Fitch Reviews Tax Risk in German Structured Finance Transactions - Sees No Rating Impact
The report replaces the Special Report "Assessing Tax Risk in German Structured Finance Transactions", dated 20 June 2012.
While the legal situation is largely unchanged since the last release date of the report - June 2012 - Fitch has undertaken various changes that further clarify the agency's approach.
Trade tax may be applicable due to a provision in the German Trade Tax Code according to which 25% of interest paid may be added to taxable profit. Trade tax is levied on a municipal level and hence the magnitude of any liabilities will depend on the place of incorporation of the SPV or - in case of a foreign SPV - on the place where the tax authorities deem the issuer to have a permanent establishment in Germany. Transactions securitising bank loans are not affected by these provisions.
With the update of the report at hand, Fitch also provides more clarity on how it analyses trade-tax risk in master transactions. Portfolio volumes in these transactions fluctuate substantially as assets are transferred from or repurchased by originators. In the latter case, the relative size of a trade tax liability increases markedly as the potential tax amount is unchanged while the portfolio balance is reduced.
Dedicated dynamic trade-tax reserves may address this effectively. However, Fitch will also consider the particularities of a transaction - e.g. the asset class and the speed with which assets are being replenished - to determine whether the risk is commensurate with the rating of the notes.
A VAT liability may arise due to the classification of the securitisation as "factoring". This may arise only in instances where the originator/seller does not - or no longer - fulfil the servicing function. Further, as SPVs and the corresponding originator are jointly and severally liable for VAT contained in underlying receivables - e.g. lease instalments - a liability may arise if the VAT portion is not forwarded to the tax authorities by the originator.
Transaction documentation seen by Fitch typically includes an originator's duty to indemnify an SPV against materialisation of tax risk. As such, bespoke risks would affect transactions only in rating scenarios above the rating of the originator.
The special report as well as further research is available at www.fitchratings.com or by clicking the link above.