Germany: Corporate Finance: Leasing

Financial & Economical Aspects Of Inbound Cross-Border Leasing In Germany
Last Updated: 19 October 2001
Article by Ulrich Eder

New German tax reform acts result in a drastically decrease of municipal tax income during the next years. This results in the urgent need for new municipal income sources. The business of cross-border leasing in Germany concentrates on municipal companies and municipalities. Private sector industries are reluctant due to the lack of suitable assets.

German municipal companies face tough competition and are in a process of privatization and globalization. There is a strong need to optimize financing structures and to gain windfall profits by utilizing innovative leasing transactions. Over the last five years cross-border leasing transactions have become part of municipal business and permanent discussions.

Tram deals which closed in 1995 through 1998 (lease-in-lease-out) have been based mainly on standardized transaction descriptions and were treated as "copy transactions". The design as well as the negotiation of present lease-to-service-contracts for waste-to-energy or waste water treatment-facilities and pipelines have to be tailor-made according to the needs and requirements of municipality, investor and banks.

  • Requirements For Formal Tender In Germany
  • German municipal companies and municipalities are bound to the principle of economic behavior. With regard to the identification and selection of participants for the leasing transaction, the formal tender requirements have to be met.

    A formal tender is required under German law, if:

    The municipal body qualifies as a public client ("öffentlicher �Auftraggeber, § 98 GWB")

    Certain minimum amounts have been exceeded -("Schwellenwerte, § 100 Abs. 1 GWB")

    The agreement covers a public order &("öffentlichen Auftrag, § 99 GWB")

    No special exception is fulfilled ("Bereichsausnahmen, § 100 Abs. 2 GWB")


  • Economic Risks Of The Tender Procedure
  • On February 1, 2001 the new "Vergabeverordnung" came into force. Sect. 13 of this regulation establishes an obligation on part of the municipal body to inform the defeated bidder in writing at least 14 days before the agreement is valid and binding. If this requirement is not met, the contract will be invalid and void.

    It is general practice for German cross-border leasing transactions to formally select the banks in such bidding process as well as to have such procedure for the selection of the trust / investor. Needless to say, this does not mean that the arranger can lean back, relax and wait for the bidding offers. Instead, the formal tender process is integrated in the whole process to avoid delays.

    It is questionable, whether there exists a tender obligation with respect to the identification and selection of an arranger. If the arranger contract would be null and void under the new regulation, the arranger's fee would not become due. On the other hand the obligations agreed upon on part of the arranger may not be effective either. This may become relevant with respect to the obligation to release the lessee from breakage costs. For this particular case it might be necessary to agree on such release obligations in a separate and independent agreement.

    However, according to the dominating legal discussions a contract entered into by the municipality without a required tender procedure is valid.

  • Economics Of The Transaction
  • Cross-border leasing transactions do not have the objective to finance the acquisition or production of assets and consequently, do not compete with domestic leasing transactions or municipal credits. Therefore, from the point of view of some governmental bodies leasing transactions are beneficial and economical, even if only a small net profit value benefit can be achieved.

    However, it should be realized that an actual minimum amount should be met to make it reasonable to enter into such long-term relationship with an U.S. investor. Even though the U.S. tax framework appears to be stabile and solid under the Bush administration, the sharp decrease of the interest rate may seriously harm the cross-border leasing industry.

    In times of low interest rates it should be the most urgent matter for the arranger to find ways and means to maximize the profitability of the transaction to perpetuate the interest of German municipalities and municipal companies in cross-border leasing. Above all, the expectations of the investor regarding his yield should be recalculated and reassessed taking into consideration the lower market interest rates.

  • Risk Allocation Between Lessee And Lessor
  • It is accepted by U.S. parties that the investor bears the risk that the structure of the transaction will provide the expected U.S. tax benefits. It is accepted by the German lessee that he bears the indemnification risk for any loss of those benefits in case of a breach of specified representations or failure to comply with covenants. From the perspective of a German tax counsel representations and covenants should not address an economic compulsion due to

    German taxes arising as a result of executing or not executing the purchase option (income tax, solidarity tax, trade income tax, VAT, real estate transfer tax) an unreasonable determination of the purchase option price or the provisions of the service contract.

