GERMANY Law and Practice Contributed by: Michael Josenhans, Lucas Lengersdorf and Karl Kuhn, Freshfields
Nevertheless, call protection is a customary feature in private credit transactions, particu - larly in unitranche and mezzanine financings. The typical structures include a side letter under English or Luxembourg law, which imposes pre - payment 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 provi - sions may be included, requiring borrowers to compensate lenders for the full value of inter - est 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 competitive 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 payments made to lenders are subject to Ger - man withholding tax depends on the financing structure. A “typical” loan agreement usually triggers no withholding tax. However, certain exceptions exist – for instance, interest paid by a German tax resident debtor under profit par - ticipating loans, convertible bonds or certain other hybrid financing arrangements is subject to withholding tax. Also, interest payments trig - ger a limited tax liability if the underlying loan is secured by German real estate. Accordingly, 4. Tax Considerations 4.1 Withholding Tax
structures to mitigate or manage withholding tax concerns are not generally required, but only in exceptional cases. 4.2 Other Taxes, Duties, Charges or Tax Considerations Besides withholding tax and limited tax liabil - ity aspects (as noted in 4.1 Withholding Tax ), lenders are usually not subject to German tax by making loans to (or taking security and guar - antees 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-cooperative jurisdiction within the meaning of the German Tax Haven Defence Act. Depend - ing on the specific case (and the tax residency of the private credit lender), protection may be provided under a double taxation agreement. 4.4 Tax Incentives There are generally no tax incentives available for foreign private credit lenders lending into Germany. 4.5 Non-Bank Status Regarding interest income, there is generally no significant difference between bank and non- bank lenders. Therefore, no additional tax con - siderations are usually necessary for non-bank lenders.
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