In August 2011 the Act to Amend the Regulations on Compensation in Distance Selling Contracts came into force. It made changes in the notice on the right of revocation and return of goods necessary; the statutory templates for this notice were also changed. Up to 4 November 2011, distance sellers using the old version of the notice templates could not be sent a cease-and-desist letter. But this period has now expired. (http://www.bundesgerichtshof.de/DE/Bibliothek/GesMat/WP17/W/Wertersatz.html)

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Concentration zoning in the repowering of wind turbines

Wind energy production on land is currently the largest contributor to the electricity generated from renewable energy sources in Germany, and it will continue to contribute a significant proportion in future. In general, wind turbines are to be concentrated in just a few locations, known as wind farms, mainly to ensure a considerably higher energy yield in locations with strong winds, but also to calm the visual character of the landscape and thus to reduce the nuisance value for affected citizens. As a result, there is a significantly limited number of suitable areas available for wind energy production. The repowering of wind turbines – in other words the replacement of smaller and older turbines, usually by fewer and more efficient and modern wind turbines – is therefore increasingly important because merely upgrading existing turbines is usually hardly economical because of numerous technical parameters. Repowering projects almost always involves the creation of new zones for wind energy production, and initially the old and new turbines operate simultaneously in different locations to ensure that there is no discontinuity in the decentralised production of energy. But usually the existing older wind turbines are then dismantled, and only the new wind turbines are operated. Up to now there has been significant legal uncertainty about how local communities can implement this repowering process under land planning law. As a result, there was not much security for investments in such projects. In the legislative package for the “turnaround in energy policies”, the legislators have now created a clarified provision in Section 249 of the German Building Code (BauGB).

1. The problem

The sites for wind farms are regulated by systematically allocating land areas for wind turbines in the regional planning and land use plans. According to Section 35 (3) sentence 3 of the Building Code, this concentration zoning means that wind turbine projects, although they are privileged in building permit applications by Section 35 (1) No. 5 of the Building Code, are not eligible for building permission on sites other than the designated areas (planning reservation). According to the case law policy of the Federal Administrative Court, this planning reservation only applies if it “creates substantial space” and if a “planning concept for the wider area” has been developed by the local communities. Especially objectors to specific projects have in the past used the declaration of new locations for wind farms as an argument to question the previous “planning concept for the wider area” by claiming that the previous zoning had not been sufficient. If this argument is accepted, this would mean that the planning reservation could not be used to reject wind energy projects outside the designated concentration zones. For both the local communities and the project developers this would create a risk that individual wind turbines or even wind farms would have to be approved as a result of repowering measures in locations which are incompatible with the planning intentions of the local community.

2. Legal clarification: continued effect of the planning reservation

The revision of Section 249 (1) of the Building Code now clarifies that the declaration of additional land for wind energy does not allow the conclusion that previously existing declarations do not validly have the exclusive effect specified in Section 35 (3) sentence 3 of the Building Code. This effectively means that the law pretends that the existing “planning concept for the wider area” cannot be called into question by the declaration of new areas.

In addition, the revision of Section 249 (2) of the Building Code (BauGB) also creates the possibility of making the construction of new wind turbines dependent on the demolition of old wind turbines in other locations. Such a provision can be stipulated both in development plans and in land use plans. And the compensation for the new zone by dismantling older wind turbines can even apply to locations outside the planning area, or even outside the area of the relevant local community.

3. Conclusion

The clarification of the building permit situation for the repowering of wind turbines by the revision of Section 249 of the Building Code and the resulting greater legal certainty and investment security for both local communities and investors is fundamentally commendable. In view of the rather unfortunate wording of the provision and the position of Section 249 in the Act, it remains to be seen whether disputes about the interpretation will arise in practice.

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A future criterion in the procurement of goods, technical devices and equipment which affect the use of energy

On 20 August 2011 a new amendment of the Contract Award Regulations (VgV) came into force to implement the EU Energy Label Directive 2010/30/EU and the energy concept of the German government for environmentally friendly procurement. Up to then, energy efficiency had only been relevant to procurement law when purchasing road vehicles, but the changes in Sections 4 and 6 of the Contract Award Regulations mean that in future it will also be a mandatory criterion when goods, technical devices and equipment which affect the use of energy are purchased by orders for goods and services and the award of contracts for construction work. The changes will be especially relevant in the structuring and implementation of contract award procedures for the procurement of energy-intensive technology including but not limited to building services installations (cooling and heating systems, lighting), research and medical technology and components for IT systems.

1. The changes in Section 4 (5) and (6) of the Contract Award Regulations initially relate to the structuring of the contract award procedure and the preparation of the contract award documents. For example, the specifications should include demands for

• The highest performance level for energy efficiency, and

• If available, the highest energy efficiency class as defined by the Energy Consumption Labelling Regulations.

In view of the wording of Section 4 (5) of the Contract Award Regulations (“should”), in the specifications the client is granted a certain degree of leeway for cases in which demanding the highest performance level or the highest energy efficiency classes is exceptionally not possible. In such cases, however, the client must place the highest possible demands on energy efficiency.

2. In the specifications or in some other suitable place in the contract award documents, the following must be demanded from the bidders:

• Specific details of the energy consumption unless the goods, technical devices or equipment offered on the market only differ slightly within the permissible energy consumption range, and

• In suitable cases: an analysis of the minimised life cycle costs or the results of a comparable method to check economic viability.

The client is entitled to check the information provided by the bidder and to demand supplementary explanations from the bidders. This gives the client the option, at its own discretion, to seek further clarification about specific details given by the bidders. In such a case, it is essential for the client to document the clarification procedure accordingly so that any allegations that certain bidders had been discriminated against by the procedure can be refuted.

3. The changes in the Contract Award Regulations also affect the evaluation of the bids, and thus in the last resort the award of the contract. The energy efficiency calculated according to Section 4 (5) and (6) of the Contract Award Regulations is now, under Section 4 (6b), a contract award criterion which must mandatorily be appropriately taken into account when determining the most economic bid under Section 97 (5) of the Restrictive Practices Act (GWB). This requirement limits the principle of economy in the sense of procurement for the best price in favour of a sustainable procurement principle, because the valuation is extended to take the criteria of energy efficiency into account. In this connection it remains to be seen what weighting can be given to energy efficiency in the contract award criteria without paying insufficient attention to the criterion of price.

4. According to Section 6 (2) to (6) of the Contract Award Regulations, it is also mandatory for the client to apply the above requirements in awarding contracts for building work if the supply of goods, technical devices or equipment which affect energy consumption is a significant part of the performance.

On the whole, the changes in the Contract Award Regulations are logical and commendable in the light of the general goal of significantly reducing the energy demand and emissions of CO2 in the next few years, partly by the use of more efficient technology. Anchoring energy efficiency targets in public procurement law will probably make a significant contribution to achieving these targets because public procurement represents a major proportion of the gross domestic product and therefore has considerable buying power in the market. Nevertheless, problems must be expected in the practical implementation because the structuring and implementation of public procurement processes taking energy efficiency into account could be increasingly complex in many cases, so that the client will be dependent on technical expertise. But if the whole potential of the energy efficiency requirements is realised this will usually be rewarded by a cost reduction over the life cycle of the technical components and the possibility of an even more economic procurement.

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In our last but one newsletter we informed you that the 7th amendment of the Schedule of Services and Fees for Architects and Engineers is planned for 2013. The 6th amendment of the Schedule of Services and Fees for Architects and Engineers of 2009 initially concentrated on the fundamental preservation of a state pricing ordinance and the implementation of the European Services Directive, but for reasons of time it was not able to include the necessary further-reaching reform to update the areas of performance and carry out a differentiated review of the sufficiency of the fees. For this reason, in the coalition agreement of 2009 the German government promised to continue the modernisation of the Schedule of Services and Fees for Architects and Engineers.

Goal of the 7th amendment of the Schedule of Services and Fees for Architects and Engineers

The goal of the reform, according to the review tasks set by the Federal Council, is to modernise and harmonise the areas of performance defined in the Schedule of Services and Fees for Architects and Engineers in the light of current construction technology, to remedy the defects that were noted in the revision of 2009 and to adjust the fee structure and the sufficiency of the fees again in the light of changed career patterns, environmental concerns and engineering principles with a view to increasing the fees. The focus of the 7th revision of the Schedule of Services and Fees for Architects and Engineers is also on moving the consulting services from Appendix 1 back to the binding part of the Schedule after a critical review of the decision to move it to the Appendix, a rethinking and revision of the provision for fees for planning and building in existing contexts in Section 35 and the introduction of new areas of performance (fire safety, urban development and building site regulations).

Timetable for the Schedule of Services and Fees for Architects and Engineers 2013

Since September 2011 the final report of the expertise on updating the areas of performance (published on the website of the German Fee Structure Commission of Engineers’ and Architects’ Associations and Chambers, AHO) and a rough timetable for the 7th revision of the Schedule of Services and Fees for Architects and Engineers have been available. The expertise on the review of the fee structure will follow in April/May 2012 to allow sufficient time for the legislative process. In September 2012, the presentation of the draft law is planned, and in the following two months the federal states and associations will be heard and departmental coordination will take place. The decision of the German cabinet is then scheduled for December 2012, and up to March 2013 the mandatory participation of the Federal Council will take place. The decision of the Federal Council is then planned for the end of March 2013, so that the new Services and Fees for Architects and Engineers can then be published in the Federal Law Gazette in April or May 2013.

Main content of the expertise on the updating of the areas of performance

The final report on the updating of the areas of performance was compiled under the leadership of Prof. Dipl.-Ing. Architect Lechner and coordinated by the Federal Ministry of Transport, Building and Urban Affairs in cooperation with representatives of the public clients from the national government and federal states, the local community associations, Deutsche Bahn AG, the Fee Structure Commission of Engineers’ and Architects’ Associations and Chambers, the German Chamber of Architects (BAK) and the German Chamber of Engineers. Then, the planned changes are to be presented as briefly as possible on the basis of the summary of the expertise.

Changes in land use planning (part 2 of the Schedule of Services and Fees for Architects and Engineers 2009)

In the updating and synchronisation of the areas of performance it was taken into account that land use planning is increasingly regulated and subject to greater public participation, so it requires more extensive documentation and coordination, which means that all land use planning services now require more time. The special services were adapted and extended due to the changes in planning practices and the resulting new areas of performance, e.g. urban designs, environmental reports, studies of fauna/flora/habitat directive compatibility and species protection surveys. Landscape execution planning is now included with the area of performance for outdoor facilities. And finally, the tables of fees for all areas of land use planning performance were consistently based on the ground area, a joint catalogue of special services was developed and the areas of performance were rearranged to take the planning reality into account.

Changes in project and specialist planning
Changes affecting more than one discipline

In practice there were many complaints that the new Schedule of Services and Fees for Architects and Engineers 2009 had become unwieldy because some parts had been moved out into the Appendices, and in particular the “services” and special services had been separated. For easier applicability of the ordinance it is therefore recommended that the areas of performance with all associated regulations (special services, lists of project types) should again be presented in concentrated form and that many of the Appendices should be omitted. The concept of basic performance should again be included and the basic performance and special services should again be placed next to each other. To this end Section 3 (2) sentence 2 of the Schedule of Services and Fees for Architects and Engineers 2009 (“other” services) is to be deleted and the fees for performance ordered by the client after the conclusion of contract is to be limited to the provision in Section 7 (5).

