Bank Levies in the UK, France and Germany A Comparison of the New Levies on Banks SUMMARY The United Kingdom, France and Germany have all recently finalised, or are in the process of finalising, details of their respective bank levies. This memorandum compares the salient features of each bank levy. Four main differences may be outlined in summary. The first difference is the computation of the basis for each levy. The United Kingdom and Germany have adopted a similar approach, taking into account total equity and liabilities subject to certain exceptions, e.g., for minimum regulatory capital. By contrast, the French bank levy is based on minimum regulatory capital. Even though both aggregates are clearly related in the banking industry, the different bases of each levy make it difficult to directly compare the financial burden on banks in each country. Second, the aim of the German levy is to create a dedicated restructuring fund to be drawn upon in the event of financial crisis, whereas the proceeds of the United Kingdom levy and the French levy will feed into general revenues. Third, France and the United Kingdom will tax banks or banking groups resident in their respective jurisdictions on a worldwide/consolidated basis, while the German bank levy is computed on a standalone basis. Fourth, rules with respect to double taxation relief are not yet harmonised. French domestic rules provide for a tax credit granted to non-french banks carrying out banking operations in France through a taxable branch or taxable subsidiaries but this relief is subject to a reciprocity condition. In the United Kingdom, double taxation relief remains subject to the negotiation of specific agreements with relevant countries or to the enactment of specific regulations in this respect. As the German bank levy is structured as a levy and not as a tax, it is not entirely clear whether double taxation relief will be available, and certain characteristics of the German bank levy are subject to the issue of the relevant ordinance (the German Ordinance ) which is still in draft form dated March 2, 2011. This memorandum does not provide a detailed description of the characteristics of each bank levy. For further information, please refer in New York Washington, D.C. Los Angeles Palo Alto London Paris Frankfurt Tokyo Hong Kong Beijing Melbourne Sydney www.sullcrom.com
particular to our client memoranda of November 10, 2010 and December 13, 2010 on the UK bank levy, and October 1, 2010 on the French bank levy. STATUS Current status of legislation Revised draft legislation published on December 9, 2010. Further consultation on this draft legislation closed on February 9, 2011. Legislation included in the UK Finance Bill published on March 31, 2011 and due to pass into law in the summer of 2011, but legislation is effective from January 1, 2011. Enacted on December 15, 2010 together with the Finance Act for 2011. Effective as of January 1, 2011. Relevant legislation introducing the bank levy was resolved on December 9, 2010 and became effective on December 31, 2010. The German Ordinance detailing certain characteristics of the bank levy is still in draft form dated March 2, 2011. WHO IS SUBJECT TO THE BANK LEVY? Entities subject to the bank levy UK-headed banking groups and building society groups, and non- UK-headed banking groups with operations in the UK. A bank is determined by reference to UK Financial Services Authority rules. Broadly, an entity will be a bank if it is a deposittaker or its activities consist wholly or mainly of specified regulated activities. Asset management companies and insurance companies should be excluded. French and non-french banks that are under the supervision of the French Regulatory Control Authority (Autorité du Contrôle Prudentiel), including établissements de crédit and prestataires de services d investissement. Asset management companies and insurance companies are excluded. Credit institutions (Kreditinstitute) within the meaning of Section 1 para. 1 of the German Banking Act (Kreditwesengesetz) holding a German banking licence that are subject to the German regulation regarding credit institution accounting. The German Federal Bank (Bundesbank) and certain German public development banks that are exempt from corporate tax (Körperschaftsteuer) are exempt from the bank levy. -2-
TREATMENT OF BRANCHES AND SUBSIDIARIES A. UK, FRENCH AND GERMAN BRANCHES AND SUBSIDIARIES OF A FOREIGN ENTITY Branches UK branches of non-uk banking groups and UK bank branches of non-uk non-banking groups are taxable (see Consolidated / standalone below). No preference is given to UK branches of non-uk EEA groups. French branches of EEA banks are exempted. French branches of non- EEA banks are taxable on the non-eea bank s minimum regulatory capital. 1 German branches of an EEA bank are not subject to the levy as they are not required to hold a German banking licence (if qualifying for EU passporting) and are not subject to the German regulation regarding credit institution accounting. German branches of a non-eea bank are likely subject to the levy as they are required to hold a German banking licence and are subject to credit institution accounting. Subsidiaries UK subsidiaries of non-uk banking groups are taxable where they are included in the aggregated UK subsidiary, UK subgroup and UK branch balance sheets. UK subsidiaries of non-uk non-banking entities are taxable if they are themselves a UK bank, a UK bank branch, or part of a UK banking subgroup. French subsidiaries of non- French entities are taxable. Not explicitly specified. German subsidiaries of a non-german entity are likely subject to the levy if the subsidiary itself holds a German banking licence. 1 No detail is provided as to the computation of the minimum regulatory capital to be allocated to the branch s activities. -3-
