Germany’s clarification of AT1 tax rules

Author: | Published: 11 Nov 2014

By Asmus Mihm, partner, Allen & Overy, Frankfurt

On April 10 2014, the German Federal Ministry of Finance issued guidance dealing with the tax treatment of AT1 instruments. The guidance only applies to certain instruments following model terms & conditions prepared by the German Banking Association. Instruments not in line with this model are explicitly not covered by the guidance.

There are two sets of model T&Cs. The first covers AT1 instruments with a write-down feature at trigger. Those may be written up again once the issuer has recovered. The second set is for AT1 instruments that convert into equity when the trigger is pulled.

The ministry’s guidance addresses a couple of major issues, including the treatment of AT1 instruments in terms of withholding tax and interest deductibility, and taxation in the case of a trigger event.

One important point not clarified by the guidance paper, though, arises indirectly from...