The areas of performance have also been updated and revised. For example, the necessary close coordination of the results of the appraisal and planning with the client in the work stages 1 to 3 was recognised, so the basic performance of “Summary of the results/documents” was changed into “Summary, explanation and documentation of the results”. In view of the fact that the reliability of the costs and deadlines are becoming increasingly important, the areas of performance were also supplemented and defined more precisely in this respect. For example, the requirement of schedule planning in the course of the planning process was integrated into the areas of performance. In the area of cost planning, instead of the previously required cost estimate in work stage 6, the concept of the “specifications priced by the planner” has been introduced. This aims to ensure that before the tender documents are sent out, it is checked whether the possible contract award totals are within the budget set in the cost calculation. The performance listed in work stage 9 has also been revised. The obligation of documentation which was previously included has now been moved to work stage 8. As the “supervision of the remediation of defects which occur within the periods of limitation for claims arising from defects” involves a very variable amount of work and is therefore not suitable for remuneration with a flat percentage rate, this item of performance has now been classed as a special service, so that the fee for this service can be agreed freely. To ensure that the client is not left alone with an evaluation to enforce his claims against the contractors or planners, a new item of performance has been included, the “technical evaluation of defects occurring during the periods of limitation”.

In addition, the lists of project types have been updated, supplemented, resorted and compiled in tables. The allocation to the fee bands is carried out by pre-defined points/crosses. The new presentation form aims to provide the user a faster overview and a clearer allocation of the buildings and structures in the individual fee bands. And finally, the work stages were assigned new percentage weightings.

Changes in project planning (part 3 of the Schedule of Services and Fees for Architects and Engineers 2009)

The designation “structural extensions and fittings” will be replaced by the term “interior rooms” to fit in with the career specialism of interior architects. If the performance for buildings and interior rooms is rendered in the course of a planning assignment, it can constitute a project. A separation of the areas of performance is therefore not recommended. Instead, in a deviation from the principle in Section 6 (1) of the Schedule of Services and Fees for Architects and Engineers, the provision from Section 25 (1) of the 1996 version of the Schedule is reintroduced, which stipulates that no separate fee can be charged if the project planning and the interior rooms are assigned at the same time.

Contrary to previous speculation that a separate performance area “Fire safety planning” was to be created, this idea was rejected. This is justified by pointing out that not all planning services by the planner of the building to implement the goals of fire safety can be classed as special services or specialist planning work, in many cases they also form part of the basic performance. Therefore a clear distinction was preferred between fire safety services which are rendered in the course of the basic performance and services which can be freely agreed as special services.

The performance for outdoor facilities is to be presented separately to make it easier to deal with the specific aspects of the discipline, because planning here is focused not only on creating the structure, because natural processes and plant growth lead to constant changes in the project, so the planning aims at the development of the project.

In the areas of performance for civil engineering and transport construction projects, the concepts of independent project and specialist planning have been introduced. In addition, the local building supervision will again be defined as binding. A model has been developed for local site supervision which enables average measures to be charged at fixed percentages, and also contains opening clauses for measures which involve below-average or above-average work. In civil engineering structures, the plant and machinery will be charged in future as part of the chargeable costs of the engineering structures. The definition of “machinery” and the term “Planning of the plant and machinery” from the official reasons given in the Schedule of Services and Fees for Architects and Engineers 1996 are to be restored. Due to the increasing volume of public procedures to obtain building permits, a special provision has been added to the percentage evaluation of work stage 4 (permission planning). In addition, the “water engineering rules” provision which is currently listed as a special service in Appendix 2.8.5 in this work stage is now to be listed as an optional service, because the remuneration rate is defined and the service is not subject to free negotiation like the special services. To evaluate the performance area of traffic facilities, the provision in Section 53 (3) of the 1996 version of the Schedule of Services and Fees for Architects and Engineers is to be restored. In addition, we recommend that the special basis for calculating the fee should be revised in the light of the technical circumstances for traffic facilities.

Changes in specialist planning

One of the main concerns of the 7th revision of the Schedule of Services and Fees for Architects and Engineers is to move the areas of performance listed in Appendix 1 of the 2009 version of the Schedule of Services and Fees back to the binding part of the ordinance. The departmental representatives were not able to anticipate the binding positions of their ministries in the legislative process, so in the final version they abstained in the vote on the recommendations in the expertise. According to the report that is currently available, the only areas of performance which are to be included in the specialist planning in part 4 of the Schedule of Services and Fees for Architects and Engineers 2009 are geological engineering, construction physics and surveying services.

In the area of Planning of the load-bearing structure, initially the term load-bearing structure is to be defined. The calculation of the chargeable costs is to be simplified. In addition to the introduction of a special provision for a percentage valuation of individual work stages, the calculating methods for valuations for assignment to the fee band were adjusted.

In the Schedule of Services and Fees for Architects and Engineers 2013, the term “geological engineering” combines soil mechanics, earthworks and ground engineering. But these services do not apply to earth structures because they are assigned to project planning.

In the area of performance Technical equipment in work stage 5, the performance item “Checking the installation and workshop plans of contractors for compliance with the execution plans”, which was previously listed as a special service, has been included in the basic performance list. To illustrate the distinction between the necessary performance for thermal installation and the performance area of construction physics, the performance area “Listing all installations with technical data and details, e.g. for the energy balance” has been added within the category of “Technical equipment” in work stage 4. The energy balance itself has been included as a basic service in the performance area of construction physics. In the three specialist disciplines which form part of construction physics (thermal properties of buildings, sound insulation and room acoustics), specific detailed tables of fees were developed as a suggestion for review by the fee expertise.

In the process of updating the performance area Engineering surveying, technical developments in surveying were also taken into account. The number of work stages was adapted to the current procedures in surveying. In future, the calculation of fees is to be separated from the chargeable costs and used as a separate reference value for charging units which are determined by the size of the area to be measured and the density of the measuring points. However, the fee suggestion remains to be reviewed by the fee expertise.

Suggestions for changes in the general regulations (part 1 of the Schedule of Services and Fees for Architects and Engineers 2009)

As a result of the technical updates in the areas of performance, the committee of experts deemed that a revision of parts of the general regulations in the Schedule of Services and Fees for Architects and Engineers 2009 was necessary. The main focus was on specifying the details of the surcharge provisions for performance involving existing structures (Section 35 of the Schedule of Services and Fees for Architects and Engineers 2009). In practice it has been found that the goal of appropriate remuneration cannot be achieved merely by granting a surcharge as envisaged in Section 35 of the present Schedule of Services and Fees for Architects and Engineers. In addition to the surcharge provision, in future the substance of the structure to be worked on is also to be taken into account in the fee calculation. The potential for disputes about the valuation of the substance of the structure to be worked on should be avoided by the introduction of performance-specific reduction factors. It is aimed for the model that has been developed to be adjusted and checked in individual points by the expertise to review the fee structure. It is also recommended that the list of definitions in Section 2 of the Schedule of Services and Fees for Architects and Engineers be streamlined and the definitions of individual objects be included in the areas of performance. In the revision of Section 11 of the Schedule of Services and Fees for Architects and Engineers “Assignment for several projects” it is recommended that the fundamental idea of the status report 2000 + be used.

Conclusion

The summary of the report on the update of the areas of performance, which comprises more than 400 pages, and a brief review of the synoptic presentation initially give the impression  that the areas of performance have only been changed in isolated points and therefore only constitute a moderate adaptation to the present performance requirements for architects and engineers. It remains to be seen whether the revision will be regarded as a great success after the national associations and the federal states have been heard. Summarising the expertise gives the reader the feeling that the experts basically longed for the old Schedule of Services and Fees for Architects and Engineers, with the exception of the increased fees.

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The existing Drinking Water Ordinance of 2001 needed clarification in some areas and an adaptation to bring it in line with new developments and the requirements under European law, so the First Amendment Ordinance for the Drinking Water Ordinance was passed, and it came into force on 1 November 2011.

1. What is the content of the Drinking Water Ordinance?

Like the previous Drinking Water Ordinance, the new Drinking Water Ordinance also serves to protect the population from contaminated water. But the demands placed on water quality and health protection are greater. The provisions of the new Drinking Water Ordinance aim to ensure that the drinking water does not contain any microbiological pathogens or chemical substances which could be harmful to health. For biological and chemical contamination, the Ordinance defined threshold values which must not be exceeded in the drinking water drawn from the tap. The main aim of the body issuing the Ordinance was to provide effective protection against legionellosis, a life-threatening illness caused by bacteria which multiply in warm water. In Germany, up to 32,000 persons per year catch pneumonia caused by legionella, and about 6% of the illnesses are fatal.

But the infection risk exists not only in buildings used by the public such as old people's homes, hospitals, playschools or schools, rather it is always present when water is at a temperature of between 25 and 55 degrees Celsius and does not flow for a long time.

Now that the amended Drinking Water Ordinance is in force, there are new notification, inspection and information obligations for owners, contractors and property managers, or duties which already existed have become stricter. Any violation of such obligations could be prosecuted under criminal or regulatory law.

Violations of the provisions of the Drinking Water Ordinance could also lead to civil claims by the injured parties, and tenants may demand a rent reduction from the owner of the water supply installation. In any future purchase or sale of property, it will therefore be necessary in future to audit the compliance with the provisions of the Drinking Water Ordinance in the due diligence on the property.

2. Obligations of owners, entrepreneurs and property managers

2.1 Obligations of notification

When any water supply installation is constructed, commissioned, resumed or closed down, the owner of the installation (and the “contractor”, i.e. the party which operates such an installation without being its owner) is obliged to notify the public health department in advance. The same applies in the event of any structural or operational change in the water-bearing parts of such an installation if this change may affect the quality of the water for human consumption.

Now, notification may also be mandatory for drinking water installations which include large-scale equipment to heat drinking water (cf. the text below on the inspection obligation).

On demand by the public health department, the technical plans of the water supply installation must be presented.

In addition, any obvious changes in the water and any unusual occurrences in the water supply installation which could affect the quality of the water must be notified to the public health department without delay. The same applies if any threshold values are exceeded (including legionella), and in this case investigations must be carried out without delay to clarify the cause and measures must be adopted to remedy the problem.

The public health department can order the site to be inspected and a risk analysis to be carried out.

2.2 Inspection obligations

Contractors and other owners of water supply installations are responsible for ensuring that the drinking water complies with the general requirements of the Drinking Water Ordinance. They are therefore obliged to carry out inspections of their drinking water or have such inspections carried out. The Drinking Water Ordinance defines in detail which water supply installations are subject to an inspection obligation and at what intervals the inspections must take place.

The owners of rented apartment buildings and residential complexes are now also obliged to inspect the drinking water for legionella in the following cases:

• If the drinking water installation includes large-scale equipment to heat the drinking water (large-scale equipment applies to water heating installations containing more than 400 litres or hot water pipes with more than 3 litres of water between the water heater and the taps; this provision does not apply to one-family and two-family houses);

• If the drinking water installation includes facilities which turn the drinking water to steam or mist (according to the official grounds for the Ordinance, for example, office buildings are not included in the buildings which have a fundamental inspection obligation because they do not contain technical facilities such as showers which turn the water into steam or mist. Apartment buildings are also not subject to compulsory inspection if they do not have central drinking water heaters or hot water storage tanks, but only facilities such as flow-type water heaters in the individual apartments.

