New legislation has come into force in Germany on 25 December 2008. As of this date factoring has become a regulated financial service within the meaning of the German Banking Act (Kreditwesengesetz).
The background of the new legislation is that the factoring companies in Germany wished to enjoy certain tax advantages which until 24 December 2008 had been reserved to the banking sector. Along with this it was decided, that the factoring sector like the banking sector should then also become a regulated sector under supervision of the German Financial Supervisory Authority (Bundesanstalt für Finanzdienstleistungsaufsicht - BaFin) (the "German Authority").
As a consequence, any entity which intends to provide factoring services in Germany will be required to apply to the German Authority for a licence.
Since 25 December 2008 doing factoring business in Germany without a licence constitutes a criminal offence pursuant to the German Banking Act and may result in imprisonment of up to three years or fine.
The new law contains transitional provisions in favour of companies which had been doing factoring business before 25 December 2008. These companies have the opportunity to obtain a licence by merely notifying the German Authority and submitting certain information and documents. The deadline for this notification is 31 January 2009 (for certain smaller companies 31 December 2009).
Any company which will set up a factoring business in Germany after 24 December 2008 will need a normal licence and will thus have to go through the normal application procedure.
Although the new law will in principle treat factoring in the same way as any other financial services already within the scope of the German Banking Act, there will be certain relief for the factoring companies: There will be no minimum capital requirement. Certain control mechanisms regarding liquidity and solvency will not be applicable. Further, the new law requires only one (not two) reliable and competent managers (as formally approved by the authorities) of the factoring company.
The new law takes into account the principles of freedom of establishment and freedom to provide services under European law. It thus allows factoring companies, which are based in another member state of the European Economic Area, under certain conditions to provide trans-border factoring services into Germany or to provide factoring services in Germany through a German branch without a license of the German Authority. Details should be clarified by way of a formal request to the German Authority.
Factoring companies already doing factoring in or into Germany should take care to observe the notification period. They should file the notification well before 31 January 2009 and against a receipt from the German Authority.
The new law also introduces a continuing supervision of factoring companies by the German Authority. This includes in particular considerable reporting obligations, organisation obligations as well as obligations to submit annual accounts, management reports and auditor's reports to the authorities on a regular basis. The costs of the supervision by the authorities will be financed by way of allocating the costs to the factoring companies.
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.