BaFin Practice for License Holiday in Germany

The German supervisory authority BaFin (Bundesanstalt für Finanzdienstleistungsaufsicht) issued on March 11, 2019 an updated statement on its practice to grant an exemption from the German license requirement (licence holiday) in certain cases of cross-border banking transactions and financial services that are carried out in Germany by a foreign credit (banks) or financial services institution that is situated outside the European Union (EU) or the European Economic Area (EEA).

The said statement concretizes a discretionary rule under the German Banking Act (Kreditwesengesetz, KWG). However, there are also a variety of non-discretionary exemptions that might apply depending on the particularities of the business model. Such exemptions include, but are not limited to, providing banking and investment services exclusively for parent or sister companies or subsidiaries, and conducting certain banking or investment services exclusively with commodity futures, emission allowances and derivatives on emission allowances under certain futher prerequisites.

General Requirements

Pursuant to German Banking Act, foreign institutions may be exempted from the licensing requirement and other provisions. The legal requirement for an exemption is that "the institution does not require supervision in this respect due to the nature of the business it conducts". Therefore, an exemption can be considered if BaFin can deny the need for supervision in connection with the operation of banking and financial services transactions. And this is generally only the case if the company is effectively supervised by the competent authority in its home country in accordance with international standards and the competent authority of the home country cooperate satisfactorily with BaFin. Under the current BaFin practice, this prerequisite is generally fulfilled in the home countries USA, Canada, Australia, Switzerland and Singapore (as of 2022).

In addition, the applicant institution must submit a confirmation from the competent home state authority confirming to BaFin

• that the foreign institution in question has been granted a license for the banking business and/or financial services that it intends to provide on a cross-border basis in Germany,

• that there are no supervisory concerns about the commencement of the intended cross-border services in Germany and

• in the event that such concerns subsequently arise, BaFin is notified accordingly.

If a third-country institution also wishes to operate on a cross-border basis in Germany via a branch located in other third countries, the confirmation of the home country supervisory authority is to be extended to the effect that no problems have arisen to date in the cooperation with the respective supervisory authority of the country in which the branch is located, that there are no supervisory objections with regard to the business activities of the branch and that any problems or objections arising at a later date will be reported to BaFin. In addition, the extent to which there is sufficient supervision, particularly with regard to corporate insolvency and the prevention of money laundering in the country in which the branches are located, must be demonstrated. A further requirement is that the applicant institution must appoint an authorized recipient in Germany.

Scope of Cross-Border Banking Transactions and Financial Services Eligible for Exemption

Taking into account the above-mentioned requirements, the areas that BaFin considers to be applicable for exemption are specified in more detail below. However, the exemption is a case-by-case decision in which the respective circumstances of the business transaction must be taken into account. In view of the various contractual and actual structures of the business transaction, it must be examined in each individual case under which conditions an exemption can be granted. In addition to the requirements outlined here, additional requirements may arise in individual cases from a supervisory perspective, in particular from a money laundering prevention perspective.

In principle, all banking transactions and financial services requiring a license can be exempted vis-à-vis institutional investors and between banks. BaFin considers institutional investors to be the Federal Government, federal states, local authorities and their institutions, credit and financial services institutions, investment companies, private and public insurance companies and medium-sized and large corporations.

With regard to private clients, banking transactions and financial services requiring a license are generally exempt from the requirement of a license if the transactions are concluded through the intermediary of a domestic credit institution. Transaction can also be concluded through the intermediary of an EEA institution, provided that the scope of the license corresponds to that of a domestic credit institution and the activities of the EEA institution are covered by the so-called European passport. Once the customer relationship has been initiated via a domestic credit institution or an EEA institution, the cross-border institution can then contact the customer directly for future (individual) transactions as part of the existing business relationship.

Exemption Procedure

The application for exemption must be submitted to BaFin in writing. Unless otherwise agreed with individual foreign supervisory authorities, the application must be accompanied by the following documents:

• Copy of the memorandum and articles of association;

• Proof of the company's entry in the register, if this is required;

• the most recent annual financial statements including all related documents (such as management report, audit report), insofar as these had to be prepared;

• Personal details of the applicant or each managing director of the applicant company (board member/managing director): Surname, all first names, maiden name, date and place of birth, residential address, nationality, parents' maiden names;

• A declaration by the applicant or each manager of the applicant (board member/managing director) as to whether criminal proceedings are pending against them, whether criminal proceedings have been pending against them for a felony or misdemeanor or whether they or a company managed by them have been or are involved as debtors in insolvency proceedings or proceedings for the submission of an affidavit or comparable proceedings;

• a detailed description of the intended business activity, including in particular a description of the specific business activities and the planned market presence in Germany as well as the clientele to be addressed; in addition, where relevant due to the intended business activity, a description of how the transfer of money and securities will be handled;

• (Model) contract forms and (model) agreements that are to be used for the planned business activity in Germany;

• Designation of an authorized recipient in Germany.

Note: As part of the existing cooperation with the Swiss Financial Market Supervisory Authority FINMA, it was agreed that the submission of company-related documents (copy of the articles of association, proof of entry in the register, annual financial statements and declarations of non-punishment) would be waived for Swiss companies subject to FINMA supervision.

Exemptions are granted by formal BaFin administrative acts that might also be subject to conditions. Administrative costs are at EUR 5,000.

Applicable German Laws

Note that certain German rules and laws stay applicable even if an exemption has been granted. There remain certain rules of the German Banking Act, anti-money laundering law and the German Securities Trading Act, if certain financial services are involved, just to name some of them.

Contact me

Dr Hendrik Müller-Lankow 

Attorney-at-law, LL. M. (UCL)

mueller-lankow@kronsteyn.law