If these requirements are met, the contractors and owners of the relevant drinking water installation must make their own arrangements for their installations to be inspected.

Inspections may only be carried out by laboratories which fulfil the requirements of the Drinking Water Ordinance. The approved laboratories are announced in a list by each federal state. The results of the inspections must be notified to the public health department within two weeks after the completion of the inspection.

The inspections must be carried out annually, although the inspection interval may be increased if at least three successive annual inspections do not lead to any objections, if the general engineering principles were adhered to in the construction and operation of the overall system of the installation and if the installation has not been significantly changed since the last inspection.

The landlords must ensure that there are suitable points where samples can be taken (if appropriate, they should also be in rented apartments, e.g. taps or showers). It is not necessary to include all apartments in the inspection. Suitable sampling points are points which are either particularly far from the water heater or which are only rarely used. The investigations must be carried out by qualified specialists.

2.3  Information obligations

If Contractors and other owners of water supply installations are subject to an inspection obligation under the Drinking Water Ordinance, they must provide all consumers with annual information material about the quality of the water provided.

From 1 December 2013, the consumers must also be informed if any pipes in the water supply installation are made of lead.

3. Can the costs be allocated to the tenants?

The costs of the inspections must initially be borne by the owner itself. However, these costs are costs of operating the building's water supply installation and also the costs of inspecting operational safety, which can be allocated to the tenants under Section 2 No. 2 or 5 of the Operating Costs Ordinance.

4. Apartment owners

Drinking water installations are normally part of the jointly owned property. Therefore the community of apartment owners is responsible for compliance with the obligations under the Drinking Water Ordinance. The community of apartment owners should therefore pass a resolution which clearly defines the implementation of the obligations created by the Drinking Water Ordinance.

In this connection, property managers should note that even without any specific provision in the property management contract they are presumably obliged to inform the community of apartment owners about the new provisions of the Drinking Water Ordinance.

CONCLUSION:

Property owners must analyse the new obligations which arise for them from the First Ordinance to Amend the Drinking Water Ordinance and react accordingly to avoid not only hefty fines and criminal prosecution, but also economic loss. However, it remains to be seen whether a sufficient number of qualified inspection laboratories will be available, and also whether the health departments will be able to cope with the anticipated data deluge in the foreseeable future.

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On 7 July 2011 the German Federal Parliament passed a law concerning the modification of § 522 section 2 and 3 of the German Code of Civil Procedure – ZPO. Up to now a Court of Appeal was able to dismiss an appeal immediately through unanimous decision if the Court of Appeal was convinced that

1. the appeal has no prospect of success
2. the case has no fundamental relevance; and
3. a decision of the Court of Appeal is not necessary for the protection of a consistent jurisdiction or for a development of the law.

The decision was incontestable (§ 522 section 3 ZPO).

The modified version of § 522 section 3 ZPO provides that there will be the ability to lodge a complaint against dismissal decisions exceeding an amount of € 20,000.00. Besides that, the modified law establishes that a dismissal is only possible if the appeal is obviously without success and if a hearing is unoffered.

With this reorganisation the government meets the intense concerns which the previous regulation caused due to its proceeding without a hearing and the restriction of the right to be heard. The requirements of a dismissing decision are now tightened. On the one hand the appeal can only be denied by unanimous decision if the Court of Appeal is convinced that the appeal is obviously  without success. On the other hand a dismissal is only possible if a hearing is unoffered.

The law will take effect on the day after its proclamation in the Federal Law Gazette – probably fall 2011.

The modification of § 522 section 2 and 3 ZPO shall stop the different handling of the Court of Appeals in Germany. It can highly anticipated be awaited if the law will successfully restrain the different handling of the Courts of Appeal in Germany in view of the various legal definitions in the new ruling. It is still up to the relevant Court of Appeal to decide if the appeal has “obviously” no success and if the hearing is “unoffered”.

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The justification of the ruling by the Federal Court of Justice on the freedom of panoramic views in the “Sanssouci” is now available. According to this justification, commercial photographs of a building or plot of land require the consent of the owner if the photograph was not taken from generally accessible places outside the photographed property.

If the site is accessible to the public, the owner can define the conditions under which it grants access, so the owner can, for example, prohibit commercial photography. Even where the site is owned by a public sector owner of architectural monuments, there is no right of the public for commercial photography to be allowed (Federal Court of Justice, ruling of 17 December 2010, V ZR 45/10).

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The EU Commission has published its considerations about a possible revision of the Data Protection Directive 95/46/EC (COM (2010) 609 final). On the one hand the Commission sees the necessity of facing up to new challenges posed by the development of social networks on the Internet and cloud computing. The ideas presented include extended obligations to inform users about data protection failures, obligations to delete personal information disclosed on the Internet (“right to be forgotten”) and more effective sanctions for violations. On the other hand, it is aimed to simplify data transfers abroad under certain conditions. The ideas presented by the Commission have been sharply criticised by the British Justice Minister, Mr. Clarke. According to Clarke, the UK advocates a solution of data protection problems at the company level and rejects any further harmonisation of European law  
(http://www.justice.gov.uk/news/features/feature260511b.htm).

Currently, the UK benefits from the fact that companies from outside Europe which only have a European branch in the UK only need to comply with the data protection laws applicable in the UK, even if they are active throughout Europe.

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On 17 June 2011, the Federal Council approved a draft law which aims to improve data protection on the Internet (BR-Drs. 156/11). In particular, the draft aims to supplement Section 13 of the German Telemedia Act by adding a sub-section 8 which stipulates that saving data on the user's terminal unit (e.g. “cookies”) and access to data stored on the user's terminal unit are only permissible if the user has been informed of and has consented to this. This would implement Article 5 (3) of the EU Directive 2002/58/EC.

The IT industry regards this provision as impracticable because in everyday actions such as visiting websites, the user would be burdened by a large number of necessary notifications and confirmations which would need to be implemented by pop-up windows. However, notifications and consent are not necessary according to the draft law if the data storage is necessary to transmit a message via an electronic communication network or if it is “absolutely necessary” in order to provide an electronic information or communication service which is explicitly requested by the user.

The background is that a large volume of user data is collected today when using computers and mobile phones. To some extent this is necessary so that the service works, for example in web shops. But often the data is collected with the intention, in the last resort, of using it for advertising purposes. And to some extent the user does not know what data is collected, where they is transferred to and what purpose the service provider aims to use it for.

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According to a press release by the Federal Ministry of the Economy and Technology (BMWi) and the Ministry of Labour and Social Affairs of 18 July 2011, the electronic remuneration statement project (ELENA) will be discontinued as quickly as possible. To justify this step, it is stated that the necessary data security standards cannot be complied with because the necessary digital signature cards (“verified electronic signature”) are not yet sufficiently widespread. The press release stated that the Federal Ministry of the Economy and Technology (BMWi) will present an appropriate draft law shortly. It said that the federal government is keen “to show solutions which make use of the investments already made by the employers”.

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The government draft which was already decided by the cabinet in August 2010 (BT-Drs. 17/4230) deals with controversial topics such as the use of the Internet in the workplace, surveillance of employees by the employer and the possibilities for the employer to obtain the consent of the employees for the use of their personal data. Most recently, the Ministers of Justice in the federal states demanded extended information rights for employees about the data saved by the employer and an exclusion of screening processes carried out without a specific reason.

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Countdown to 31 August 2012

Since 1 September 2009, the Federal Data Protection Act (BDSG) has stipulated stricter requirements for the collection and use of data for advertising purposes (Section 28 of the Federal Data Protection Act). This particularly applies to obtaining and documenting declarations of consent. Data collected before 1 September 2009 is still subject to the old version of Section 28 of the Federal Data Protection Act. This period of transition for legacy data expires on 31 August 2012. Customer databases should therefore be resolved in good time and contract templates should be adjusted to the new legal position.

It must be expected that the supervisory authorities will check compliance with data protection law more strictly in future. They are already increasing their personnel.

In addition, the lack of a proper declaration of consent for advertising by phone, fax or e-mail constitutes a violation of the Act against Unfair Competition (UWG) In this connection, a ruling by the Higher Regional Court (OLG) of Düsseldorf from 2009 must be borne in mind. According to this ruling, the manager of a company which purchases an address list collected by another company without observing the requirements may also become personally liable to receive an injunction. It is not sufficient to rely on assurances given by the vendor. The court did not rule on whether sample checking would have been sufficient (Higher Regional Court of Düsseldorf, ruling of 24 November 2009, I-20 U 137/09).

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Faster local community prcurement processes

In an announcement of 8 June 2011 (cf. General Ministerial Gazette, No. 6/2011, 207) the Bavarian state government has extended the existing threshold value provisions for local community procurement for orders which fall below the threshold until midnight on 31 December 2011. As a result of the finance and economic crisis, the economic stimulus package II at the beginning of 2009 introduced threshold values for restricted tenders and free award of contracts for orders with a value which falls below the threshold as a means of stimulating the economy by awarding public sector orders more quickly. These threshold value provisions were fundamentally for a limited period up to the end of 2010; in Bavaria they were initially extended to 30 June 2011, whereas other federal states extended them for a further year from the outset. Bavaria has now followed this procedure for the award of local community contracts which fall below the threshold.

Until 31 December 2011, in the procurement of building work under the Standard German Building Contract Terms Part A (VOB/A) it is now permissible to carry out a restricted tender without a competition up to a threshold of 1 million Euros exclusive of VAT or a free award of contracts up to a threshold of 100,000.00 Euros exclusive of VAT without giving reasons, as long as the estimated order value does not exceed the relevant threshold values. In restricted tenders with an order value of 150,000.00 Euros or more exclusive of VAT or free awards of contract with an order value of 50,000.00 Euros or more exclusive of VAT, either an informal prior market survey must be carried out or information about the award of contract must be posted on an appropriate public Internet forum without delay after the award of contract and left on this forum for at least one month, to ensure a minimum of transparency.

In addition – assuming that the German Procurement and Contract Regulations for Services part A (VOL/A) are applicable and not hindered by any conditions in grant award notices or voluntary commitments in individual cases – in the same period a restricted tender or free award of contracts without a competition is also permissible for deliveries and services up to a threshold estimated order value of 100,000.00 Euros exclusive of VAT. Like the faster award of local community contracts for building work, in procurement under the Procurement and Contract Regulations for Services any restricted tender and free award of contracts with an order value of 25,000.00 Euros or more exclusive of VAT must be supported either by a prior informal market survey or by information about the award of contract which is posted on an appropriate public Internet forum in Bavaria without delay after the award of contract for a period of at least one month, to ensure a minimum of transparency in procurement.

At present there are not yet any figures to show to what extent the introduction of threshold values and the associated possibility of a faster award of contract by local communities and other bodies has really led to the intended positive effects on the economy. But the extension of the threshold value provisions is an indication that the national legislative body wishes to wait for a valid data basis which may possibly lead to a decision on the addition of statutory provisions, which have long been discussed, to make contract award procedures faster and more flexible. Such tendencies are also apparent at the European level for the provisions for contract award procedures even above the threshold values. Speeding up the processes and making them more flexible, for example in the choice of the contract award procedure in individual cases, is not only desirable from the perspective of the public sector client, but also from the contractor's point of view because goal and performance oriented procurement is currently often hindered by the existing public procurement regulations.