    Permitted acts have to cover:

    German tax issues disclosed to the investor (tax ruling papers, VAT reclaim procedure, tax handling during the lease period)

    Structural circumstances (e.g. previous German leasing financing, co-ownership in the asset between city and municipal company)

    Trigger events agreed in the operational documents (springing servitude, springing L/C, springing pledge of the equity PUA)

    Although the lessee will have to accept the indemnification of all parties for increased costs as a result of withholding taxes during the lease term, there should be no obligation for the lessee to cover any withholding tax for closing date payments.

    If an obligation to indemnify other parties falls due, the contracts have to cover provisions regarding principles to give evidence for any tax losses, obligations to cooperate and restructure the transaction, contest-clauses and the right for a burdensome buyout by the lessee.

  • Risk Allocation Between Lessee And Banks
  • Dealing with banks in cross-border leasing has become much more complicated during the last two years. On one hand this is a result of increased structural requirements of lease-to-service-contract transactions. On the other hand the banks noticed the aggravated financial situation of the municipalities and the dramatic desire to privatize even essential parts of the municipal companies. In addition, we have to focus on two substantial changes of the banking world which will become effective in the near future or are already in effect.

    A. The Basel II Proposal

    During the last years the Basel Committee on Banking Supervision has managed to amend the 1988 international capital adequacy framework for banks. Due to some delays in the decision making process the final version will come into effect not before 2005. Under the new capital adequacy framework it can be expected that municipal companies and even municipalities will be subject to rating classifications, the costs for credits for some municipal entities will increase, a restructuring respectively privatization of municipal companies which had entered into leasing transactions in the last years will be more complicated and more expensive.

    As a result it has to be stated that the zero-weighting for municipal credits cannot be remained during the full lease term. It can be expected that some banks will sustain increased costs for their credit portfolio.

    B. The Big Landesbanken Rating Meltdown

    In contrast to private banks, the public sector banks were subject to an unlimited liability guarantee, to the Guarantor’s liability and the liability assumed by a public sector body for the debts of a corporation incorporated under public law ("Anstaltslast" and "Gewährträgerhaftung").

    By the resolution of July 18, 2001, the European Commission and the Federal Republic agreed in a historic compromise, that unlimited guarantees for public sector banks would be abolished by a transitional agreement of four years. The Brussels compromise will be transformed into German law by the end of 2002.

    "Grandfathering I"

    "Grandfathering II"

    Full privatization

    Nothing will change during the aggregate life of lending operations, which have been concluded up to July 18, 2001

    Loans, which are issued up to July 18, 2005, will be subject to the guarantees matured until the end of 2015

    All guarantees will be abolished for business, which has been concluded from July 18, 2005

    Due to this development, Landesbanken are focussed with certain problems to refinance any time period after 2015. In addition, it has to be considered, that they might have the burden of increased costs after 2005.

  • Risk Allocation Between Lessee And Lawyers
  • The German lessee needs a sufficient opinion of the lawyers involved in the transaction above all regarding these issues:

    • Sect. 544 German Civil Code (BGB), Sect. 34 Introductory Act to the German Civil Code (EGBGB): Is it possible to avoid the legal ban on a lease contract exceeding 30 years by agreeing on New York law or is there an ordre public which cannot be excluded?
    • § 29a Code of Civil Procedure (ZPO): Is it possible to agree on New York jurisdiction or does compelling German law request the jurisdiction of local courts at the location of the immovable property because of special provisions for lease contracts?
    • §103 Insolvency Act (InsO): Does the insolvency administrator of the lessee have the right to a refund of the payments rendered by the lessee under the payment undertaking agreement to the bank or is there a claw-back risk?
    • § 741 German Civil Code (BGB): Is the U.S. concept of undivided interest, i.e. a fractional interest in an asset owned by two or more holders, comparable to the joint ownership of rights ("Gemeinschaft nach Bruchteilen") under German law?
    • Ultra-vires: Is it possible for a public law entity to enter into a cross-border leasing transaction even if this is not provided for in the statutes respectively special law. What are the consequences for the lessee and its members if the leasing contracts are void due to the ultra-vires-doctrine?
    • EC Notification: Is there a requirement under German respectively EC law to file a formal notification to the European governmental bodies before entering into a cross-border leasing transaction? Is it a relevant fact whether the lessee is part of the municipality ("Eigenbetrieb") or a separate entity ("Eigengesellschaft") of the municipality?
    • EC Tender Procedure: Is the tender procedure for the banks and trust properly executed? Is there a tender obligation for the bank loans, because these loans are part of a financing package?

