The finance ministry has published a slightly amended version of its draft decree of February 2004 on the minimum branch capital to be attributed to branches of foreign banks for tax purposes.
Bank branches in Germany from the European Economic Area countries (EU, Iceland, Liechtenstein and Norway) do not fall under the full supervision of the German supervision authority, BAFin, and do not therefore draw up and submit financial statements as independent banks. Accordingly, no specific branch capital is allocated to their German operations under the provisions of the Banking Act, which means there are no "statutory" financial statements to serve as the basis for the branch's tax accounts. In particular, there is no accounting rule under which a bank could allocate its equity, or "core", capital over its domestic and foreign branches. The finance ministry decree of Christmas Eve 1999 on permanent establishments laid down minimum amounts of capital to be assumed for tax purposes in a rather rough-and-ready table but stated that the rule did not apply after 2000. The ministry of finance has now issued the second draft of a replacement decree. The main thrust of the draft is to set out formulae for calculating the minimum capital to be allocated by a foreign bank to its German branch, or, for that matter, the maximum capital to be allocated by a German bank to its foreign branches. If these limits are overstepped, the interest expense to be charged against the branch profit taxable in Germany will be reduced accordingly. More specifically, the decree rules that:
- The core capital of the bank should be allocated between its German and foreign branches in proportion to its weighted risk assets and market risk positions carried. This calculation may be derived from the bank's accounts under foreign law and from the risk weighting rules of its foreign supervisory authority as long as appropriate adjustments are made to take differences between national accounting principles into account (e.g. in the calculation of pension provisions).
- If this "capital allocation method" gives an excessive result, the bank may base its "branch capital" on a "minimum capital" of 8.5% of the branch's weighted risk assets and market risk amounts. The factor of 8.5% can fall to not less than 4.5% if the bank has secondary, or supplemental, capital. The "minimum capital method" may be applied for a further four years without the need to reexamine its justification, unless circumstances change dramatically.
- Newly opened branches start with a minimum capital of at least € 5m.
- Small branches with gross assets of not more than € 500m can take their minimum capital at 3% of gross assets if this is higher than € 5m. For 2001-2 the minimum capital is 2% and for 2003-4 2.5% of gross assets.
- For 2001-2 other banks may apply the "minimum capital method" at a standardised factor of 4.5% of the weighted risk assets and market risk amounts. For 2003-4 the full factor relevant to the bank must be taken. Thereafter the "capital allocation method" must be applied unless it is inappropriate.
- Banks from the USA, Japan and Australia (equated with EEA banks for supervision purposes) should follow these rules with respect to their German branches except that the branch capital must be at least € 5m.
- Banks from other countries must take the higher amount of branch capital from these rules or from their branch financial statements as filed with the BAFin.
- German banks apply these rules in respect of their foreign branches in the order of preference of minimum capital for an equivalent branch in Germany under German law, the "capital allocation method", or at 3% of gross assets if a small branch.
- The calculations are to be done annually as the basis for the minimum capital for the following year. Adjustments to the interest charge are to be at the average refinancing cost to the bank, or, for simplicity, at the average of the three-month EURIBOR rate.
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