The Foreign Trade Act and the Foreign Trade Regulation contain extensive reporting requirements regarding payment transactions in M&A processes.
Under the AWG (Foreign Trade Act) and the AWV (Foreign Trade Regulation), there are reporting requirements that must be taken into account when planning corporate acquisitions, as compiling the transactions subject to reporting is time-consuming, and failure to report or incorrect reporting pursuant to Section 19(2) in conjunction with Section 19(6) of the AWG can result in substantial fines of up to 30,000 EUR for each piece of information subject to reporting.
Reporting requirements can be divided into three categories:
1. Payment Notifications (Section 67 et seq. of the AWV):
Payments (incoming and outgoing) include, among other things: Cash payments, payments by (SEPA) direct debit, check, and bill of exchange; (SEPA) transfers via financial institutions in euros and other currencies; offsets and setoffs; and the contribution of assets and rights to companies, branches, and permanent establishments (direct and indirect payment transactions).
2. Reports on Foreign Receivables and Liabilities (Section 66 of the AWV)
3. Notifications of Cross-Border Corporate Interests (Section 64 et seq. of the AWV)
The reports referred to in Nos. 2 and 3 are known as “position reports.” A single underlying transaction may give rise to one or more reporting obligations. To ease the burden on those required to report, reports are not required—depending on the transaction amount—until statutory reporting thresholds are exceeded. In addition, payments related to the trade in goods are exempt from the reporting requirement. However, services are generally not exempt from the reporting requirement (e.g., fees for attorneys, architects, and interpreters; payments for license fees and software). Exceptions apply to payments related to the granting, taking out, or repayment of loans.
Background on the statutory reporting requirements:
Cross-border payment and position reports are primarily used to compile the balance of payments and the international investment position of the Federal Republic of Germany, as well as statistics on direct investment positions. The statutory reporting requirements are derived primarily from Section 11 of the Foreign Exchange Act (AWG) in conjunction with Sections 63 et seq. of the Foreign Exchange Regulations (AWV).
The Importance of Disclosure Requirements in M&A Transactions:
The settlement of a transaction can trigger both payment reports (e.g., reports of purchase price payments or so-called offsets of purchase price claims in the case of reinvestments in the buyers within fund structures) and portfolio reports (e.g., § 64 et seq. AWV). In particular, the reporting requirement for cross-border corporate investments as part of the portfolio reports often leads to problems in practice.
The report is used to compile statistical information on the volume and structure of German direct investment abroad. The stock statistics on direct investment provide information on cross-border corporate holdings representing 10 percent or more of the capital or voting rights.
Who is required to register?
Pursuant to Section 11 of the Foreign Trade Act (AWG) in conjunction with Section 64 of the Foreign Trade Regulation (AWV), all companies and private individuals (direct investors) domiciled in Germany that hold a 10% or greater stake in a foreign company (direct investment target) are required to file a report (so-called K3 report). Likewise, pursuant to Section 11 of the AWG in conjunction with Section 65 of the AWV, any company based in Germany (direct investment target) in which one or more foreign investors hold a stake of 10% or more is subject to reporting requirements (K4 report). In both cases, there is a reporting threshold of 3 million euros (converted if necessary) based on the total balance sheet assets of the respective direct investment entity.
Content of the message:
- General information about the individual or company required to file the report; for companies, this includes additional key figures (total assets, annual revenue, and number of employees).
- List containing information on the names and registered offices of foreign companies, including branches and permanent establishments, in cases of direct or indirect ownership or existing dependence
- Percentage of Equity or Voting Rights
Indirect holdings exist when the domestic entity and its controlled foreign subsidiaries collectively hold more than 50% of the shares or voting rights. A foreign company is considered controlled if the shares or voting rights in that foreign company attributable to the domestic entity, either directly or indirectly, exceed 50%. Reports on the acquisition of equity interests must be filed once a year and submitted electronically to the Deutsche Bundesbank.
Conclusion:
Both the buyer and the target company must prepare for the requirements in the event of a reporting obligation. Identifying and compiling the transactions subject to reporting is resource-intensive and must be done thoroughly; otherwise, there is a risk of heavy fines. We recommend integrating this process into the internal control system of the company subject to the reporting obligation.
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