1. Overview
1.1 What are the main trends/significant developments in the project finance market in your jurisdiction?
The past year has once again been dominated by COVID-19 and the restrictive measures imposed by the federal and state governments to combat the pandemic. Climate change and renewable energy have also remained prominent on the agenda and have been prioritised further by the new federal government made up of Social Democrats, Greens and Liberals. It also became apparent that thousands of bridges on Germany's motorway and highway network are in need of urgent repair or replacement, further increasing the vast investment requirements in Germany's infrastructure over the next eight to 10 years.
1.2 What are the most significant project financings that have taken place in your jurisdiction in recent years?
Among several large infrastructure projects, the construction of a new terminal 3 at Frankfurt airport has commenced and Berlin Brandenburg Airport (BER) was finally completed. The new federal coalition government is planning significant investments in the development and upgrading of the railway network on the basis of the so-called “Germany pulse” (Deutschlandtakt), which comprises infrastructure projects totalling approximately EUR 30 billion.
2. Security
2.1 Is it possible to give asset security by means of a general security agreement or is an agreement required in relation to each type of asset? Briefly, what is the procedure?
Under German law, there is no concept of a floating charge that would be applied over all or substantially all assets of a company from time to time. In order to achieve this effect, depending on the types of assets owned by it, the security grantor must enter into a number of separate security agreements relating to the different assets. Additional protection for creditors can be provided through the assumption of personal liability by the debtor in a notarial deed, together with submission to immediate enforcement. This provides the creditor with the possibility to foreclose on the debtor's entire assets without needing first to go to court to obtain an enforcement title.
2.2 Can security be taken over real property (land), plant, machinery and equipment (e.g. pipeline, whether underground or overground)? Briefly, what is the procedure?
Security over real property, including over heritable building rights, can take the form of either a land charge (Grundschuld) or, more rarely, a mortgage (Hypothek); the latter is accessory to the secured claim and therefore cannot be transferred independently of it, and is thus less flexible. Both types of security can take a certificated or, more commonly, uncertificated form and are usually notarised (as they almost invariably contain a submission to immediate foreclosure) and must be registered in the relevant land register. A land charge, given its abstract non-accessory nature, also requires a security purpose agreement (Sicherungszweckvereinbarung), which sets out details of the secured obligations as well as the triggers for enforcement.
A land charge or mortgage will encumber fixed assets serving the economic purpose of the land, as well as any buildings and other permanently fixed parts thereon. Other plant, machinery and equipment will require a separate security agreement, often in the form of a transfer of title for security purposes (Sicherungsübereignung) under which legal ownership of the collateral passes to the creditor.
2.3 Can security be taken over receivables where the chargor is free to collect the receivables in the absence of a default and the debtors are not notified of the security? Briefly, what is the procedure?
Security over receivables can be taken by way of a security assignment, which can be open or silent (with certain limited exceptions). The assignor is given express authority to continue collecting the receivables until such authority is revoked (usually in case of default) and the assignee usually agrees not to disclose the existence of the assignment to the underlying receivables debtors except in case of default.
2.4 Can security be taken over cash deposited in bank accounts? Briefly, what is the procedure?
Account pledges are the most commonly used instruments for granting security over cash deposits. The pledge must be notified to the account bank in order to be validly created. As German banks invariably will have been granted a senior account pledge in their standard terms of business, in the notification they will usually be requested to either waive or subordinate their rights under such pledge.
2.5 Can security be taken over shares in companies incorporated in your jurisdiction? Are the shares in certificated form? Briefly, what is the procedure?
Security over shares is invariably taken by way of pledge. The right to dividends and other payment claims must be pledged in addition to the pledge of shares, and such pledge must be notified to the pledged company. The voting rights attaching to shares are not pledged. Shares in private limited companies are uncertificated and do not entail any specific perfection requirements, except that the pledge itself must be in notarial form.
A pledge of shares in public limited companies (Aktiengesellschaft, AG) does not need to be in notarial form but, depending on the form of shares, may require security perfection. AG shares are sometimes certificated, in which case a valid pledge requires the share certificate to be handed over, or a substitute form of handover to occur (e.g., where there is a global certificate kept by a custodian, notice to the custodian and a pledge or assignment of the co-ownership rights would be used). Sometimes, AG share certificates need to be endorsed. It is also possible for AG shares and other securities to take a dematerialised form. Perfection of security in such cases depends on where the register is kept.