    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.

    To print this article, all you need is to be registered on

    Click to Login as an existing user or Register so you can print this article.

    Some comments from our readers…
    “The articles are extremely timely and highly applicable”
    “I often find critical information not available elsewhere”
    “As in-house counsel, Mondaq’s service is of great value”

    Mondaq Advice Centre (MACs)
    Up-coming Events Search
    Font Size:
    Mondaq on Twitter
    Register for Access and our Free Biweekly Alert for
    This service is completely free. Access 250,000 archived articles from 100+ countries and get a personalised email twice a week covering developments (and yes, our lawyers like to think you’ve read our Disclaimer).
    Email Address
    Company Name
    Confirm Password
    Mondaq Topics -- Select your Interests
     Law Performance
     Law Practice
     Media & IT
     Real Estate
     Wealth Mgt
    Asia Pacific
    European Union
    Latin America
    Middle East
    United States
    Worldwide Updates
    Check to state you have read and
    agree to our Terms and Conditions

    Terms & Conditions and Privacy Statement (the Website) is owned and managed by Mondaq Ltd and as a user you are granted a non-exclusive, revocable license to access the Website under its terms and conditions of use. Your use of the Website constitutes your agreement to the following terms and conditions of use. Mondaq Ltd may terminate your use of the Website if you are in breach of these terms and conditions or if Mondaq Ltd decides to terminate your license of use for whatever reason.

    Use of

    You may use the Website but are required to register as a user if you wish to read the full text of the content and articles available (the Content). You may not modify, publish, transmit, transfer or sell, reproduce, create derivative works from, distribute, perform, link, display, or in any way exploit any of the Content, in whole or in part, except as expressly permitted in these terms & conditions or with the prior written consent of Mondaq Ltd. You may not use electronic or other means to extract details or information about’s content, users or contributors in order to offer them any services or products which compete directly or indirectly with Mondaq Ltd’s services and products.


    Mondaq Ltd and/or its respective suppliers make no representations about the suitability of the information contained in the documents and related graphics published on this server for any purpose. All such documents and related graphics are provided "as is" without warranty of any kind. Mondaq Ltd and/or its respective suppliers hereby disclaim all warranties and conditions with regard to this information, including all implied warranties and conditions of merchantability, fitness for a particular purpose, title and non-infringement. In no event shall Mondaq Ltd and/or its respective suppliers be liable for any special, indirect or consequential damages or any damages whatsoever resulting from loss of use, data or profits, whether in an action of contract, negligence or other tortious action, arising out of or in connection with the use or performance of information available from this server.

    The documents and related graphics published on this server could include technical inaccuracies or typographical errors. Changes are periodically added to the information herein. Mondaq Ltd and/or its respective suppliers may make improvements and/or changes in the product(s) and/or the program(s) described herein at any time.


    Mondaq Ltd requires you to register and provide information that personally identifies you, including what sort of information you are interested in, for three primary purposes:

    • To allow you to personalize the Mondaq websites you are visiting.
    • To enable features such as password reminder, newsletter alerts, email a colleague, and linking from Mondaq (and its affiliate sites) to your website.
    • To produce demographic feedback for our information providers who provide information free for your use.

    Mondaq (and its affiliate sites) do not sell or provide your details to third parties other than information providers. The reason we provide our information providers with this information is so that they can measure the response their articles are receiving and provide you with information about their products and services.

    If you do not want us to provide your name and email address you may opt out by clicking here .

    If you do not wish to receive any future announcements of products and services offered by Mondaq by clicking here .

    Information Collection and Use

    We require site users to register with Mondaq (and its affiliate sites) to view the free information on the site. We also collect information from our users at several different points on the websites: this is so that we can customise the sites according to individual usage, provide 'session-aware' functionality, and ensure that content is acquired and developed appropriately. This gives us an overall picture of our user profiles, which in turn shows to our Editorial Contributors the type of person they are reaching by posting articles on Mondaq (and its affiliate sites) – meaning more free content for registered users.

