GERMANY Law and Practice Contributed by: Wolfram H. Krüger, Barbara Rybka, Markus Wollenhaupt and Alexander Zitzl, Linklaters
equity is available in the company’s group, additional funds may need to be obtained from mezzanine lend - ers. For mezzanine loans, there will typically be an increased margin, giving the lender a way to partici - pate in the profit and/or the possibility to transform the loan into an equity participation (“equity kicker”). Portfolios are often financed by syndicated loans involving different lenders, and secured debt is traded between the lenders. For refinancing, the so-called Pfandbrief (covered bond) is often used. In this case, the loan and granted security must comply with a strict standard. Furthermore, sale-and-leaseback transactions can be seen as a different form of financing, as the for - mer owner/now tenant of the property activates new liquidity. 3.2 Typical Security Created by Commercial Investors The most important security granted over real estate is the land charge ( Grundschuld ) or mortgage ( Hypothek ). While the more often-used land charge is non-acces - sory in nature and connected to the secured claim via a security purpose agreement, the mortgage is accessory in nature and attached to the underlying claim. Both are registered as rights in rem in the land register, as encumbrances over the freehold property or a hereditary building right. In addition, the typical security package includes the assignment of rental income, claims under the acquisition agreement, the property management agreement, insurances and contractor agreements. Bank accounts and shares or interest are pledged to the financing bank. The property/asset manager is expected to conclude a duty of care agreement. If developments are financed additionally, cost over - run and/or finance costs shortfall guarantees are com - monly granted by the sponsor. 3.3 Restrictions on Granting Security Over Real Estate to Foreign Lenders There are no restrictions on granting security over real estate to foreign lenders and no restrictions on repay -
ments made to a foreign lender under a security docu - ment or loan agreement. However, the payment of interest to foreign lenders can be restricted. Under German tax law, banks and other financial services providers must withhold taxes on interest payments made to foreign lenders that do not themselves qualify as a bank or financial services provider. If a foreign lender has a permanent establishment in Germany and the loan is attributable to this establish- ment, the foreign lender is subject to German taxation on the profit resulting from the loan. Depending on the applicable double-taxation treaty, the interest will generally either be tax-exempt in the foreign jurisdic - tion or the German tax will be credited against the tax liability arising in this jurisdiction. 3.4 Taxes or Fees Relating to the Granting and Enforcement of Security Land charges/mortgages as well as share pledges require notarisation which triggers mandatory statu - tory notarial fees. Furthermore, the mandatory regis - tration of land charges/mortgages on the land register triggers registration fees. If the land charge/mortgage is granted by a foreign entity, the land registry often requests a cost advance before registration. Enforcement of security is done via court proceed - ings for which court fees are payable. The court will only initiate the proceedings once the secured creditor applying for the proceedings has paid a cost advance. No taxes apply to the granting and enforcing of secu - rity. However, if a land charge/mortgage is enforced by way of public auction, RETT of between 3.5% and 6.5% (depending on the German federal state in which the property is located) is payable, for which the successful bidder and the property owner are jointly liable. Additionally, interest on loans granted by a foreign lender and secured by German real estate would trig - ger German domestic income for the lender; ie, inter - est would in principle be subject to German income tax if no double tax treaty excludes the German right to tax this income.
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