2.6 What are the notarisation, registration, stamp duty and other fees (whether related to property value or otherwise) in relation to security over different types of assets (in particular, shares, real estate, receivables and chattels)?
Share pledges of private limited companies (GmbH) must be notarised and security over land is usually granted in notarial deeds as well. In each case, statutory notary fees are incurred which depend primarily on the value of the security granted. In addition, security over land must be registered in the land register, incurring further registration fees. The enforcement of security over land would usually trigger real estate transfer tax, as would the enforcement of share security over a pledged company which owns real property.
2.7 Do the filing, notification or registration requirements in relation to security over different types of assets involve a significant amount of time or expense?
The registration of a land charge incurs fees and can take a few weeks (longer if the same land charge relates to several plots of land registered in different land registers, as registration cannot be effected simultaneously). Where third parties have to be notified of security, for evidentiary purposes this is usually done in writing by way of fax or registered mail, but the notice itself need not take any particular form.
2.8 Are any regulatory or similar consents required with respect to the creation of security over real property (land), plant, machinery and equipment (e.g. pipeline, whether underground or overground), etc.?
Security over land does not require any consent unless the real property is located in a designated redevelopment area, in which case the agreement of the designating municipality needs to be sought. Other relevant encumbrances such as a transfer of title for security purposes or a security assignment of plant, machinery and equipment do not require any consent.
3. Security Trustee
3.1 Regardless of whether your jurisdiction recognises the concept of a “trust”, will it recognise the role of a security trustee or agent and allow the security trustee or agent (rather than each lender acting separately) to enforce the security and to apply the proceeds from the security to the claims of all the lenders?
Collateral which secures syndicated financings is commonly held by a security trustee where the security in question is not “accessory” to the debt secured by it and can therefore be assigned independently of the debt. The most important non-accessory security types are land charges, security assignments and transfers of title for security purposes.
Accessory security such as a pledge or mortgage is, where practically feasible, held directly by each secured party and, in addition, by a security trustee. In order to makes this workable in practice, a parallel debt in favour of the security trustee must be created by way of an abstract acknowledgment of debt by the debtor; this gives the security trustee an independent claim equal to the aggregate amount of all claims outstanding in connection with the secured financing from time to time. Whilst the parallel debt concept is widely used in the German market, it has never been tested in court.
3.2 If a security trust is not recognised in your jurisdiction, is an alternative mechanism available (such as a parallel debt or joint and several creditor status) to achieve the effect referred to above which would allow one party (either the security trustee or the facility agent) to enforce claims on behalf of all the lenders so that individual lenders do not need to enforce their security separately?
See question 3.1 with respect to accessory security.
4. Enforcement of Security
4.1 Are there any significant restrictions which may impact the timing and value of enforcement, such as (a) a requirement for a public auction or the availability of court blocking procedures to other creditors/the company (or its trustee in bankruptcy/liquidator), or (b) (in respect of regulated assets) regulatory consents?
Enforcement of collateral requires the enforcing creditor to obtain an enforcement title in court, resulting in some delay. Where possible, this requirement is either waived (e.g. in share pledges) or avoided by immediate submission to foreclosure (almost invariably in land charge creation deeds).
The enforcement of a land charge requires the land charge to be declared mature upon six months' notice being given to the debtor.
The primary method of enforcing land charges and mortgages is by way of public auction, and this (court-driven) process can be expected to last at least 12 months. Where the charged real property generates income, it is also possible to place the property into forced administration and to use such income to pay down the secured debt, which is a quicker process.
Pledges of shares and chattels are also commonly enforced by public auction, although the enforcement process here is not court-driven and, depending on the circumstances, can be completed in a few months. It is usual for the parties to also contractually agree on a private sale as an alternative to auction.
4.2 Do restrictions apply to foreign investors or creditors in the event of foreclosure on the project and related companies?
