Potential Additional German Capital Gains Tax for Real Estate Investors

Posted in EU and Competition, Finance and Capital Markets

Real estate investors with their corporate seat and management outside of Germany may be subject to German taxation on capital gains from share deals. Non-resident individuals (investing directly or through partnerships or funds) will primarily be affected.

By Tobias Klass and Verena Seevers

According to a German draft tax bill, the sale of shares by foreign-based shareholders of foreign-based companies primarily holding real estate in Germany will trigger a new capital gains exit tax as of 1 January 2019. This change may signal a need for alternative exit strategies.

No-PE Structures

In classic No-PE structures (i.e. a structure avoiding a permanent establishment in Germany), foreign-based companies investing in German real estate are subject to German corporate income tax (at a rate of 15.8%) with respect to the company’s rental income and sale proceeds in case of asset sales of German real estate. Neither rental income nor capital gains are subject to German trade tax (generally ranging from 7-17%) if neither a company’s corporate seat nor permanent establishment is situated in Germany.

Share deal exits from No-PE structures are currently not taxable in Germany, i.e., capital gains from share deals with the target being a foreign-based real estate company (for example a Luxembourg S.à.r.l with non-German based shareholders) are not subject to German corporate income or trade tax. The draft bill aims to change that from January, 1, 2019. Continue Reading

GDPR & PSD2: Squaring the Circle

Posted in Data Protection

GDPR and PSD2 are two legal initialisms that have both generated a great deal of press coverage in recent months, but they are seldom considered together.

By Christian F. McDermott, Calum Docherty and Brett Carr

There were around 122 billion non-cash payments in the European Union (EU) in 2016, with card payments accounting for 49% of all transactionsi and the trend is continuing: UK Finance recently reported that UK debit card payments overtook the number of cash transactions for the first time in the final quarter of 2017. As Europeans increasingly swap cash for cards and live their lives online, businesses have tremendous opportunities to take advantage of the vast amount of personal data generated by the increased use of payment services.

In the EU, activities in the payments sector are subject to the revised Payment Services Directive (2015/2366, known as PSD2). PSD2 was transposed in the UK primarily by the Payment Services Regulations 2017, the majority of which came into force on 13 January 2018.

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FCA Sets Out Stance on Cross-Border Booking Arrangements

Posted in Brexit

The “Dear CEO” letter underlines the FCA’s open and pragmatic approach in the context of Brexit.

By Nicola Higgs and Charlotte Collins

The FCA has published a “Dear CEO” letter to firms, advising them of its position in relation to the use of cross-border booking models in the context of Brexit. Firms commonly use remote and back-to-back booking models, but these arrangements have come under closer scrutiny recently as firms prepare their businesses for Brexit.

European supervisors have cautioned against the use of such models, and warned against firms potentially seeking to set up “empty shell” companies in the EU. For example, the European Central Bank (ECB) (which carries out a supervisory role in relation to Eurozone banks) has set out fairly detailed expectations for banks wishing to relocate to the Eurozone. In particular, the ECB expects that EU products and transactions with EU clients are booked in the EU, and that risk management capabilities related to such products are located in the EU.

The FCA, in contrast, is not seeking to restrict market access, and simply is concerned that firms with a UK presence structure themselves so as to enable the FCA to supervise their UK business effectively, and to continue to meet the FCA’s high-level threshold conditions. Additionally, the FCA wants to see that, when formulating their plans, firms consider not only their business needs, but also the best interests of their clients. Continue Reading

Can Private Equity Buyers Be Suitable Purchasers of Divested Assets for Antitrust Regulators?

Posted in M&A and Private Equity

By Sven Volcker and Tomas Nilsson

In the last five years, the European Commission (EC) has required divestitures in more than 70 antitrust cases, requiring merging parties to divest business assets as a condition to receiving regulatory approval. This increasingly interventionist approach from competition regulators presents opportunities for buyout firms to acquire divested assets.

However, regulators are increasingly imposing upfront buyer requirements to ensure the ongoing success of the divested business — divested asset purchasers must be approved before the underlying merger transaction can be completed. PE buyers may need to significantly advance transaction work, including negotiating final form documents (which must be provided to the regulator for review), before they find out if they are a suitable purchaser.

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FCA to Create Global Financial Innovation Network

Posted in Finance and Capital Markets

FCA teams up with other regulators to advance its idea of creating a global regulatory sandbox.

By Stuart Davis, Gabriel Lakeman, Sam Maxson, Brett Carr and Charlotte Collins

The FCA, along with several other financial services regulators, has launched a consultation on the operating framework for a Global Financial Innovation Network (GFIN). This is an evolution of the FCA’s proposal, mooted earlier this year, to create a global regulatory sandbox (see Latham’s related blog post).

The FCA reports that its proposal was received positively, with respondents keen to see greater regulatory coordination and cooperation at a global level. Therefore, the FCA sees merit in continuing to explore this idea. The FCA has revised the name of the project to the GFIN, to reflect the fact that the group will have a broader remit than first anticipated, with a global regulatory sandbox constituting only one component of the group’s activities.

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Payment Systems Regulator to Review Card Acquiring Market on Competition Concerns

Posted in EU and Competition, Finance and Capital Markets

The PSR is to consider whether there is effective competition in the market and makes clear that further reviews of the payments ecosystem could be triggered by its findings

By Brett Carr, Stuart Davis and Christian McDermott

The Payment Systems Regulator (PSR) has issued Draft Terms of Reference for a market review into the supply of card-acquiring services.

The PSR will use its powers under the Financial Services (Banking Reform) Act 2013 to carry out the market review in line with its statutory competition, innovation and service user objectives.