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For further information please visit the German version of this site or contact the Practice Group Tax tax @ sibeth.com.

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After the Federal Council approved the Act to Improve Measures against Money Laundering and Tax Fraud (Act to Combat Undeclared Taxable Income) on 28 April 2011, it then came into force on 3 May 2011.

This Act tightens the requirements for avoiding punishment by voluntary self-disclosure. These requirements were discussed in the last issue of our newsletter, but it is worth mentioning them briefly again:

- Exclusion of partial self-disclosure:
Exemption from punishment is now only granted if all tax offences which have not expired by limitation are retrospectively declared in full and accurately, although minor inaccuracies do not prevent such exemption.

- Stricter time limitations:
Up to now, voluntary self-disclosure to avoid punishment was possible up to the start of the tax audit. In future, exemption from punishment will only apply if the voluntary self-disclosure is made before the notification of audit is issued.

- Limitation to a maximum amount of tax evaded:
Exemption from punishment after voluntary disclosure will be limited in future to tax evasion amounting to no more than 50,000.00 Euros. For tax evasion totals of more than 50,000.00 Euros per tax type and taxation period, the tax offender will only be exempted from punishment if he pays 5% of the evaded amount to the state treasury in addition to the arrears of tax and interest.

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Some time ago, the German fiscal administration began working on the revision of the Reorganisation Tax Decree in order to adapt it to the extensive changes in reorganisation tax law resulting from the German Act on Fiscal Measures Accompanying the Introduction of the European Company and Amending Further Tax Legislation (SEStEG) of 7 December 2006. On 2 May 2011 the Federal Ministry of Finance published the long anticipated draft of the Reorganisation Tax Decree 2011 and initiated the associated expert consultation process. The federal ministries, trade associations, central local community associations and expert groups now have the opportunity to submit their written response to the draft by 15 June 2011. The publication of the Reorganisation Tax Decree 2011 in the Federal Tax Gazette is planned for the second half of 2011 after consultation with the higher fiscal authorities in the federal states.

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The German Fee Structure Commission of Engineers’ and Architects’ Associations and Chambers (AHO) has firmly resolved to carry out another reform of the regulations for architects’ and engineers’ fees (HOAI), which has only just been revised in 2009, at the latest by 2013, when it aims to publish the 7th revision of the HOAI in conjunction with the Federal Ministry of Transport, Construction and Urban Development. The goal of the reform is first of all to update and modernise the areas of performance in the HOAI. In addition, the defects which have been observed in the 2009 revision of the HOAI are to be remedied. The focus is especially on the reinstatement of the consulting services which are summarised in Appendix 1 of the 2009 revision of the regulations for architects’ and engineers’ fees (environmental compatibility studies, thermal properties of the building, insulation and room acoustics, soil mechanics services, earthworks, ground engineering and surveying services – parts VI and X–XIII of the 1996 regulations for architects’ and engineers’ fees) into the binding part of the regulations for architects’ and engineers’ fees and the revision of the fee structure for planning and building in existing contexts.

Reinstatement of consulting services to the binding part of the schedule of services and fees

In a resolution of 12 June 2009, the Federal Council had called on the federal government to carry out critical monitoring of the practical effects of the non-binding provisions in Appendix 1, and if appropriate to reinstate the binding character of the fees for “consulting services” in Appendix 1 of the ordinance. It is claimed that the necessity of reinstating the consulting services defined in Appendix 1 of the 2009 HOAI to the binding part of the HOAI has been proved to the Fee Structure Commission by two independent reports commissioned from the Technical University of Darmstadt. It is stated that the independent experts have concluded that the removal of the engineering services from the binding part of the HOAI and the reclassification as consulting services is not technically justified and has caused major disruption to the quality of contract awarding and the fees paid for these services. The details are not yet known. The reinstatement of the “consulting services” listed in Appendix 1 to the binding part of the HOAI is thus presumably a “foregone conclusion”.

Planning and building in existing contexts

The provision on fees in Section 35 of the 2009 revision of the regulations for architects’ and engineers’ fees for planning and building in existing contexts apparently does not lead to the desired results. In practice, the agreement of a surcharge of up to 80% is not accepted as intended. Realistically, only surcharges up to a maximum of 40% could be achieved in negotiations. Therefore, it is currently being considered whether the chargeable costs of the building fabric that is included in the work should again be included in the fee calculation for services related to building in existing contexts. On this basis, a system is to be developed for the calculation of the chargeable costs which is both practicable for principals without expert knowledge and detailed enough to permit a calculation which is less subject to dispute than the old Section 10 (3a) of the 1995 version of the regulations for architects’ and engineers’ fees. The following parameters are being discussed as possible factors to include:

• Fee bands
• Fee rates
• Surcharge system
• Increase in the chargeable costs

Various models are currently being intensively discussed, although no tendency towards any one model is yet apparent.

Other planned changes

In addition to these two central topics, the coordinating group of the individual trade working groups is considering the introduction of new areas of performance for fire safety, urban design and building site regulations. In addition, the old terminology of “basic performance” and “special services” is to be used again. No separate area of performance and no separate scale of fees is to be created for performance involving existing structures. It is possible that the fee rates in the regulations for architects’ and engineers’ fees will again be adjusted and increased in the 2013 revision because the single increase by 10% since 1996 is not regarded as sufficient to remunerate the work of architects and engineers in a way that is appropriate for the market.

To meet the ambitious time scale of revising the regulations for architects’ and engineers’ fees by 2013, the Federal Ministry of Economics will commission an independent expert report on the fee level and fee structure from the middle of this year. This report should then be available in the middle of 2012 so that the 7th revised version of the HOAI can go into the final discussion stage. The further development remains to be seen.

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In the past there have been numerous court disputes about the reasonableness of noise emanating from the operation of childcare centres, playgrounds and similar facilities. The courts were then faced with the problem of how noise made by children should be classified. In the current legal situation, the standard provisions (noise prevention regulations, noise regulations for sports facilities (18th Federal Immission Control Ordinance, BImSchV), and the Recreational Noise Regulation of the Pollution Control Committee of the Federal States (Länderausschuss Immissionsschutz, LAI)) do not apply to childcare centres and playgrounds. Nevertheless, these provisions are often consulted by the courts which shape case law as a general guideline to evaluate children's noise both in relation to public noise prevention laws and in relation to civil neighbourhood law. The noise caused by children was often considered too loud when measured against the regulations, so locations in residential areas were ruled out for noise control reasons. This meant that some childcare centres and playgrounds could not be built, or only in unfavourable locations. Where such facilities already existed, it was sometimes a problem to carry out residential construction projects in the area.

The situation is similar in relation to planning permission. Up to now it has not been clearly established whether playschools and childcare centres should be legally permissible in purely residential areas under the Land Use Ordinance (BauNVO).

This legal position is generally regarded as antagonistic towards children. Some courts therefore considered that noise created by children is socially acceptable on principle. The existing confusion and the public discussion on the subject led the German government to create a privileged legal status for noise caused by children to indicate that children are welcome in our society.

This is to be achieved by an amendment to the German Immission Control Act and the Land Use Ordinance. In Section 22 of the German Immission Control Act, which regulates installations which do not require approval, it is planned to insert a new sub-section 1a: “Noise caused by children at childcare centres, play areas and other such facilities, e.g. ball play areas, is generally not classified as having harmful effects on the environment. When assessing the impact of such noise, the sound immission limits and target values must not be applied.”

In the course of the legislation process, the German Association of Municipalities also suggested that small football pitches for juveniles should be included in this provision because these pitches also fulfil a significant social and health-promoting function and should therefore not be regarded as an environmental nuisance.

At the same time, playschools and childcare centres in purely residential areas are to be declared permissible in the Land Use Ordinance. This is a reaction by the legislative body to the need to set up childcare centres where the demand actually arises and thus to avoid long distances for the parents and children. The approval of these uses is also a statement on the reasonableness of child noise in residential areas from a planning law perspective. In conjunction with the privileged status of child noise under the Federal Immission Control Act, in future it will no longer be possible to refuse a childcare centre in the widest sense on the grounds that it violates the obligation of considerate behaviour. At the same time, it will be easier to implement projects which are sensitive to noise in the vicinity of childcare facilities.

Both amended laws are still in the planning phase. But it is regarded as certain that the changes will soon be made. It remains to be seen what the final versions will contain.

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On 2 November 2010 the Federal Ministry of Justice published a draft of the amendment to the Stock Corporation Act. The planned changes mainly involve a reform of the provisions on non-voting preference shares, the extension of the right of the company to exchange convertible bonds and the obligation of all joint-stock companies not listed on the stock exchange to issue registered shares to their shareholders.

1. Non-voting preference shares

The previous Section 139 (1) of the German Stock Corporation Act (AktG) stipulates that non-voting preference shares must include an obligation to make subsequent payments. That means that preference payments not made due to a lack of balance sheet profit must be paid subsequently as soon as the company has sufficient balance sheet profit.

So if the preference payment is not made within a year, or not paid in full, and if the amount in arrears is not subsequently paid in the following year together with the full preference payment for that year, the excluded voting rights of the preference shareholders are reinstated until the arrears have been paid.

This subsequent payment obligation is particularly problematical for banks. The balance sheet items which can be declared as core equity are set out in a definitive list in Section 10 (2a) sentence 1 of the German Banking Act (KWG). According to Section 10 (2a) sentence 1 No. 2 of the German Banking Act, preference shares are explicitly not counted as core equity. The decisive feature which qualifies capital as core equity is that it is available without any time limit and that it must not be possible to repay it on the initiative of the creditor. Core equity must therefore consist of funds which are available to the institution without any limitation and can thus be used to cover any current losses.

The German Stock Corporation Amendment Act now aims to allow companies also to form core equity by issuing non-voting preference shares. To this end, the obligation to make subsequent payments is to be deleted from the act, so that in future the company can issue preference shares without an obligation to make subsequent payments.

But the legislative body does not currently wish to change the provision on voting rights. So the voting rights of the (originally) non-voting preference shareholder are still reinstated if the preference payment is not made. The legislative body does not see this as a contradiction because the voting rights do not conflict with the classification of the item as equity. In effect, this also means that preference shares without a right of subsequent payment are permanently awarded voting rights unless the company's articles of association grant a right of subsequent payments which can cause the voting rights of the preference shareholders to lapse again. However, a subsequent payment without a corresponding provision in the articles of association probably constitutes a forbidden repayment of contributions.

So although the legislative body expects to achieve greater flexibility in the financing of joint-stock companies as a result of the amendment, even the reasons given in the Act assume that in the last resort the market will decide whether non-voting preference shares without a right of subsequent payment will be accepted.

2. Right of the company to exchange convertible bonds

According to current legislature, convertible bonds only grant the creditor the right to convert the bonds into shares of the company. To avoid this, companies sometimes resort to two possible solutions. Either the company is authorised by the conditions of the issue to grant shares at the end of the term instead of repaying the face value, or these conditions stipulate an obligation of conversion for the creditor. But both options are legally questionable because the use of conditional capital for such purposes is controversial.