No particular restrictions exist with respect to foreign investors or creditors but foreclosure on the basis of a foreign judgment may first require an enforcement declaration. The process differs according to whether or not an international convention (e.g. the Brussels or Lugano Convention or the Hague Convention on Civil Procedure) or bilateral treaty applies to the proceedings in question.
5. Bankruptcy and Restructuring Proceedings
5.1 How does a bankruptcy proceeding in respect of the project company affect the ability of a project lender to enforce its rights as a secured party over the security?
Upon the filing for the opening of insolvency proceedings over the assets of the project company, the insolvency court may order preliminary protective measures to secure the assets of the project company. Such protective measures can include a suspension or stay of any enforcement measures against the assets of the project company. Once the insolvency proceedings over the assets of the project company are opened, the project company's right to manage and transfer its assets expires and is solely vested with the insolvency administrator. The project company's creditors may no longer individually execute into the project company's assets. The project company's creditors having a right in rem in an asset may demand the separation of such asset from the insolvency asset. Land charges/mortgages, pledges and security assignments granted to the project company's creditors prior to the opening of the insolvency proceedings give a right of separate satisfaction prior to the remaining creditors of the insolvency estate.
5.2 Are there any preference periods, clawback rights or other preferential creditors' rights (e.g. tax debts, employees' claims) with respect to the security?
Any security granted within the last month prior to the opening of the insolvency proceedings over the assets of the project company becomes legally invalid when the insolvency proceedings are opened. Transactions made prior to the opening of the proceedings over the assets of the project company to the disadvantage of the other insolvency creditors may be contested and clawed back. The preference period depends on the nature and circumstance of the contested transaction and may last between three months, in cases of congruent coverage, and 10 years, in case of acts committed intentionally to the disadvantage of other creditors. There are no preferential creditors' rights for tax debts and/or employees' claims. Only debts accrued after the opening of the insolvency proceedings (Masseforderungen) are preferred to other insolvency creditors.
5.3 Are there any entities that are excluded from bankruptcy proceedings and, if so, what is the applicable legislation?
Neither the Federal Republic of Germany nor its federal states can file for the opening of insolvency proceedings over their respective assets. The same applies to a legal person under public law under the supervision of a federal state if the law of the respective federal state exempts such legal person from insolvency proceedings (e.g. municipalities).
5.4 Are there any processes other than court proceedings that are available to a creditor to seize the assets of the project company in an enforcement?
Creditors may seize assets of the project company in an enforcement without court proceedings, if the project company has submitted itself to immediate foreclosure in a notarial deed.
5.5 Are there any processes other than formal insolvency proceedings that are available to a project company to achieve a restructuring of its debts and/or cramdown of dissenting creditors?
A project company may initiate (pre-insolvency) restructuring proceedings under the German Corporate Stabilisation and Restructuring Act (StaRUG) to achieve a restructuring of its debts and cramdown of its dissenting creditors outside formal insolvency proceedings. The main component of such (pre-insolvency) restructuring proceedings is the so-called “restructuring plan” which may provide for restructuring contributions of the creditors of the project company, such as, for instance, (partial) debt waiver, deferred payment and/or adjustments of security rights granted by the project company, including the underlying contractual relationships. The restructuring plan must be adopted by the affected creditors, which have to vote in creditor groups. The adoption of the restructuring plan requires a majority of 75% of the voting rights existing in each creditor group. If the required majority is not reached in a given creditor group, its consent may be replaced under certain conditions (so-called “cross-class cramdown”). Since the measures under the StaRUG can have a massive impact on rights of the creditors of the project company, the project company is only entitled to these measures if it is facing threatened illiquidity (drohende Zahlungsunfähigkeit – i.e., overwhelming risk of becoming illiquid).
5.6 Please briefly describe the liabilities of directors (if any) for continuing to trade whilst a company is in financial difficulties in your jurisdiction.
The directors are obliged to file for insolvency without undue delay (ohne schuldhaftes Zögern) once the project company becomes illiquid (zahlungsunfähig) and/or over-indebted (überschuldet), but not later than three weeks after the project company becomes illiquid (zahlungsunfähig) or within six weeks after the project company becomes over-indebted (überschuldet). Directors violating such duty may face criminal penalties (e.g., fine or imprisonment of up to five years). In addition, they may be personally liable for all payments made by the project company after the project company became illiquid (zahlungsunfähig) and/or over-indebted (überschuldet), if such payments were not made in the ordinary course of business (ordnungsgemäßer Geschäftsgang), in particular if the payments were not required for maintaining the business operations of the project company.