Effective competition in the payments market is a focus of the PSR, and this review follows shortly after dawn raids reported by the PSR in February 2018 as part of its first action under the Competition Act 1998.


  • The PSR is taking these steps to investigate concerns that savings from the interchange fee cap are not being passed on to merchants, there is a lack of transparency around the fees paid by merchants to accept card payments and there are barriers to the substitution of acquirer service providers, which all point to competition not working well in the card-acquiring market.
  • A range of actions is open to the PSR, which could see it give directions to the market and its participants, make proposals to the FCA or make a market investigation reference to the CMA.

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FRC Releases Revised UK Corporate Governance Code… in 30 Seconds

Posted in Finance and Capital Markets

The FRC has published a shorter and sharper Code which clarifies requirements for accountability, workforce engagement, and board diversity.

By Claire Keast-Butler, James Inness, Richard Butterwick, and Anna Ngo

The revised Code will apply to all companies with a premium listing on the London Stock Exchange for accounting periods beginning on or after 1 January 2019.

The key points are:

  • Board leadership and company purpose: The revised Code focuses on regular engagement with major shareholders, with companies being required to report on the actions taken if a board recommended resolution has received significant votes against it. The Code promotes greater “workforce” engagement through (i) a director appointed from the workforce, (ii) a formal workforce advisory panel, and/or (iii) a designated non-executive director responsible for “workforce” matters.
  • Division of responsibilities: The Code largely restates existing principles, including (i) the independence of the chair being determined at the time of appointment, (ii) the board retaining discretion to determine the independence of non-executive directors, and (iii) the requirement that at least half the board, excluding the chair, should be independent.
  • Composition, succession, and evaluation: The Code places emphasis on the promotion of gender, social, and ethnic diversity at the board and senior management levels. Directors should be subject to regular externally facilitated board evaluations and all directors should be subject to annual re-election.
  • Audit, risk, and internal control: There is emphasis is on a robust assessment of the company’s emerging and principal risks including to the company’s business model, future performance, solvency, or liquidity and reputation.
  • Remuneration: The revised Code continues to focus on executive pay, with amendments to (i) expand the remit of the remuneration committee to set senior management remuneration, and to review workforce remuneration in the context of setting executive remuneration, (ii) require the remuneration committee chair to have served at least 12 months on a remuneration committee before taking the role, and (iii) extending the total vesting and holding periods for executives’ awards from three years to five years.

For a full client briefing, see Latham’s Client Alert.

FCA Speaks Out on the Ethics of Big Data

Posted in Data Protection, Emerging Companies and Technology, Finance and Capital Markets

FCA Chair hints that new regulation addressing data ethics in the FinTech space may be on the horizon.

By Nicola Higgs, Fiona Maclean and Terese Saplys

Will societies of the future be ruled by algocracy, in which algorithms decide how humans are governed? Charles Randell, Chair of the Financial Conduct Authority (FCA) and Payment Systems Regulator, addressed how to avoid this hypothetical scenario in a broad-ranging speech on that he delivered on 11 July 2018 in London.

Randell’s Remarks

Contributing Factors to an Algocracy

According to Randell, the following three conditions could collectively give rise to a future algocracy:

  • If a small number of major corporations were to hold the largest datasets for a significant number of individuals (as is currently the case)
  • Continuing vast and rapid improvements in artificial intelligence and machine learning that allows firms to mine Big Data sets with greater ease and speed
  • Further developments in behavioural science allowing firms to target their sales efforts by exploiting consumers’ decision-making biases

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Corporates Reorganise Amid M&A Boom

Posted in M&A and Private Equity

By Daniel Treloar

Last year marked a continuation of strong M&A volumes, with US$3.15 trillion in global transactions according to data provider, Mergermarket. Strong activity, driven by cheap debt and a low growth environment, has continued into Q1 2018, and large deals are expected to be a fixture of the M&A landscape in the year to come. The buoyant M&A market has led to extensive reorganisation work for both sellers and buyers, particularly for mega-deals that frequently require substantial post-deal integration and non-core divestment work — a trend Latham believes will continue while M&A levels remain high. However, while well-executed reorganisations can help facilitate a smooth M&A process or integration project, they require meticulous and timely planning to ensure a successful outcome.

What constitutes a corporate reorganisation and why reorganise?

A corporate reorganisation typically involves the transfer of assets, whole businesses, or shares between entities forming part of the same corporate group, on a solvent basis. Businesses undertake corporate reorganisations for several reasons, and M&A is currently a large driver. Continue Reading

German Federal Court: Property Sellers Who Withhold Usage History Risk Liability

Posted in Dispute Resolution, EU and Competition, Finance and Capital Markets

FCJ decision finds that mere suspicion of contamination resulting from a sold property’s past use constitutes a defect.

By Patrick Braasch and Christian Thiele

The German Federal Court of Justice (FCJ) has ruled that an abstract suspicion of contamination resulting from a sold property’s past use already constitutes a material defect — irrespective of the actual existence of any contamination. A seller’s failure to disclose the known usage history — which objectively gives rise to the suspicion of contamination — constitutes fraudulent conduct. As a consequence, the seller cannot invoke any contractual limitation of liability.

Case background

The FCJ’s judgment, dated 21 July 2017 (V ZR 250/15), involved a case in which the plaintiff had acquired from the defendant several plots of land that had been developed as a business park. In the notarized sale and purchase agreement, any liability of the defendant was excluded, with the exception of intent and fraudulent conduct. The defendant was aware that an asphalt mixing plant for regional road construction, as well as a sewage sludge retention basin, had been operated on the property from the 1960s until the 1980s. When the defendant acquired the property in 1989, the seller at that time represented that he was not aware of any soil contamination. Continue Reading