This legal insecurity is not removed by the planned amendment of Sections 192 and 221 of the German Stock Corporation Act. But joint-stock companies are offered alternatives which could make it unnecessary to fall back on these solutions. According to the wishes of the legislative body, convertible bonds which grant the company a right of conversion should also fall under Section 221 of the German Stock Corporation Act in future, and could thus also be served by conditional capital as defined in Section 192 of the German Stock Corporation Act.

This change aims to give companies the opportunity to prepare a debt-equity swap which could protect the company against financial difficulties in times of crisis, and thus help to stabilise it.

In addition to the extension of the conversion right to the company, the 50% limit for the creation of conditional capital is to be eliminated for bonds which provide a right of exchange for the company. Although the wording of the Act is ambiguous on whether this option can also apply to conditional capital which stipulates a conversion right for the creditors as well as the company, it must probably be assumed that the legislative body only wishes to abolish the 50% limit if the conditional capital is exclusively used by the company to provide shares after the right of exchange has been exercised.

This interpretation is also supported by the purpose of the 50% limit. By contrast with all other forms of capital increase, conditional capital does not provide a subscription right for the shareholders. The only measure which shareholders can take to influence how many shares can be issued and thus prevent a significant watering down of their shares is by defining the designated purpose of the relevant conditional capital and by passing resolutions about the conditional capital and the powers given to the Board of Directors. The legally defined maximum threshold is the only way for the shareholder to estimate to what extent his share may possibly be watered down in future by the existing powers of the Board of Directors.

3. Obligation for non-listed joint-stock companies to issue registered shares

Probably the most controversial of the planned changes is the obligation of non-listed joint-stock companies to issue registered shares. Listed joint-stock companies will continue to be at liberty to issue bearer shares or registered shares.

a. Content of the changes

The initiative for this planned change in the law goes back to a report by the Financial Action Task Force (FATF), which is responsible for the fight against money laundering and terrorist funding. In this report, the FATF criticises the lack of transparency concerning the shareholders of non-listed German joint-stock companies. By introducing this obligation to issue registered shares, the legislative body is now attempting to increase transparency about the ownership of these companies. The legislative body decided not to reduce the threshold values for the disclosure obligations of listed companies because of the greater administrative burdens which this would create.

The legislators did not consider that the change involved any significant disadvantages for non-listed companies because the only additional work is to maintain the share register. And a transfer of shares was not expected to become more difficult because a transfer by blank endorsement pursuant to Section 14 (2) No. 3 of the German Bills of Exchange Act (Wechselgesetz, WG) is also possible for registered shares. The obligation to issue registered shares is also deemed to be a suitable way of increasing transparency because although nominee shareholders may be registered in the register of shares, the articles of association can force these persons to make a disclosure. If the obligation of disclosure is not fulfilled, the voting rights arising from these shares cannot be exercised.

However, in this respect the legislative body overlooked the fact that companies are still not obliged to publish the identity of the real shareholder or to include a relevant provision in their articles of association, so in view of this the goal of increasing transparency is not really achieved.

The starting point of the planned changes is Section 24 of the German Stock Corporation Act. On this basis, bearer shares may only be issued if this is provided for in the articles of association. And the articles of association must contain a provision that bearer shares may only be issued if the company is listed on the stock exchange.

To ensure the smoothest possible preparation for conversion if the company plans to be listed, the registered share can bear a note stating that the holder is entitled to claim it as soon as the company is listed on the stock exchange. In this way, the issued registered share can be approved without any need to convert it into a bearer share first.

b. Necessary measures

Listed joint-stock companies which have issued bearer shares must supplement their articles of association to state that bearer shares will only be issued if the company is listed.

Listed and non-listed joint-stock companies which have issued registered shares do not need to change anything. The previous wording of the articles of association stating that the shares are registered by name does not need to be changed or removed. In future, however, it will only have a declaratory significance.

The greatest change will affect non-listed joint-stock companies with shares which are currently registered to the bearer. These companies must convert their shares to registered shares. And the added provision that the shares are registered to the bearer if the company is listed may not be used by non-listed companies. Similarly, registered shares which are converted (from bearer shares) to registered shares may contain a note that they will be automatically converted to bearer shares if the company is listed. Under Section 26f (1) sentence 3 of the Introductory Act to the Stock Corporation Act (EGAktG), non-listed companies with bearer shares are granted until 31 December 2014 to convert them to registered shares.

It is also worth noting that the changes in the articles of association which are necessary for non-listed joint-stock companies may also be resolved by the Supervisory Board. This is remarkable because the necessary changes in the articles of association are material changes, not merely changes in the wording. A corresponding authorisation for the Supervisory Boards of listed companies which are obliged to supplement their articles of association to state that bearer shares are only issued if the company is listed is not currently planned, so in these cases the Annual General Meeting is (still) the responsible body. Further, there is no transitional provision stating a time by which listed joint-stock companies with bearer shares must have changed their articles of association.

It can only be hoped that these points will be changed during the legislation process to create a consistent provision.

4. Continued development of the law on defective resolutions in joint-stock companies

Although the law on defective resolutions, especially the approval procedure, has been significantly improved by the German Act to Implement the Shareholder Rights Directive (German Shareholder Rights Act, ARUG), the concept of a nullity action has not so far been dealt with. The revision of company law is intended to change this.

Up to now, an action for nullity has not been subject to any time limit. Some shareholders have abused this fact, and after filing nullity or contestation action they have observed the development of the proceedings and have then filed a (new) nullity action after a resolution of approval has been passed.

This means that the registration of a resolution of the Annual General Meeting is delayed still further, and new approval proceedings become necessary. Even if it appears likely that the contestation action will be successful, this additional nullity action is “worth it” for the shareholders because it means that there is a (further) reason to claim costs from the company with a relatively low risk.

To prevent such additional nullity claims, the draft law envisages that the filing of a nullity action against a resolution of the Annual General Meeting against which action has already been filed is only possible within one month after the first action has been announced. The legislative body hopes that this change will further restrict the abuse of court action filed against defective resolutions under company law.

5. Conclusion

The planned changes in the amendment of the Company Act are welcome, and the provisions in connection with nullity action in particular are a step in the right direction. It remains to be seen whether these changes will be successful in practice and whether they will achieve the desired goals.

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The right lessons from the crisis in the financial markets?

The project
The reform of insolvency law is one of the most important projects of the German government in the area of the economy. The economic crisis was also a test of the resilience of insolvency law. The German Insolvency Act (InsO) largely passed this test, but weaknesses also became apparent. At the same time, the crisis in the financial markets also presented completely new challenges. Due to its magnitude, the reform of insolvency law is being tackled in three stages.

In the first stage the most urgent reforms will be dealt with. The aim is to strengthen the role of insolvency law as an opportunity to rescue a company. In particular, reforms are needed in the insolvency plan process and in self-administration. Both of these aim to help ensure that insolvency applications are made earlier and the chance of a rescue can be used better. In addition, there is an intention to create a reorganisation procedure for banks which are crucial to the system. And the Insolvency Act is to be modified to take clearing houses into account, an Insolvency Statistics Act is to be created and the privileges of the social insurance funds in contesting insolvency are to be abolished.

The second stage will focus on a reform of consumer insolvency law. In particular, the good conduct period for clearing the remaining debt is to be shortened. In addition, it is to be checked whether a new reorganisation process can be created which can take place before insolvency.

In a third stage, long-term projects such as provisions for group insolvencies and insolvency administrators are to be checked.

First legislation projects

The first stage was already implemented specific legislation projects in the course of 2010, and some of the resulting laws have been in effect since December 2010:

• Changes in the Insolvency Act (InsO) in the course of the Budget Supplement Act 2011;
• Restructuring Simplification Act;
• Restructuring Act.

a) Changes in the Insolvency Act (InsO) in the course of the Budget Supplement Act 2011 (HBeglG 2011, effective since 15 December 2010)

Basically this involves the legal position of public authorities in insolvency proceedings, which led to controversial discussions during the legislation process on the continuation of the "tax office privilege". Articles 3 and 4 combine several provisions which improved the position of public authorities as "mandatory creditors" in insolvency proceedings in comparison with other secured and preferential insolvency creditors. This is justified especially by pointing out that the tax authorities – by contrast with other creditor groups – are not able to chose their debtors and are therefore "mandatory creditors" which never have any opportunity to support their claims by obtaining security.

b) Restructuring Simplification Act (ESUG, not yet legally valid)

The main focus of the draft legislation is to simplify the restructuring of businesses by strengthening the influence of creditors on the selection of the insolvency administrator, by extending and streamlining the insolvency plan process, by simplifying access to self-administration and by a greater concentration in the competence of the insolvency courts. Improving the chances of restructuring a company also helps to preserve jobs.

The changes in the Insolvency Act are also set to strengthen the position of clearing houses which act as a central contract partner and a mediator between the buyer and seller in financial transactions with the aim of ensuring efficient handling and minimising the risks. In the interest of the stability of the markets it must be ensured that financial transactions between a large number of participants which are handled by a central contract partner can be properly completed even if one of the participants becomes insolvent. Finally, the law on insolvency statistics is to be revised so that meaningful data can be obtained in the future about the financial results and the outcome of insolvency proceedings.

So far there is a discussion draft of the Federal Ministry of Justice of 29 June 2010 and 1 September 2010 which was evidently passed to several periodicals by mistake and was then published and discussed there. On 25 January 2011 the Federal Ministry of Justice presented a draft of the Restructuring Simplification Act.

c) Restructuring Act (legally effective as from 15 December 2010)

In the event of an insolvency of a bank, the application of the current provisions, which especially aim to freeze the bank's business operations, is said to have negative effects on other participants in the financial market and on the finance system as a whole. And although the kind of state support that has been provided since the crisis broke out in 2008 can limit the short-term effects of such problems in the financial markets, the state's possibilities for overcoming the crisis are deemed to be limited if no organised restructuring or liquidation is possible. At the same time, it is thought to weaken the entrepreneurial responsibility of the banks involved in the market if they can rely on the state intervening if there is any emergency. This is likely to create incentives to enter into unmanageable risks.

The Act basically consists of five parts and deals with issues in relation to 1) the rescue and reorganisation of banks, 2) regulatory instruments, 3) the bank levy – restructuring funds for banks, 4) to new tasks for the Federal Financial Supervisory Authority in stabilising the financial markets, and 5) an extension of the period of limitation for the liability of directors & officers under company law.

Evaluation
The projects connected with the reform of insolvency law appear on the whole to be sensible and necessary, well structured and practicable. However, the laws which have been passed and become effective as part of the first stage are still very new, so there are not yet any reports of how they work in practice. It remains to be seen to what extent the goals that were set are attained.

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Against the background of the purchase by the German tax authorities of CDs which prove tax offences committed against the German treasury, the legal instrument of voluntary self-disclosure has again become a highly interesting concept for people under threat of criminal sanctions. The Federal Constitutional Court recently decided that the illegally purchased data can be used for criminal investigations.

In the first ten months of 2010 alone, more than 25.000 voluntary self-disclosures were made by remorseful tax offenders; conservative estimates assume that there will be an extra tax revenue of about two billion euros merely from the disclosure of untaxed capital income. Because the investigations are mainly based on information in relation to Switzerland and Liechtenstein, the tax authorities assume that in many cases only investments which are specifically at risk of discovery will be declared voluntarily.