6. Foreign Investment and Ownership Restrictions
6.1 Are there any restrictions, controls, fees and/or taxes on foreign ownership of a project company?
Germany introduced a regime on foreign investment control several years ago; however, only within the last three years has this area of law been subject to extremely dynamic development. Thresholds for the review of an intended foreign investment have been lowered to 10% (previously 25%) in certain sensitive areas. A mandatory notification procedure has been introduced, and closing prior to government approval is invalid and may even trigger criminal sanctions. The scope of the reviewed areas has been expanded as well, so that now a range of sectors can be reviewed including telecommunications, infrastructure, pharmaceuticals, emerging technologies, etc. Thus foreign investment control has become one of the major issues in international M&A transactions. Transactions within the European Union (EU) are mostly not affected, except in very sensitive areas, above all the defence sector.
6.2 Are there any bilateral investment treaties (or other international treaties) that would provide protection from such restrictions?
Bilateral investment treaties fall within the competence of the EU Commission. However, all (bilateral) investment treaties that were signed prior to the EU Commission being granted such competence will remain in place until such time when the EU concludes a (new) treaty. To date, Germany has entered into some 130-plus treaties, a number of which remain relevant.
6.3 What laws exist regarding the nationalisation or expropriation of project companies and assets? Are any forms of investment specially protected?
With investment protection agreements, states guarantee investors protection under international law in the host state. If there is an investment protection agreement that provides for the settlement of investment protection disputes in so-called investor-state arbitration proceedings, the investor can assert his rights at the level of international law before independent arbitral tribunals.
Without an investment protection agreement, a foreign investor might have to rely on uncertain lawsuits in national courts in the host country or diplomatic intervention by its government to protect its investment from arbitrary measures, such as expropriation without compensation.
The Lisbon Treaty in 2009 transferred jurisdiction over foreign direct investment to the EU. The EU Commission thus has the competence to negotiate agreements on investment protection. For example, the EU's “new” free trade and investment protection agreements contain the EU's proposals for a reformed dispute settlement procedure with a modern, transparent investment court.
7. Government Approvals/Restrictions
7.1 What are the relevant government agencies or departments with authority over projects in the typical project sectors?
Depending on the type of project and its location, various agencies at federal and state level can be involved. The Bundesnetzagentur für Elektrizität, Gas, Telekommunikation, Post und Eisenbahnen is the relevant government agency for energy and railway networks. The Bundesamt für Seeschifffahrt und Hydrographie is responsible for the planning of offshore wind projects. The Fernstraßen-Bundesamt is the planning authority responsible for motorways. The federal system means that a number of other areas such as technical approvals are supervised at the level of the individual states rather than nationally.
7.2 Must any of the financing or project documents be registered or filed with any government authority or otherwise comply with legal formalities to be valid or enforceable?
Certain security documents (pledges of shares in private limited companies (GmbH), land charges and mortgages) must be executed by way of notarial deed. Land charges and mortgages must also be registered in the relevant land register. Apart from this, there are no specific format, registration or filing requirements.
7.3 Does ownership of land, natural resources or a pipeline, or undertaking the business of ownership or operation of such assets, require a licence (and if so, can such a licence be held by a foreign entity)?
Ownership of land does not require a licence and resources found on the property in general belong to the owner. The mining of metals, salt, etc. is only permitted with the approval of the mining authority. The construction and operation of energy pipelines, power supply lines, etc. are subject to the approval of the competent authority in the federal state where they are located. There is no general restriction on ownership by foreign entities, but sanctions or the right of the Federal Ministry for Economic Affairs and Climate Action to prohibit ownership on the grounds of security or public order may impose limitations.
7.4 Are there any royalties, restrictions, fees and/or taxes payable on the extraction or export of natural resources?
Extraction companies have to pay annual fees both for the extraction of the relevant resource (Förderabgabe, with the exception of “old rights” pertaining to, e.g., lignite, granite and salt) and for the use of the relevant land (Feldesabgabe).
