The German Federal Court of Justice (Bundesgerichtshof) (BGH) had to decide on the validity of an assignment of credit receivables by a savings bank (Sparkasse) organised as a public law institution (Anstalt des öffentlichen Rechts).

The claimant and his wife entered into two loan agreements with the defendant savings bank in the mid and late 1990s. These loans were secured on two land charges (Grundschulden). When the financial condition of the claimant deteriorated, the savings bank terminated the loans in 2004 and demanded their immediate repayment. In 2005, the defendant sold a credit portfolio in the aggregate amount of EUR30 million which included the loan receivables against the claimant and his wife and assigned, among other things, those loan receivables and the land charges.

The claimant sought a declaratory judgment against the savings bank to the effect that the loan agreement had not been validly terminated, irrespective of the assignment by the savings bank, and that the savings bank continues to be the owner of the land charges which have been created as security for the loans. In particular, the claimant claimed that the assignment was invalid because the savings bank employee(s) (as a public officer(s)), by making available information about the claimant and his wife, their financial condition and the loans to the assignee, had breached private secrecy obligations stipulated by bank secrecy rules in conjunction with section 203(2)(1)No. 1 of the German Criminal Code (Strafgesetzbuch) (StGB).

The court of lower instance dismissed the claim and the claimant then petitioned the BGH on appeal. In its decision of 27 October 2009, the BGH has overruled the appeal of the claimant and held that the defendant was entitled to assign the loan receivables and that the relevant assignment by a savings bank organised as a public law institution neither conflicts with bank secrecy rules nor with section 203(2)(1)No. 1 StGB.

As regards a bank secrecy rules violation, the BGH had already ruled in a landmark decision in 2007 that the validity of an assignment of receivables is not adversely affected by a potential breach of secrecy obligations by a savings bank.

In addition to this earlier decision, the BGH has now held that an assignment of receivables by a savings bank organised as a public law institution does not constitute a breach of private secrecy within the meaning of section 203 StGB.

Since the bank secrecy rules to which private banks and mutual savings bank are bound is not protected by section 203 StGB, as a consequence and for the avoidance of any inconsistencies, the same applies to the bank secrecy of savings banks organised as public law institutions. While, in essence, the BGH has made it clear that German bank secrecy rules are not "secrecy" protected by section 203 StGB, it does, however, remain unclear whether an employee of a savings bank organised as a public law institution can be credited as a public officer within the meaning of section 203 StGB or if a function-related distinction must be drawn.

This decision may have an impact on future non-performing loan (NPL) and securitisation transactions involving public law organised institutions. In the past, the uncertainty about whether an assignment of receivables by a public law organised bank would be considered invalid because of a breach of bank secrecy rules may have been the reason why there have been so few transactions in this sector. Nonetheless, such transactions will still need to be carefully structured so as to avoid damages claims for the violation of (other) bank secrecy and data protection laws.

In response to growing interest from investors in Islamic countries relating to Sharia compliant investments in Germany, on 29 October 2009, the German banking regulator, BaFin, hosted the first Islamic finance conference in Frankfurt.

The conference was used, among other things, to discuss necessary amendments to the German regulatory and tax regimes. In this context, BaFin president, Jochen Sanio, noted that he "cannot perceive any reasons why BaFin would not issue a licence to a bank in Germany that offers Sharia compliant financial products" and that "Germany will make it easy for Islamic financial institutions to obtain a licence to sell Sharia compliant products, provided that those products are also compatible with German law."

While Germany's Deutsche Bank and insurer Allianz already offer Sharia compliant products in Muslim countries, no financial institution has, to date, made the move to offer Sharia compliant products in Germany. A remarkable fact considering that Germany, with its large Muslim population, represents a market with bigger potential than that of any other European country. Mr Sanio's comments therefore raise hope that next to the UK, Germany will establish itself as a European hub in the ever-growing Islamic finance market and attract some of the Gulf-based investments currently flowing into the UK and other European countries.

On 9 November 2009, the German cabinet published the draft Law for the Acceleration of Economic Growth (Wachstumsbeschleunigungsgesetz) (Bill), which is generally expected to come into force on 1 January 2010. The Bill contains welcome proposals to amend a number of important areas of German tax law, including the interest barrier rules and rules restricting tax loss carry forwards in case of a transfer of the loss making company.

If passed, the new rules under the Bill would provide relief from the current restrictions in these areas and would additionally provide for a number of other changes that will benefit taxpayers.

The scope of application of section 8c of the German Corporate Income Tax Act (CITA), which provides for the partial or full loss of tax loss carry forwards (steuerliche Verlustvorträge), if more than 25% or 50% of the shares in a German company that has tax loss carry forwards (LossCo) are transferred within a period of five years, would be reduced as follows:

The Bill would additionally introduce a number of changes to the operation of the German thin capitalisation rules (the so-called interest barrier). Generally, the interest barrier applies if the negative interest balance (that is, interest expense minus interest income) exceeds 30% of EBITDA as determined for tax purposes.

These changes include:

Decrease of the taxable add-back of leasing and rental payments paid for the use of real estate from currently 16.25% to 12.5%.

In case of specific intra-group restructurings (for example, mergers, splits) no real estate transfer tax is triggered, provided, that certain additional requirements are fulfilled. These conditions require that the transferor has held the property for at least five years and that the property is not sold by the acquirer during the five-year period after the restructuring.

Overall, in light of the changes to the restrictions on tax loss carry forwards, consideration should be given (where appropriate) to delaying transactions until after 31 December 2009 to take advantage of the proposed new rules.