With the draft for an Act to Combat Undeclared Taxable Income of 8 December 2010, the legislative body therefore significantly tightened the requirements for voluntary self-disclosure, especially excluding any exemption from punishment for partial self-disclosure, and thus at the same time reacted adequately to a ruling of the Federal Court of Justice (BGH) of 20 May 2010, which also limited partial self-disclosures. The main argument for refusing exemption from punishment for partial self-disclosure was that this does not constitute a return to complete tax honesty, which was the crucial reason for the exemption privilege.

New
In future, any exemption from punishment will be dependent on a complete and correct voluntary self-disclosure, and this disclosure for the past must include all types of tax and all assessment periods which are not yet statute-barred. To achieve this, especially Section 371 of the German Fiscal Code (AO) will be changed and supplemented.

In future, a notification of a tax audit will prevent the taxpayer from gaining any advantage from a voluntary disclosure; in the past this only applied when the auditor arrived.

Consequences
On the whole it can be stated that a voluntary self-disclosure in the new legal situation must be drawn up and evaluated with greater care and circumspection. This applies especially because it is not yet known how taxpayers will be treated who have mistakenly submitted an incomplete or incorrect disclosure.

Especially in a business context where the taxation situation is complex and the interdependence of different areas involves many factors, for example in group companies, voluntary declarations will involve a far higher risk in the future. In many cases, the goal of correcting all tax errors in a single disclosure will be almost impossible to achieve. The business entrepreneur is therefore urgently advised to carry out a comprehensive audit of the affected years before submitting any voluntary disclosure and not only to focus on the business transactions which need to be corrected, so that in the worst scenario it cannot be alleged that he should have known that a retrospective disclosure was incorrect.

The distinction between the two legal concepts "correction of tax returns" and "voluntary self-disclosure" is likely to be more important in future. For example, where deviations and factual changes are detected retrospectively in relation to VAT or preliminary income tax declarations, it has so far been the accepted practice to declare these changes in the relevant annual tax return. In the light of the stricter requirements for voluntary self-disclosure, this area must now be treated with special care, because if a retrospective tax return which is submitted as a correction is then reinterpreted as a voluntary self-disclosure and any errors are discovered in the tax return, this could then be classified as an incomplete self-disclosure which disqualifies the taxpayer from any exemption from punishment.

Any voluntary self-disclosure made before the Act to Combat Undeclared Taxable Income came into effect will fall under the old legal provisions to protect any action taken in good faith. The new law cannot be expected to become effective before the end of March 2011. In connection with the revision of voluntary self-disclosure, the introduction of an "administrative fee" is also being discussed, so it must also be taken into account that submitting a voluntary self-disclosure is likely to become more expensive in future.

When considering the possibility of a prompt voluntary self-disclosure, the criteria that have applied so far are still relevant, e.g. that the whole of the tax debt plus the interest must be paid to the tax office immediately and that the underlying factual tax situation must be sufficiently documented by suitable receipts.

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Fundamentally, capital income paid by banks and financial service providers is subject to capital gains tax, i.e. the bank or service provider which pays the capital income retains tax on the amount paid out, and passes this tax on to the tax office. On the basis of a declaration for exemption from withholding tax, the capital income can be paid tax-free up to the annual savings threshold of 801,00 euros for a single person or 1.602,00 euros for a married couple.

New declarations for exemption from withholding tax issued or changed after 1 January 2010 are only effective if they contain the tax identification number of the creditor, and the creditor's spouse if appropriate. Existing declarations for exemption from withholding tax do not yet need to be changed; they will remain valid until the end of 2015.

This change which is made in the Annual Tax Act 2010 aims to enable the tax offices to check whether investors with several bank accounts have claimed more than the maximum amount of their tax-free savings allowance.

It is therefore advisable to check any existing declarations for exemption from withholding tax to decide whether there is any need for action in the future. If the lifelong tax identification number is no longer known, it can be obtained by a written request to the Federal Central Register for Tax (BZSt).

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The tax debtor for VAT is fundamentally the business which provides the performance. In certain legally defined cases the VAT liability can be reversed, i.e. the party liable for the VAT is the recipient of the performance (the "reverse charge method"). The Annual Tax Act 2010, which came into effect as from 1 January 2011, created another case in which the VAT liability of the recipient of the performance is included in the law, i.e. the cleaning of buildings and parts of buildings.

Where building cleaning services are rendered within Germany after 31 December 2010 by a business domiciled in Germany, the recipient of the services is the tax debtor if it is a business enterprise which itself provides building cleaning services. The decisive issue for the business rendering the services is especially the need to know whether the recipient of the services itself renders building cleaning services. This can be assumed to be the case if it provides a valid certificate from the responsible tax office. For this certificate, the Federal Ministry of Finance in its circular of 4 January 2011 introduced a printed form (USt1TG Certificate of tax liability of the recipient of building cleaning services)

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On 2 February 2011 the German government passed the draft of the Tax Simplification Act 2011. The Act is due to come into force on 1 January 2012, although some of the measures are planned to be retrospectively effective as from 1 January 2011.

The draft envisages a package of about 40 tax simplification measures. The main provisions include the following:

Increase in the flat rate employee tax allowance from the current 920,00 euros to 1.000,00 euros Childcare costs: Currently childcare costs are treated differently for tax purposes, depending whether they arise for work-related reasons or for private reasons. In future, the individual life circumstances of the parents is to be eliminated in relation to the deductibility of childcare costs.

Child benefit  /  tax-free allowances for adult children: In future, the income test for adult children is to be waived.

Distance-based commuting allowance: The comparison between the distance-based allowance and the actual cost incurred for using public transport is only to be carried out on a yearly basis in future, so a day-by-day comparison of the ticket price and the kilometre allowance is to be eliminated.

Reduction of the assessment methods for married couples: The number of assessment methods and tax scales for married couples is to be reduced from seven to four.

No mandatory assessment of employees with low wages: In future, employees earning low wages are to be exempted from the obligation to file an income tax return merely because tax deductions from the wages for the minimum allowance for health and nursing care insurance were too high.

Waiver of the inclusion of capital income in the tax return because of deductions made for donations and extraordinary expenses

Filing of income tax returns for two years: In future, taxpayers who are not involved in business activities can submit a combined income tax return for two years to the tax office. By exercising this option they can avoid the necessity of dealing with income tax law and filling in the tax return every year. The taxpayers can revoke this option at any time by simply sending in their annual income tax return. This provision can benefit employed persons, pensioners and persons with a normal volume of income from property management.

Paperless communication with the tax offices: IT-based processes are progressively being developed and offered for as many phases in the taxation process as possible. Paperless communication enables the citizens to transmit the income tax return and all necessary receipts electronically. In return it is also planned for the tax assessment notices from the tax authorities to be transmitted to the taxpayers or their consultants electronically in a legally binding form. And the declaration of the separate and consistent assessment to reallocate the tax base for corporation tax is also to be transmitted electronically in future.

Provision of a pre-completed tax return. In future, it is planned to give taxpayers access to a pre-completed tax return in which the applicable data for the current assessment period is automatically entered into the fields in the tax return as far as the tax office already has the data. If the taxpayer uses this service, he must call up his tax return on the Internet. After checking the content, and correcting and adding to the pre-completed data where necessary, the final tax return is then transmitted to the tax office again.

Electronic tax card: The introduction of the electronic tax card means that in future the basis of taxation can be automatically administered centrally and consistently by the tax authorities in a national database. From the year 2012, employers can request an electronic tax card.

Simplifications for electronic invoices: The high demands that are currently placed on electronic invoices for VAT purposes are to be reduced in future. To ensure that VAT monitoring will still be effective, at the same time measures are to be taken to enable electronically saved records and electronically transmitted invoices to be inspected.

Fast tax audits: In future, tax audits should fundamentally be carried out more promptly. To achieve this, the Tax Audit Regulations are to include a definition of prompt tax audits for businesses and the tax authorities, and a consistent standard is to be formulated. This is intended to enable the tax offices to cooperate with the relevant companies to develop individual and pragmatic solutions which will lead to more up to date tax audits.

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Announcement of the taxonomy and the pilot trial

Section 5b of the German Income Tax Act (EStG) has created a provision for the simple and unbureaucratic electronic transmission type of the content of balance sheets and profit and loss accounts to the tax office. The provision initially applied to financial years beginning after 31 December 2010. In the meantime, the introduction date has been postponed by one year in an official announcement to give business companies sufficient opportunity to fulfil the necessary technical and organisational requirements. Section 5b of the Income Tax Act now applies to financial years beginning after 31 December 2011.

To test and optimise the electronic data transmission, according to a circular from the Federal Ministry of Finance (BMF) of 16 December 2010 (IV C 6 -S 2133-b/10/10001, Federal Law Gazette I, 1500), a pilot scheme is to be carried out in the first six months of 2011. In this scheme, companies selected on a voluntary basis will transmit the content of their balance sheet and profit and loss account electronically as stipulated in Section 5b (1) of the Income Tax Act. This circular from the Federal Ministry of Finance also announced the officially prescribed data record ("taxonomy") for the transmission. This is available for inspection and use under http://www.eSteuer.de, together with the relevant assistance and documentation.

The insights gained from the pilot scheme will be integrated into the revision of the taxonomy. After the completion and evaluation of the pilot scheme, a new circular will be issued by the Federal Ministry of Finance on the rules for the application of the taxonomy, and this will be published in the Federal Tax Gazette together with the revised taxonomy. It will then apply to the first electronic data transmission for all business companies obliged to use this facility under Section 5b of the Income Tax Act for financial years beginning after 31 December 2011.

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For further information please visit the German version of this site or contact the Practice Group Tax tax @ sibeth.com

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In the two decrees on trust issued on 14 June 2005 and 30 March 2007, the tax authorities dealt with the treatment under inheritance tax law of limited partner shares held on trust. The opinion advocated by the tax authorities, which was unfavourable for taxpayers, was that the tax treatment of the free assignment of a limited partner share held in trust should be governed by civil law, which stipulates that an entitlement to demand the return of the share from the trustee is assigned (entitlement to performance in kind). The consequence of this view was that for business partnerships, the tax authorities did not apply the more favourable valuation principles for business assets, nor did they grant tax exemption for business assets. This view of the tax authorities was especially relevant in the inheritance of shares in closed investment funds and family companies which were held in trust. These decrees from the tax authorities came in for severe criticism in the literature.

Now, the opinion of the tax authorities has changed. In a decree of 16 September 2010 (Ref. 1034 - S 3811 - 035 - 38476/10), the Bavarian State Ministry of Finance announced that the treatment of the entitlement to performance in kind for tax purposes should be based on the type of asset which is held in trust. This means that for business partnerships, the valuation regulations for business assets are now applicable, and where the other conditions are fulfilled, the tax exemption for business assets under Section 13a of the Inheritance and Gift Tax Act (ErbStG) should be granted; the old decrees on trusteeship are therefore no longer applicable.

In agreement with the new decree from the Bavarian State Ministry of Finance, the Lower Saxony Finance Court had already decided in a legally enforceable ruling of 28 July 2010 (Ref. 3 K 215/09) that the benefits of Section 13a of the Inheritance and Gift Tax Act must also be granted for limited partner shares held on trust. The ruling explicitly stated that the first decree on shares held on trust had no legal basis.