7.5 Are there any restrictions, controls, fees and/or taxes on foreign currency exchange?
There are no generally applicable exchange controls. Specific restrictions may, however, be relevant as a result of applicable financial sanctions.
7.6 Are there any restrictions, controls, fees and/or taxes on the remittance and repatriation of investment returns or loan payments to parties in other jurisdictions?
There are no generally applicable restrictions and controls, but international sanctions applicable in Germany can hinder or even prevent payments from being made abroad, as is currently the case in relation to Russia. Dividend payments are subject to withholding tax. Interest payments on loans can in limited circumstances be subject to tax, but applicable double tax treaties usually mean that such payments are taxed in the country of origin of the lender, not Germany. Payments made abroad in excess of EUR 12,500 have to be notified to the Bundesbank for statistical purposes, but failure to do so does not invalidate the payment itself.
7.7 Can project companies establish and maintain onshore foreign currency accounts and/or offshore accounts in other jurisdictions?
Yes, there are no general restrictions other than applicable anti-money laundering regulations/know-your-customer obligations.
7.8 Is there any restriction (under corporate law, exchange control, other law or binding governmental practice or binding contract) on the payment of dividends from a project company to its parent company where the parent is incorporated in your jurisdiction or abroad?
Dividend payments are sometimes restricted by provisions in the constitutional documents or credit agreements of the project company. There is no general restriction on paying dividends to a parent incorporated outside Germany. Dividends cannot be paid in respect of mere accounting profits generated by the activation of certain assets.
7.9 Are there any material environmental, health and safety laws or regulations that would impact upon a project financing and which governmental authorities administer those laws or regulations?
Projects which might cause harmful environmental effects, or which otherwise might be hazardous to the environment or people, require a licence, usually from the competent local authority. The implementation of projects is subject to, inter alia, applicable occupational health and safety regulations, which are monitored by various authorities. The safety of pipelines and networks is monitored by the Bundesnetzagentur.
7.10 Is there any specific legal/statutory framework for procurement by project companies?
Public sector entities (including private law companies founded by them for this purposes) have to comply with applicable procurement rules with respect to public orders made by them. The applicable thresholds in 2022 are EUR 140,000 for supplies and services made to higher federal authorities, EUR 215,000 for orders made by lower authorities which do not concern national defence and security, EUR 431,000 for contracts in the utilities sector and EUR 5,382,000 for works contracts and concessions. Above these thresholds, an order has to be put out EU-wide. Below these thresholds, the authority has a choice as to whether to use the open procedure (inviting an unlimited number of offers) or the restricted procedure (inviting offers from a limited number of suppliers chosen according to objective, non-discriminatory and transparent criteria).
8. Foreign Insurance
8.1 Are there any restrictions, controls, fees and/or taxes on insurance policies over project assets provided or guaranteed by foreign insurance companies?
There are no particular restrictions on insurance policies written by foreign companies incorporated and regulated elsewhere in the European Economic Area (EEA). Insurance companies from outside the EEA require a licence from BaFin in order to offer insurance in Germany.
8.2 Are insurance policies over project assets payable to foreign (secured) creditors?
Insurance policies are commonly assigned to both domestic and foreign secured creditors by way of security. Any such assignment must be perfected by way of notice to the relevant insurance company.
9. Foreign Employee Restrictions
9.1 Are there any restrictions on foreign workers, technicians, engineers or executives being employed by a project company?
There are no restrictions with respect to nationals of an EEA country or Switzerland. Employees who are nationals of other countries require a residence and work permit issued by the immigration authority with the consent of the employment agency.
10. Equipment Import Restrictions
10.1 Are there any restrictions, controls, fees and/or taxes on importing project equipment or equipment used by construction contractors?
Imports from outside the EU must be notified to customs and usually require the payment of customs duties.
10.2 If so, what import duties are payable and are exceptions available?
Import duties depend on the specific equipment in question in accordance with its TARIC (EU integrated tariff) code, usually by reference to its value. Import value-added tax (VAT) may also apply.
