banks will be required to pay an annual sum which will be calculated based on the individual bank's systemic risk. A bank's systemic risk will be calculated based on the credit institution's size, the degree of market interconnectedness, and particularly its liabilities vis-?-vis other credit institutions. Please note that pursuant to the current language of the Act, the bank levy will be subject to a cap. However, at the same time, even if the bank does not make any profit, it may nonetheless be required to pay in a minimum contribution as a percent-age of the annual contribution.

The draft Act goes on further to state that the bank levy will not be tax-deductible as an operating expense.


Taxand's Take


The extent of the Act's application to foreign banks with German subsidiaries or branches still re-quires some clarification. In order to provide both clarity and predictability for the financial market and credit institutions operating in Germany, the German government should take particular care in providing a clear scope of application of the Act and thereby of the bank levy. It is in the Ger-man financial market's interests that this important issue is resolved before the Upper House of the German Parliament, the Bundesrat, votes on the draft Act.

Your Taxand contacts for further queries are:
Carsten Boedecker
T. +49 211 5660 25020
E. Carsten.Boedecker@luther-lawfirm.com

Nathalie Grenewitz
T. +49 211 5660 25038
E. Nathalie.Grenewitz@luther-lawfirm.com

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