B. FOREIGN BRANCHES AND SUBSIDIARIES OF A UK, FRENCH OR GERMAN ENTITY Branches Non-UK branches of UKheaded banking groups or building society groups are taxable by reference to the group s global consolidated balance sheet. Minimum regulatory capital allocated to non-french branches of a French bank is taxable in France (see Worldwide / territorial below). Not explicitly specified. Non-German branches of a German credit institution are part of the balance sheet of the single entity and therefore their business volume is taken into account. Subsidiaries Non-UK subsidiaries of UK-headed banking groups or building society groups are taxable by reference to the group s global consolidated balance sheet. Non-UK subsidiaries of non-uk banking groups are taxable where they are included in the aggregated UK subsidiary, UK subgroup and UK branch balance sheets. Minimum regulatory capital allocated to consolidated non-french subsidiaries of a French bank is taxable in France (see Worldwide / territorial below). Not explicitly specified. Non-German subsidiaries of a German credit institution are likely not subject to the levy as the bank levy is computed on a single entity and not on a group basis, and domestic and non-german subsidiaries of a German credit institution are not taken into account, even if they are consolidated for regulatory or accounting purposes. -4-
COMPUTATION OF THE BANK LEVY Tax basis Total equity and liabilities shown on a relevant balance sheet, except for Tier 1 capital (not Tier 2 capital) and other items such as insured deposits, certain tax and pension fund liabilities, sovereign repos and sovereign stocklending liabilities. Adjustments to balance sheets may be required in order to net certain assets and liabilities, e.g., cashcollateralised derivatives. Credit is given for high quality liquid assets. Minimum regulatory capital as determined based on risk-weighted assets by the French Regulatory Control Authority. If the French Regulatory Control Authority modifies the minimum regulatory capital rules within three years after the date of payment of the bank levy due in respect of a given tax year, the bank levy for such tax year will be retroactively increased or decreased accordingly. Two bases including (i) relevant liabilities and (ii) relevant derivatives: (i) Relevant liabilities equal total liabilities (Passiva) 2 less liabilities to customers 3 less profit participation right capital (Genussrechtskapital) 4 less funds for general banking risks (Fonds für allgemeine Bankrisiken) less equity (Eigenkapital). 5 (ii) Relevant derivatives equal value of all offbalance sheet derivatives. Rate 0.075% for 2011, rising to 0.078% from 1 January 2012. Funding liabilities of greater than one-year maturity and certain other liabilities will be charged at half the rate otherwise applicable. 0.25% Standard annual contribution equals the sum of (i) and (ii) below: 6 (i) Rate for relevant liabilities is progressive and cumulative: Relevant liabilities of up to 10 billion are chargeable at 0.02% annually, relevant liabilities of 10 billion or more up to 100 billion are chargeable at 0.03% annually, and relevant liabilities in excess of 100 billion are chargeable at 0.04%. 2 3 4 5 6 As stated in the last annual statement prepared in accordance with the German Commercial Code (Handelsgesetzbuch HGB) on a standalone basis; subject to the issue of the German Ordinance. Except for liabilities to legal entities that are affiliates of the credit institution and need to be included in the consolidated financial statements. Except for profit participation right capital with a maturity of less than two years. Subject to the issue of the German Ordinance, equity means core Tier 1 capital as listed in Form 1 of the German regulation regarding credit institution accounting. Subject to the issue of the German Ordinance. -5-
(ii) Relevant derivatives are chargeable at 0.00015% on the nominal value of the derivatives. 7 Additional contributions can be requested from credit institutions under certain circumstances, e.g., where the assets of the restructuring fund are insufficient to cover measures proposed to be taken to stabilise the financial market. Anticipated Yield 2.5 billion per annum, forming part of general revenue, and partly offsetting the planned reduction in corporation tax from the current rate of 26% to 23% by April 2014. 500 million in 2011 and 800 million per annum as from 2012, forming part of general revenue. Up to 1.3 billion per annum from 2012, accruing to a dedicated restructuring fund. The target for the resolution fund is 70 billion. Consolidated / standalone UK banking groups and building society groups: global consolidated basis. Non-UK banking groups: by reference to the aggregated balance sheets of each UK subsidiary, UK subgroup and UK branch. Relevant entities in a nonbanking group: by reference to the balance sheets of UK banks, UK bank branches and UK banking subgroups. Tax basis is computed on a global consolidated basis if the French taxable entity is the head of a consolidated group for accounting purposes. Computed on a single entity and not on a group basis; only the entity holding a German banking licence is subject to the bank levy. 7 It is not yet clear how the nominal value of the derivatives is determined. The German Ordinance only refers to the credit institution specific accounting rule that lists which derivatives need to be included in the annex of the annual financial statement. -6-