11. Force Majeure
11.1 Are force majeure exclusions available and enforceable?
German statute suspends the obligation to perform a contract where this performance has become impossible due to force majeure (meaning an external occurrence outside the reasonable control of the parties). Where performance is not strictly impossible but the “basis of the contract” (Geschäftsgrundlage) has fallen away, statute permits a court to adapt the contract in accordance with the perceived intentions of the parties in order to rebalance the contract. It is possible to contractually agree on express force majeure provisions, which are in principle enforceable.
12. Corrupt Practices
12.1 Are there any rules prohibiting corrupt business practices and bribery (particularly any rules targeting the projects sector)? What are the applicable civil or criminal penalties?
In Germany, provisions outlawing bribery have a long tradition and can be found in the Criminal Code (Strafgesetzbuch, StGB). The most recent amendments came into force in 2015.
Sections 299 and 300 StGB criminalise bribery and corruption in business dealings. Sections 331 et seq. StGB may not be violated in dealings with public officials. Frequently, there is a simultaneous violation – in addition to Sections 299 et seq. StGB – of section 261 StGB (Money Laundering) and section 266 StGB (Infidelity).
Offering and accepting a bribe is equally penalised.
Violation of the German law may result in civil, criminal and economic consequences for the company and/or the individual concerned. Besides imprisonment of up to five years, criminal penalties include high fines (up to EUR 10 million for companies) as well as the possibility to seize the profits the company involved in corruptive activities.
Possible consequences under civil law include, for example, exclusion from certain transactions, in particular with government entities. Further, it is becoming common practice to provide for penalties in this respect within contracts, such as termination rights.
There are no provisions aimed explicitly at the projects sector, although this field is typically regarded as being more exposed to corruption and bribery than other business areas.
13. Applicable Law
13.1 What law typically governs project agreements?
Typically these are governed by German law, or sometimes by English law.
13.2 What law typically governs financing agreements?
Credit agreements are governed by German law or English law. The latter has become less frequent following Brexit. Security agreements are usually governed by the law of the jurisdiction where the collateral is located.
13.3 What matters are typically governed by domestic law?
Security agreements are governed by the law of the jurisdiction where the collateral is located.
14. Jurisdiction and Waiver of Immunity
14.1 Is a party's submission to a foreign jurisdiction and waiver of immunity legally binding and enforceable?
It is possible for a party to submit to a foreign jurisdiction. Depending on the foreign jurisdiction in question, this submission will be binding in accordance with the Brussels Regulation (for EU Member States) or, e.g. with respect to the United Kingdom, the Hague Convention of 30 June 2005 on Choice of Court Agreements (unless there is an “asymmetrical” jurisdiction clause). Even absent the application of these conventions and regulations, an express or implied choice of forum is in principle valid, albeit subject to a larger number of possible exceptions.
A sovereign entity which is otherwise accorded immunity under German law can validly waive such immunity.
15. International Arbitration
15.1 Are contractual provisions requiring submission of disputes to international arbitration and arbitral awards recognised by local courts?
Yes, if the dispute itself is eligible for arbitration. An agreement in writing is generally required whereby the parties submit to arbitration. In the case of a consumer, this needs to be a separate document signed by each party in its own hand.
15.2 Is your jurisdiction a contracting state to the New York Convention or other prominent dispute resolution conventions?
Germany is a member of a number of dispute resolution conventions such as the New York Convention, the Energy Charter Treaty of 1964, the Geneva Protocol on Arbitration Clauses of 1923 and the Convention on the Settlement of Investment Disputes between States and Nationals of Other States (ICSID Convention) of 1965.
15.3 Are any types of disputes not arbitrable under local law?
Family law disputes regarding status, certain employment law issues, tenancy law and criminal proceedings cannot be the subject of arbitration.
15.4 Are any types of disputes subject to mandatory domestic arbitration proceedings?
No disputes are subject to such proceedings in Germany.
16. Change of Law / Political Risk
16.1 Has there been any call for political risk protections such as direct agreements with central government or political risk guarantees?
No, there has not been any such demand.
17. Tax
17.1 Are there any requirements to deduct or withhold tax from (a) interest payable on loans made to domestic or foreign lenders, or (b) the proceeds of a claim under a guarantee or the proceeds of enforcing security?