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On 28 October 2010, the German parliament passed the Annual Tax Act 2010 (JStG 2010) in its second and third reading. The Federal Council is scheduled to finalise the Act on 26 November 2010. The Annual Tax Act 2010 includes the following provisions:

Changes in the Income Tax Act
• In a ruling of 25 June 2009, the Federal Court of Finance (BFH) decided that the partial prohibition of deduction for expenses under Section 3c (2) sentence 1 of the Income Tax Act does not apply if the shareholder of a stock corporation has not earned any income or any increase in operating assets during the investment period. But the Annual Tax Act 2010 now stipulates that the intention to earn income is sufficient for the partial prohibition of deduction in future. The case law rulings in favour of the taxpayer are therefore cancelled.

• After the Federal Constitutional Court decided in its ruling of 6 July 2010 that the existing provision for the deductibility of expenses for a home office is unconstitutional, this provision has now been amended. In future, up to € 1,250 can be claimed against tax for a home office if no other place of work is available for business or vocational activities. This limitation of the amount does not apply if the home office is also the centre of the whole of the taxpayer’s business and vocational activities. This amendment takes effect as from the 2007 tax assessment period in all pending cases.

• Under Section 7 (1) sentence 5, the tax depreciation for assets which are declared as business assets will be reduced by the deduction of the tax depreciation amounts utilised in the private sphere. Under the Annual Tax Act 2010 – in accordance with the case law of the Federal Court of Finance – this deduction is calculated on the basis of the fair value, not the acquisition value or cost of production. If the updated acquisition value or the cost of production is greater than the fair value, they are used as the basis of calculation.

• The church tax that has been paid is deductible as a special expense. Under the Annual Tax Act 2010 this no longer applies if the church tax has been withheld in the context of withholding tax.

• Recently, the Federal Court of Finance had rejected the theory of the final withdrawal of assets. As a result, assigning assets to a foreign operating site was not regarded as a withdrawal and therefore did not lead to the realisation of hidden reserves. In the Annual Tax Act 2010, the legislative body has now anchored the theory of the final withdraw of assets in the law. A withdrawal of assets is equivalent to excluding or limiting the taxation rights of the German tax authorities. The same applies to the evaluation of any discontinuation of business operations.

• In future, the interest which the tax office pays to taxpayers, e.g. because of a late refund of income tax (interest on reimbursements) is taxable as capital income. This is the reaction of the lawmakers to a ruling of the Federal Court of Finance of 15 June 2010 which found that reimbursement interest from the tax office is not taxable (cf. also below). But the interest on arrears of tax which taxpayers must pay to the tax office is still not eligible for tax deduction.

• Under the Annual Tax Act 2010, the sale of objects for everyday use within the one-year speculation period will no longer be taxable in the future. This is especially designed to prevent the tax utilisation of sale-related losses within this one-year period.

• As from from the 2011 tax assessment period, certain publicly subsidised measures will be excluded from tax relief for household-related services. This is designed to prevent double subsidies.

Changes in the Turnover Tax Act (UStG)

• The Annual Tax Act 2010 extends the list of cases in which the recipient of services is the debtor for tax (the reverse charge procedure). In future is the reverse charging of tax will also be applied to taxable deliveries of industrial scrap, old metal and other specifically defined waste materials, cleaning of buildings and parts of buildings and certain taxable deliveries of investment gold.

• The “Seeling model” is now abolished to implement an EU directive. This means that the deduction of input tax for mixed-use land or buildings is now limited. Deductions can now only be made for the input tax on parts of the building which are allocable to business use, not for the part of the building which is used privately. As a result, the taxation of private use as a free withdrawal of assets is also abolished. The provisions for the adjustment of input tax will be amended accordingly.

• An obligation to submit the annual VAT return by electronic transmission will be introduced from 2011. The law already requires the preliminary VAT returns to be submitted by electronic transmission.

Changes in the Inheritance and Gift Tax Act (ErbStG)

• Registered cohabitant partners are now fully equivalent to married partners. With retroactive effect for tax which arose as from 31 July 2001, they not only have the same personal tax-free allowances as married partners, they also have the same tax class.

• The administration assets test in the framework of tax exemption for operating assets will be changed stock corporations.

Change in the Corporation Tax Act (KStG)

• According to the provision of Section 8c of the German Corporation Tax Act (KStG) (the former provision for corporate shell purchases) in the event of a substantial purchase of more than 25 % or 50 % of the shares of a corporation, the losses of the corporation are proportionally or fully lost. But this does not apply if there are hidden reserves of the domestic operating assets. The Annual Tax Act 2010 changes this hidden reserves provision so that the calculation is now based on the domestic taxable hidden reserves. This means that foreign operating assets can also be taken into account if the German tax authorities have a taxation right for these assets.

• Under the provisions of the Annual Tax Act 2010, domestic branches of insurance companies which have their headquarters abroad in a member state of the EU or the EEA, if they wish their loss reserves to be recognised for tax purposes, must claim this from the Federal Financial Supervisory Authority on the basis of the ordinance on the reporting of insurance companies which was issued under Section 55a of the Act on the Supervision of Insurance Companies. The following suggested changes which were proposed in the legislative process did not become part of the Annual Tax Act 2010:

• Change in the taxation of official and company cars.

• Tightening of Section 6b of the Income Tax Act so that hidden reserves cannot be transferred to purchased or produced assets which are used for letting and leasing.

• Extension of the deadline for submitting recapitulative statements.

• Stricter requirements for voluntary self-disclosure to avoid penalty; here, however, it must be taken into account that the desired amendment may be added retrospectively in an amendment act which does not require approval.

The Annual Tax Act 2010, like the preceding Annual Tax Acts for 2008 and 2009, is a combination of many small and medium changes in the law. Taxpayers should check these changes to ascertain whether they need to make any adjustments in their circumstances before the Act comes into force.

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Globalisation and the resulting growth in the number of international contracts is increasingly posing the question of the applicable national laws for any contractual relationship. The applicable law is fundamentally determined on the basis of the international private law of the relevant legal systems, or by bilateral or multilateral international treaties which are implemented in national law. Up to now, this also applied within the European Community. In the absence of any normative competence of the European Community, the applicable law for contractual agreements involving the laws of different European states was decided on the basis of international treaties between the European states in the Convention on the Law Applicable to Contractual Obligations of 1980. The German legislative body implemented this convention in German law in Articles 27 to 37 of the Introductory Act to the German Civil Code (EGBGB).

EC Council Regulation No. 593/2008 on the law applicable to contractual obligations (Rome I)

When the EC Council Regulation No. 593/2008 on the law applicable to contractual obligations (the Rome I Regulation) came into effect, it created a clear and consistent legal
position on this matter, at least for the member states of the European Community. This Regulation represented a long awaited further step in the process of European harmonisation of international private and procedural law, which began in 1999 with the Treaty of Amsterdam. Since 17 December 2009, Rome I has been in force in all EU member states - with the exception of Denmark which does not participate in the measures to enhance judicial cooperation in civil law affairs. The Regulation defines what law is applicable to cross-border contracts. Articles 27 to 37 of the Introductory Act to the German Civil Code (EGBGB) were abolished.

The Regulation retains most of the tried and tested provisions of the Convention on the Law Applicable to Contractual Obligations. Nevertheless, the fact that this matter is now governed by an EC Regulation strengthens the legal certainty for companies and consumers engaged in cross-border transactions. On the one hand, it is now equally and directly valid in the member states, and on the other hand the sometimes divergent rulings of national courts on the Convention on the Law Applicable to Contractual Obligations are now replaced by the jurisdiction of the European Court of Justice to rule in this area.

Area of application and scope of the regulation

Where contractual obligations involve the laws of different European member states, the applicable law for the respective transaction is based on the contractually agreed applicable law, i.e. it is governed by the provisions of the Regulation. The applicable law determined on this basis fundamentally governs the whole of the contractual relationship, especially the origination and effectiveness of the contract, the consequences of its invalidity, the interpretation of the contract, the fulfilment of the obligations created by the contract, the consequences of non-fulfilment, the lapse of obligations and the statute of limitations. But certain contractual relationships and individual issues which must be evaluated apart from the agreed law for the contract are explicitly defined as exceptions to the material scope of the Regulation. According to Article 1 (2) of the Regulation, matters such as contractual obligations in family cases, matrimonial property regimes, wills and trusts, precontractual negotiations, certain insurance policies, arbitration and place of jurisdiction agreements and certain obligations arising from bills of exchange, cheques and other tradable securities are excluded from the area of application.

Other areas of law which are not covered in the provisions of the Regulation include civil status issues, questions involving the legal personality, legal capacity and capacity to act of natural persons, questions of company law and effective representation. Whether a contract has effectively been created must therefore be judged according to the relevant provisions of other legal systems, irrespective of the contractually agreed laws. For example, it is important to check carefully whether the person representing a foreign company was really effectively entitled to make undertakings for the company at the time of the contract under the relevant laws in the jurisdiction of that company. And according to Article 11 of the Regulation, the question of whether a contract has come into force in the correct form is also not exclusively decided under the contractually agreed law. Instead, the formal requirements of the state in which the contract is concluded may be applicable if all parties to the contract are in this state at the time when the contract is agreed. If this is not the case, the requirements may alternatively be based on the laws of the state in which a party to the contract has his/her habitual residence, or in which he/she is at the time when the contract is concluded.

Potential for contract design

Under Article 3 (1) sentence 1 of the Regulation, a contract is fundamentally subject to the free choice of law of the parties. This means that the decisive factor is the actual intention of the parties as it is explicitly or implicitly expressed in the contractual agreements. If the choice of law is not explicit or cannot be clearly derived from the provisions of the contract or the circumstances of the case, the applicable legal system is determined according to the provisions of Article 4 of the Regulation, or alternatively on the basis of prescribed objective criteria, some of which are typical for the type of contract, such as the habitual residence of a specific party to the contract, the location of a property or the place of the characteristic performance, although the legal system determined in this way may be corrected by proof of an obviously closer connection to some other legal system. An explicit statement of the contractually agreed legal system is therefore advisable for reasons of legal certainty. Apart from that, the subjective choice of law can take the special characteristics of the individual case into account. Instead of strict rules on connecting factors which link the case with a specific rule of law, an individual arrangement for the choice of law should be considered. According to Article 3 (1) 1 sentence 3 of the Regulation, the parties may make a choice of law for the whole contract or only for parts of the contract. If this is carefully examined and designed, it is therefore possible to subject different aspects of the contract to the legal system which the parties consider most favourable in individual areas. Differentiated solutions for various complexes such as the content of the contract, faulty performance, warranty and liability are therefore possible, and in view of the fundamental equivalence of contract law in the European countries and the largely optional nature of contractual provisions, they are generally no cause for misgivings. This freedom of contract design should be utilised. In view of the fact that Article 3 (2) of the Regulation also stipulates the basic principle of the free choice of law over time, the parties are also at liberty to agree on the applicable law at a later time, or to change a previously agreed choice of law by mutual agreement. The only issues not affected by the later agreement are the formal validity of the contract and the rights of third parties. It is worth considering this option from time to time for existing contracts.