    We are only able to provide the material on the Mondaq (and its affiliate sites) site free to site visitors because we can pass on information about the pages that users are viewing and the personal information users provide to us (e.g. email addresses) to reputable contributing firms such as law firms who author those pages. We do not sell or rent information to anyone else other than the authors of those pages, who may change from time to time. Should you wish us not to disclose your details to any of these parties, please tick the box above or tick the box marked "Opt out of Registration Information Disclosure" on the Your Profile page. We and our author organisations may only contact you via email or other means if you allow us to do so. Users can opt out of contact when they register on the site, or send an email to with “no disclosure” in the subject heading

    Mondaq News Alerts

    In order to receive Mondaq News Alerts, users have to complete a separate registration form. This is a personalised service where users choose regions and topics of interest and we send it only to those users who have requested it. Users can stop receiving these Alerts by going to the Mondaq News Alerts page and deselecting all interest areas. In the same way users can amend their personal preferences to add or remove subject areas.


    A cookie is a small text file written to a user’s hard drive that contains an identifying user number. The cookies do not contain any personal information about users. We use the cookie so users do not have to log in every time they use the service and the cookie will automatically expire if you do not visit the Mondaq website (or its affiliate sites) for 12 months. We also use the cookie to personalise a user's experience of the site (for example to show information specific to a user's region). As the Mondaq sites are fully personalised and cookies are essential to its core technology the site will function unpredictably with browsers that do not support cookies - or where cookies are disabled (in these circumstances we advise you to attempt to locate the information you require elsewhere on the web). However if you are concerned about the presence of a Mondaq cookie on your machine you can also choose to expire the cookie immediately (remove it) by selecting the 'Log Off' menu option as the last thing you do when you use the site.

    Some of our business partners may use cookies on our site (for example, advertisers). However, we have no access to or control over these cookies and we are not aware of any at present that do so.

    Log Files

    We use IP addresses to analyse trends, administer the site, track movement, and gather broad demographic information for aggregate use. IP addresses are not linked to personally identifiable information.


    This web site contains links to other sites. Please be aware that Mondaq (or its affiliate sites) are not responsible for the privacy practices of such other sites. We encourage our users to be aware when they leave our site and to read the privacy statements of these third party sites. This privacy statement applies solely to information collected by this Web site.

    Surveys & Contests

    From time-to-time our site requests information from users via surveys or contests. Participation in these surveys or contests is completely voluntary and the user therefore has a choice whether or not to disclose any information requested. Information requested may include contact information (such as name and delivery address), and demographic information (such as postcode, age level). Contact information will be used to notify the winners and award prizes. Survey information will be used for purposes of monitoring or improving the functionality of the site.


    If a user elects to use our referral service for informing a friend about our site, we ask them for the friend’s name and email address. Mondaq stores this information and may contact the friend to invite them to register with Mondaq, but they will not be contacted more than once. The friend may contact Mondaq to request the removal of this information from our database.


    This website takes every reasonable precaution to protect our users’ information. When users submit sensitive information via the website, your information is protected using firewalls and other security technology. If you have any questions about the security at our website, you can send an email to

    Correcting/Updating Personal Information

    If a user’s personally identifiable information changes (such as postcode), or if a user no longer desires our service, we will endeavour to provide a way to correct, update or remove that user’s personal data provided to us. This can usually be done at the “Your Profile” page or by sending an email to

    Notification of Changes

    If we decide to change our Terms & Conditions or Privacy Policy, we will post those changes on our site so our users are always aware of what information we collect, how we use it, and under what circumstances, if any, we disclose it. If at any point we decide to use personally identifiable information in a manner different from that stated at the time it was collected, we will notify users by way of an email. Users will have a choice as to whether or not we use their information in this different manner. We will use information in accordance with the privacy policy under which the information was collected.

    How to contact Mondaq

    You can contact us with comments or queries at

    If for some reason you believe Mondaq Ltd. has not adhered to these principles, please notify us by e-mail at and we will use commercially reasonable efforts to determine and correct the problem promptly.