- Taxes are in principle not deducted from interest payments made to domestic or foreign lenders in respect of loans advanced by them. However, by way of exception, a tax liability might be incurred, e.g. if the loan is secured by real estate located in Germany or, in the case of profit participating loans, if the borrower is domiciled, managed or has its registered office in Germany. In these cases, a tax rate of currently 26.375% applies, unless otherwise provided for in a double taxation agreement.
- Proceeds from the enforcement of guarantees or security are not subject to withholding tax in Germany.
17.2 What tax incentives or other incentives are provided preferentially to foreign investors or creditors? What taxes apply to foreign investments, loans, mortgages or other security documents, either for the purposes of effectiveness or registration?
There are no special tax benefits or exemptions for foreign investors or creditors.
No taxes are required to be paid in Germany for the effectiveness and registration of foreign investments, loans, mortgages or other security documents alone. However, notary or administration fees may apply.
18. Other Matters
18.1 Are there any other material considerations which should be taken into account by either equity investors or lenders when participating in project financings in your jurisdiction?
No, there are no further considerations in this regard.
18.2 Are there any legal impositions to project companies issuing bonds or similar capital market instruments? Please briefly describe the local legal and regulatory requirements for the issuance of capital market instruments.
Bonds and similar capital markets issues are often listed, albeit not invariably so. The admission of bonds to be traded on the regulated market of the stock exchange requires the issuer to be in existence for at least three years and for the expected issue volume to be not less than EUR 1.25 million. Listed debt securities (and unlisted debt securities issued to the public rather than “qualified investors”) require a prospectus complying with harmonised EU requirements set out in the Prospectus Regulations, which needs to be approved by BaFin. An issue of debt securities will involve an arranging bank, a paying agent and, where the issue is secured, a security trustee.
19. Islamic Finance
19.1 Explain how Istina'a, Ijarah, Wakala and Murabaha instruments might be used in the structuring of an Islamic project financing in your jurisdiction.
An Istina'a structure can be put in place by way of a contract for work and services (Werkvertrag) where the specifications and payment are fixed at the outset but the price becomes due only after delivery.
An Ijarah structure can be put in place via a finance lease arrangement where the lessor purchases the asset and then lets it to the lessee while retaining all risks associated with the ownership of the asset; depending on individual preferences, a transfer of ownership in the asset to the lessee at the end of the lease can either be contemplated or not.
Wakala can be structured by way of an agency agreement whereby the agent (Wakeel) will invest the principal's (Muwakil) funds in certain assets. The agent will be entitled to a fee for its services and, if desired, can also be paid any profit made above an agreed profit rate as a further incentive.
A Murabaha structure can be put in place by way of a sales contract under which the financier purchases the asset and, at the same time, enters into another future sales contract under which the ultimate buyer purchases the asset; the latter would include the cost and margin of the financier.
19.2 In what circumstances may Shari'ah law become the governing law of a contract or a dispute? Have there been any recent notable cases on jurisdictional issues, the applicability of Shari'ah or the conflict of Shari'ah and local law relevant to the finance sector?
In Germany, the parties are generally free to choose the governing law of their contract and could therefore in principle choose the law of a jurisdiction that has implemented Shari'ah law. In practice, there would be obstacles resulting from the potential difficulties a German court in a dispute would face when trying to ascertain and apply such law. German public policy may also run contrary to some aspects of the chosen Shari'ah-conforming laws, in which case German law would prevail.
Invariably, one would therefore use German law-governed instruments, adapted to conform to the relevant Shari'ah principles. German court cases involving Shari'ah law have so far been confined to family law, and the potential conflicts between Shari'ah law and German public policy thus remain largely unexplored. Unlike for example in the United Kingdom, Islamic finance is still a niche product in Germany.
19.3 Could the inclusion of an interest payment obligation in a loan agreement affect its validity and/or enforceability in your jurisdiction? If so, what steps could be taken to mitigate this risk?
The obligation to pay interest is a key characteristic of loans contemplated by general German law. Such obligations are therefore prima facie enforceable, save where interest is itself charged on interest (where particular structuring care has to be taken to make such an obligation enforceable) or where the interest charged is vastly in excess of comparable rates found in the market for the same product (in which case the obligation may be void for being unconscionable (“contra bonos mores”)).
Originally Published by ICLG
The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.