Limitations of the choice of law

But care must be taken in relation to the limits of the choice of law which are stipulated by the Regulation. To protect the intrinsically “weaker” party, the Regulation limits the basic principle of a free choice of law for certain groups of persons. This especially applies to contracts with private consumers and employees. Even for these contracts there is no general prohibition of a choice of law. But according to Article 6 (2) sentence 2 of the Regulation, the choice of law must not lead to a situation in which the private consumer is deprived of the protection of the mandatory law of the state in which he has his habitual residence. This does not make the choice of law null and void, but the legal system of the consumer’s country of residence determines the minimum level of protection which must be afforded. This means that the principle of the more favourable law is applied. If the legal system chosen by the parties offers the private consumer greater protection, this legal system applies. According to Article 8 of the Regulation, the same applies to the choice of law in relation to individual contracts of employment, although here the connecting factor relates to the legal system of the state in which the employee normally carries out his work under the contract, or alternatively the state in which the branch is situated which employed the employee. The Regulation  stipulates similar restrictions of the choice of law for transport contracts and insurance policies. In addition to these limitations based on connecting factors in relation to the parties to the contract, the Regulation also limits the content of the free choice of law in cases which mandatory national law is involved. Article 9 of the Regulation defines a special connecting factor in national intervention standards which govern the situation irrespective of the agreed choice of law. This applies to mandatory national provisions which the state regards as essential for the defence of its public interests, especially its political, social or economic organisation, so that they are applied to all matters which fall into their area of application, irrespective of the law that is applicable to the contract under the Regulation. One example of this is the provisions of antitrust law. In addition, Article 3 (3) of the Regulation provides for a limitation of the choice of law in cases in which there are no foreign connecting factors – with the exception of the choice of law provision itself. In the event of such a purely domestic contractual situation, it is still possible to choose to apply the laws of another state, but these laws must not affect the mandatory provisions of the state with which the contract is exclusively connected. In Germany, for example, these mandatory requirements include the provisions for general terms and conditions and the provisions for door-to-door transactions. In addition, Article 3 (4) of the Regulation stipulates a similar restriction in favour of community law.

Changes in the transfer of receivables

The Regulation envisages a significant change in the choice of law in any transfer of receivables. Under German law, the majority view was formerly that a free choice of law was only possible for the contractual transaction which creates the obligation, but that the material transfer agreement, i.e. the assignment or transfer itself, was not governed by the agreed law of the contract, but by the law of the state which had jurisdiction for the existence and cancellation of the receivable (applicable law for accounts receivable). In the future it will still be possible for the parties to make a free choice of the law governing the contractual transaction which creates the obligation. A new element is that Article 14 (1) of the Regulation now also envisages a free choice of law for the whole of the contractual relationship between the assignees and the assignor as the new creditor for the account receivable. This includes the material aspects of the transfer of the receivable. As a result, the parties can now freely choose the applicable law, even for the transfer of the receivable. And according to Article 14 (3) of the Regulation, this applies not only to the “complete” transfer of receivables, it also applies to the assignment of of receivables for security purpose and the assignment of rights of lien or other security rights to receivables. Important partial rights are therefore placed on the same basis as the receivables. But the Regulation continues to deal with the question of transferability and the effects of the transfer on the debtor on the basis of the applicable law for the transferred receivable (Article 14 (2) of the Regulation). The background to this provision is that the content of the contractual relationship should not be changed by the transfer, so the applicable law should be retained in the interest of the debtor. The changes in the Regulation have now harmonised the legal situation in Europe in relation to the differences which previously arose from the different implementations of the separation between the contractual transaction which creates the obligation and the material transfer agreement. Especially from a German perspective, this means that the cross-border transfer of receivables can be designed with greater flexibility in future. In the absence of any explicit provision for the previously controversial effect of the transfer on third parties and the question of multiple transfers, there is still a need for interpretation even after the Regulation came into effect.

Conclusion

The harmonisation of national provisions on the national law applicable to contractual relationships as a result of the Rome I Regulation increases the legal certainty for the parties to cross-border contracts. In the light of the scope offered by the Regulation, both new and old contracts should be reviewed for any possibility of a choice of law which is appropriate for the interests of the parties, taking into account the limitations defined by the Regulation. In particular, the possibility of the free choice of law for material transfer transactions which is granted in the Regulation offers potential for flexible contract design for the transfer of receivables.

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The initiation and sale of closed investment fund products is already subject to a number of regulatory requirements. For example, every person who sells investment fund products must have a trading licence, and there are specific requirements for the content of the sales prospectus. Two new draft laws aim to make the regulation of closed investment funds and their initiators even stricter.

Directive of the European Parliament and the Council on Alternative Investment Fund Managers and amending Directives 2004/39/EC and 2009/…/EC (AIFM Directive)

The AIFM Directive is the subject of discussions at the European level at the moment. The draft Directive is in the process of conciliation negotiations between the EU institutions. After initial delays, it now no longer seems unlikely that it could be passed this year. The negotiations include the area of application of the AIFM Directive and any possible exceptions. Fundamentally, the AIFM Directive applies to all investment instruments which collect money from investors and are not subject to any other stricter approval regulations. Therefore, as a general rule, it is also applicable to closed investment funds. Although in principle the AIFM Directive only allows capital to be raised from “professional investors” (e.g. institutional investors, financial service providers etc.), it can be expected that Germany will make use of the exception by which sales to small investors may be permitted at the national level. But exceptions are still being discussed in the legislation process (e.g. if the investment falls short of certain threshold values for the managed assets, or if it consists entirely of property and equity funds). It is still uncertain to what extent closed investment funds or their initiators could benefit from any easing of the requirements. Regulation by the AIFM Directive is directed at the managers of alternative investment funds, not the investment products themselves. The provisions are therefore addressed to the issuers of closed investment fund products. The scope of the Directive envisages EU-wide permits for asset managers, and this could also apply to the issuers of closed investment funds. In this connection, the integrity and professionalism of the supplier will play a prominent role. It will probably be necessary, for example, to give detailed information about the planned financial activities, designation and characteristics of the managed investment funds, the identity of the shareholders, any substantial participations, management structures (including any agreements about delegation of individual fund management services), the valuation and depositing of the investment assets and the reporting system. This is more than just a permit procedure; after receiving the permit, the fund manager will be subject to constant supervision with substantial reporting obligations (transparency requirements). On the one hand, the supervisory authority and investors must be provided annual yield, assets and business reports. The approval, supervision and regular reporting would lead to significant costs for the fund initiators. In addition, specific demands are to be placed on the starting capital and the current capital resources of the supplier. Depending on the value of the portfolio, the capital resources will need to amount to at least € 125,000. Other aspects of the Directive are also likely to involve considerable costs. For example, it is planned to require a valuation of the assets at least once a year, which would probably involve substantial costs, especially for real estate funds. And the investor money that is raised would need to be deposited in a special account by a bank which would act as a custodian. This means that the management and custody of the invested monies is to be separated. It is still completely unclear whether trustees and asset allocation supervisors, who are often found in German closed investment funds, will be considered to provide sufficient security for the investors’ money in this connection. And finally, the risk management system which will need to be implemented (due diligence, stress test, calculation of the risk profile) is also likely to cause considerable expense.

Act to Strengthen the Protection of Investors and Improve the Functionality of Capital Market Law (Act to Improve Investor Protection, AnSVG)

The efforts to implement the AIFM Directive are accompanied by the national legislative initiative of an Act to Improve Investor Protection. This reform project, in the form laid down in the discussion paper of 3 May 2010, aimed to implement an even further-reaching regulation of the grey capital market (especially closed investment funds). Although the Act to Improve Investor Protection was brought before the German parliament on 22 September 2010 as a result of a cabinet resolution, it did not include the section on the regulation of the grey capital market which had been part of the discussion draft. According to information provided by the Federal Ministry of Finance, this section is to be submitted in a new legislation process which will be jointly coordinated by the Federal Ministry of Finance and the Federal Ministry of the Economy. The discussion draft not only proposed significantly stricter requirements for the sales prospectus and wider powers for the Federal Financial Supervisory Authority (BaFin) in the approval process for the prospectus, it also included suggestions of a possible extension of the supervision of the initiators of closed investment funds. In addition, the fund initiators and the sale of closed investment fund products were to be subject to the requirements of the Securities Trading Act (WpHG) in the future. This Act includes an obligation to provide meaningful consultation for the investor, to disclose commission fees, to keep records of the consultation and to prepare information sheets. Responsible persons and consultants would need to be registered with the Federal Financial Supervisory Authority (BaFin) and to provide constant proof of their special qualifications and suitability for the work. According to the discussion draft, intermediaries for closed investment funds should be subject to supervision by the Federal Financial Supervisory Authority. The supervision proposed in the discussion draft would at least apply to the sale of investment fund products, which would therefore require a permit under the Banking Act (KWG). This in turn would place considerable demands on the integrity and the professional quality of the sales organisations, their staff, internal control bodies and their solvency. According to press information, the proposal to place intermediaries under the supervision of the Federal Financial Supervisory Authority in particular met with strong resistance from the Federal Ministry of the Economy. Nothing is yet known about the details of what the draft act drawn up jointly by the Federal Ministry of Finance and the Federal Ministry of the Economy for the regulation of the grey capital market could look like.

Conclusion and outlook

To summarise, it can be stated that many details have not yet been clarified. The AIFM Directive is still in the middle of the legislation process, and the details of the joint draft act by the Federal Ministry of Finance and the Federal Ministry of the Economy are not yet known. In particular, it is an open question whether the approval of intermediaries under the Banking Act is still being considered. Even if free intermediaries remain entirely subject to the supervision of the trade inspection authorities in the future, their actions and those of the fund initiators may still be subject to stricter regulation. The information obligations for investment fund products (prospectuses, sales information etc.) may also become considerably stricter.

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On 3 May 2010 the Federal Ministry of Finance published the updated draft of an “Act to Strengthen the Protection of Investors and Improve the Functionality of Capital Market Law” (Gesetz zur Stärkung des Anlegerschutzes und Verbesserung der Funktionsfähigkeit des Kapitalmarktrechts). One of the goals of this draft legislation is to strengthen the regulation of the “grey capital market”. If the draft legislation becomes law, this would create a number of new regulations for closed investment fund products.

One significant change would be that closed investment funds would be classed as financial instruments in future, so they would fall under the German Banking Act (Kreditwesengesetz, KWG) and the German Securities Trading Act (WpHG). As a consequence of this, the sale of such products would be subject to increased regulation because of the obligation to register and certify the products with the Federal Supervisory Institution for Financial Services (BaFin) and the requirement for certain standards to be fulfilled in the advice and consulting provided.

Numerous changes would also need to be taken into account in future in publishing the prospectus. The abolition of the short special periods of limitation for prospectus-related liability, an extension in the scope of the review by the Federal Supervisory Institution for Financial Services to allow the publication of the prospectus (check for coherence and contradictions) and numerous other requirements for the content of the sales prospectus are just a few examples.

And finally, the draft legislation also contains a prohibition of the naked short selling of shares and an abolition of the daily repurchase commitment for open investment funds. The latter provision is to be implemented, for example, by complying with a minimum holding period and a period of notice for investors in closed investment funds.

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On 29 March 2010 the Federal Ministry of Finance published the draft of the German Annual Tax Act 2010 (JStG 2010). It contains a large number of individual measures which are unconnected or only partly connected with each other. The main provisions are summarised in the following overview, which only reflects the present state of discussions on the legislation. It is unlikely that the legislation process will be completed before the summer recess.  

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