GERMANY Law and Practice Contributed by: Michael Josenhans, Lucas Lengersdorf and Beatrice Zobel, Freshfields
period will generally trigger break costs under Ger - man law. Nevertheless, call protection is a customary feature in private credit transactions, particularly in unitranche and mezzanine financings. The typical structures include a side letter under English or Luxembourg law, which imposes prepayment penalties during the initial years of the loan. These penalties often follow a step-down structure, such as 3% in the first year, 2% in the second, and 1% in the third year, with no penalty for prepayments thereafter. In more complex financings, make-whole provisions may be included, requiring borrowers to compensate lenders for the full value of interest payments they would have received during a specified period. Call protection terms can vary depending on market conditions and negotiations. Strong borrowers may secure more flexible terms, while lenders may enforce stricter protections in riskier deals. Given the competi - tive market environment, call protection is increasingly a focal point in structuring agreements to balance lender security and borrower flexibility. Whether payments of principal, interest or other pay - ments made to lenders are subject to German with - holding tax depends on the financing structure. A “typ - ical” loan agreement usually triggers no withholding tax. However, certain exceptions exist – for instance, interest paid by a German tax resident debtor under profit participating loans, convertible bonds or cer - tain other hybrid financing arrangements is subject to withholding tax. Also, interest payments trigger a limited tax liability if the underlying loan is secured by German real estate. Accordingly, structures to mitigate or manage withholding tax concerns are only required in exceptional cases. 4.2 Other Taxes, Duties, Charges or Tax Considerations Besides withholding tax and limited tax liability aspects (as noted in 4.1 Withholding Tax ), lenders 4. Tax Considerations 4.1 Withholding Tax
are usually not subject to German tax for making loans to (or taking security and guarantees from) entities incorporated in Germany. In particular, Germany does not levy stamp duty nor a net wealth tax. With respect to VAT, an exemption usually applies. 4.3 Tax Concerns for Foreign Lenders Tax concerns for foreign tax resident lenders only appear where at least a limited German tax liability is triggered, or if they have a nexus to a non-coopera - tive jurisdiction within the meaning of the German Tax Haven Defence Act. Depending on the specific case (and the tax residency of the private credit lender), protection may be provided under a double taxation agreement. A comprehensive collateral package will typically comprise collateral over all of the obligors’ assets to the extent that the cost-benefit ratio and the agreed security principles justify it. Although this scope may differ in certain transactions, the customary package offered in private capital financings consists only of share pledges to ensure the single point of enforce - ment (SPE), account pledges and assignments of certain receivables. Parallel debt structures are cus - tomarily used. 5. Guarantees and Security 5.1 Assets and Forms of Security Most security agreements have standard terms, leav - ing little room for negotiation. With few exceptions, security agreements can be executed by simple exchange of signatures (electronic, if agreed between the parties). Shares/Interests/Stocks Pledges over shares in a German limited liability com - pany (GmbH), contrary to pledges over partnership interests and stocks in an AG, need to be notarised, incurring high costs. Attending the notarial meeting will usually require a power of attorney (certified/legal - ised to the extent required). The perfection of a pledge requires that the relevant pledged entity be notified accordingly. In the case of certified stocks, the stock certificates need to be
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