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Germany Gives Green Light To Bank Tax

July 2011 - Tax & Private Client. Legal Developments by Hassans.

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Following a long and difficult debate, Germany's upper house of parliament or Bundesrat has finally adopted the government's decree pertaining to a restructuring fund, and approved, although with changes, specific details of its proposed bank levy.

Despite giving the final go-ahead to the coalition's bank tax plans, the Bundesrat nevertheless insisted on introducing into the provisions a tax allowance of EUR300m, to reduce the burden on smaller credit institutes in Germany and to guarantee overall equality of contribution. Although the Bundesrat notes in its release that the allowance will apply equally to all financial establishments, it explains that smaller institutes will reap greater benefits from the effect of the measure.

Other changes to the government's original proposals include plans to raise the so-called reasonable limit threshold, which is intended to ensure that credit institutes are not overburdened. Consequently, the levy will be capped at 20% of net profit, instead of 15% as initially agreed.

In August last year, the German cabinet adopted the coalition government's draft restructuring law (Restrukturierungsgesetz), providing crucially for the introduction of a bank levy in Germany.

The bill was approved by the lower house of parliament in November 2010.

The law pertains to cornerstone measures for financial market regulation, adopted by the cabinet on March 31, 2010, and contains the following key provisions:

  • A law providing for the reorganization of credit institutes;
  • The introduction of instruments designed to overcome future crises among systemically important credit institutes;
  • A law establishing a restructuring fund for credit institutes;
  • An extension of the limitation period for the liability of listed companies and credit institutes.

Anchored in the new restructuring law is a so-called reorganizations procedure designed to support banks in future in their autonomous recovery and reorganization. The law also facilitates the transfer of systemically important parts of a company to a third party to protect financial market stability.

To fund this procedure, a restructuring fund is to be set up, financed by contributions from the country's banking sector in the form of an annual banking levy imposed on all credit institutes in Germany, adjusted according to risk exposure and to the level of interconnectivity of a bank. Designed to have a steering effect and to reduce systemic risk within the financial sector, the tax is not deductible as a business expense.

Expected to generate around EUR1bn annually for the state, the product of the levy is to flow directly into a bank restructuring fund designed to support banks in the event of a future financial crisis. The government aims to supply this fund with a total of around EUR70bn.

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