Worldwide / territorial Worldwide basis for UK banking groups and building society groups, and UK subgroups of non- UK banking groups (see Consolidated / standalone above). Worldwide basis, but only for the French heads of a consolidated group for accounting purposes. Computed on a single entity and not on a group basis; domestic and non- German branches of a German bank are taken into account, whereas domestic and non-german subsidiaries are not, unless they hold a separate German banking licence. Thresholds / allowances Allowance: Levy is charged on chargeable equity and liabilities to the extent that these exceed 20 billion. De minimis rule: Equity and liabilities of certain entities/sub-groups within a non-uk banking group or a non-banking group can be disregarded if they are less than 50 billion at the end of the relevant chargeable period. However (1) the aggregate group/entity liabilities which may be disregarded are capped at 200 billion; and (2) the de minimis rule does not apply to the attributed liabilities of the UK branch of a non-uk bank. De minimis rule: Entities for which regulatory minimum capital requirements are below 500 million are exempt. Cap: 15% of the annual profit of the credit institution (based on the annual financial statement prepared in accordance with the Commercial Code (Handelsgesetzbuch HGB) on a standalone basis), in computing which the annual bank levy does not qualify as an expense. 8 If the standard annual contribution that the credit institution would have to pay according to the computation described under Rate above exceeds 15% of the annual profit, the excess amount needs only to be paid in subsequent years. 9 Minimum levy: 5% of the standard annual contribution that the credit institution would have to pay according to the computation described under Rate above, even if the credit institution does not make any profit that year. 10 8 9 10 Subject to the issue of the German Ordinance. Subject to the issue of the German Ordinance. Subject to the issue of the German Ordinance. -7-
Antiavoidance provisions Any arrangements in respect of which the main purpose, or one of the main purposes of any of the parties to the arrangements is to reduce a liability to the bank levy will be disregarded for the purposes of calculating the bank levy, to the extent that such arrangements have a specific effect on an ongoing basis (see Note). Not specified. Not specified. Note - Arrangements will not trigger the anti-avoidance rule to the extent that they have one of the following effects on an ongoing basis (not simply over the end of an accounting period): Increasing excluded equity and liabilities, or long-term equity and liabilities, or high quality liquid assets; Reducing short-term liabilities where there is no corresponding increase in the amount of funding from sources which are not excluded equity and liabilities or long-term equity and liabilities; Reducing long-term equity and liabilities where there is no corresponding increase in the amount of funding from sources which are not excluded equity and liabilities; or Entering into netting agreements. DOUBLE TAXATION MEASURES Relief available Domestic law will provide for relief in two ways: (1) giving effect to treaties or agreements with other states that provide relief from double taxation. An agreement was announced between the UK and France on November 29, 2010, although details are not yet known; and Domestic law provides for double taxation relief through a tax credit. As the bank levy is structured as a levy and not as a tax no double taxation relief may be available. -8-
(2) enacting regulations that provide for relief from double taxation. Conditions (1) To qualify for relief, the relevant non-uk levy should (i) follow the proposals made by the IMF in June 2010, (ii) be based on the balance sheet (rather than income, profits or gains); and (iii) be similar in intent to the UK bank levy. (1) The relevant non- French levy should have an objective of reduction of systemic risk. See above. (2) Reciprocity condition: the other jurisdiction should have also made appropriate provision for avoidance of double taxation in relation to the UK levy. (2) Reciprocity condition: the other jurisdiction should have also made appropriate provision for avoidance of double taxation in relation to the French levy. Method of relief Although details are not yet known, likely to be by way of tax credit. Non-French banks having a taxable French branch or subsidiary shall get a tax credit equal to the portion of the non-french bank levy paid in respect of such French branch/subsidiary. See above. -9-
ADMINISTRATION Payment mechanics Accounted for and payable to HM Revenue & Customs under the existing Corporation Tax Self Assessment system, subject to appropriate amendments, on a quarterly basis. A single group member (the responsible member ) will pay and account for the bank levy on behalf of the group, and will submit bank levy computations as part of its corporation tax returns. Payable on June 30 of each taxable year. The tax is based on the minimum regulatory capital applicable in the year preceding the taxable year. A single group member will pay and account for the bank levy on behalf of the group. Payable on September 30 of each year, starting on September 30, 2011, to the German restructuring fund for credit institutions. 11 Bank levy is not considered a tax and therefore not imposed by the tax authorities but by the restructuring fund which issues an official notification to the credit institution or an appointed banking association demanding payment. Not deductible for corporation tax purposes, although the UK corporation tax rate is in any case projected to fall in stages from 26% to 23%. Should be deductible for corporation tax purposes. Not deductible for corporation tax (Körperschaftsteuer) and trade tax (Gewerbesteuer) purposes. Deductibility Intra-group payments relating to meeting or reimbursing the cost of the Bank Levy are to be disregarded for corporation tax. * * * Copyright Sullivan & Cromwell LLP 2011 11 Subject to the issue of the German Ordinance. -10-
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