Brexit: German Transitional Rules - German Ministry of Finance publishes Draft Act on Brexit Transitional rules

On 20 November 2018, the German Ministry of Finance published a Draft Act which would provide for a smooth transition in case of a hard Brexit by granting UK banks and financial services institutions the same status as if they continued to hold an EU passport. This transitional regime would apply to branches as well as to cross-border activities currently carried out on the basis of an EU passport. The transitional phase would last for up to 21 months, ie to the end of 2020.

On 20 November 2018, the German Ministry of Finance published a “Draft Act Supplementing the Act on Tax Related Provisions concerning the Withdrawal of the United Kingdom of Great Britain and Northern Ireland from the European Union” (the Draft Act). Despite its cumbersome name, the Draft Act may provide for a smooth transition in case of a hard Brexit.

The Draft Act provides the German Federal Supervisory Authority (Bundesanstalt für Finanzdienstleistungsaufsicht, BaFin), with the power in the event of a Hard Brexit (ie, one where no deal is concluded by 29 March 2019) to grant UK banks and financial services institutions the same status as if they continued to hold an EU passport. This transitional regime would apply to credit institutions as well as investment firms including branches as well as cross-border activities carried out on the basis of an EU passport. The BaFin would be able to grant a transitional phase for a period up to 21 months, ie to the end of 2020.

The Draft Act proposes amendments to the German Banking Act (Kreditwesengesetz, KWG). The precondition for its applicability is that the UK withdraws from the EU at midnight on 29 March 2019 without having concluded an agreement on its withdrawal from the EU. In this case, the BaFin may determine that, in order to prevent any detriment to the functioning and stability of financial markets, the EU Passporting Exemptions would continue to apply (even though the UK would no longer be part of the EU) for a period of up to 21 months following the time of withdrawal. The exemptions would apply to companies based in the UK and conducting banking business or providing financial services in Germany through a branch in Germany or by providing cross-border services.

It should be noted though that such exemptions would only apply to financial transactions entered into after 29 March 2019 insofar as these transactions are closely connected to transactions that existed at the time of withdrawal. The transitional regime would not, therefore, apply to new business without a link to pre-Hard Brexit business.

The forthcoming rules of the German Banking Act will also introduce a change to the ‘dismissal protection’ of employees who qualify as so called ‘highly paid material risk takers’. Material risk takers will be defined as members of staff whose professional activities have a material impact on the risk profile of an institution. Highly paid material risk takers will be treated as equivalent to senior executives, who are entitled to self-employment or dismissal of employees, with regard to dismissal protection. These new rules will apply to material risk takers of major institutions that receive a minimum fixed annual remuneration of  €208,000.

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