COVID-19: The four pillar protective governmental shield for Germany

Latham & Watkins LLPThe German Federal Ministry of Finance and the German Federal Ministry for Economic Affairs and Energy announced a protective shield for employees and companies in Germany in light of coronavirus implications. The protective shield is based on four pillars:

FIRST PILLAR – Reducing the Employees’ Working Hours (Short-Time Work) is More Flexible

Government grants (so called short-time work allowances (Kurzarbeitergeld)) are easier available for companies which want to realize substantial salary savings by sending their employees home on a temporary basis. As decided today, retroactively, to the beginning of March 2020, the respective rules will be relaxed. As decided today, retroactively, to the beginning of March 2020, the rules on reduced hours compensation benefit will be adapted. Eligibility requirements will be loosened as follows:

  • Reduction of the minimum ratio of the employees in a company affected by shorter working hours to up to 10%;
  • Partial or complete waiver of the need to build up a negative balance in working hours;
  • Reduced hours compensation benefit will also be available to temporary/agency workers;
  • Complete reimbursement of social security contributions by the Federal Labour Office.

SECOND PILLAR – Tax-related Liquidity Assistance for Businesses

To improve the companies’ liquidity situation, options for deferring tax payments and reducing prepayments will be implemented:

  • Revenue authorities will be able to defer taxes if their collection would lead to significant hardship. The revenue authorities will be instructed to not impose strict conditions in this respect.
  • As soon as it becomes clear that a taxpayer’s income in the current year is expected to be lower than in the previous year, tax prepayments shall be reduced in a swift and straightforward manner.
  • Enforcement measures (g. garnishment of bank accounts) and late-payment penalties will be waived until 31 December 2020 if debtor of pending tax payments is directly affected by corona virus implications.

THIRD PILLAR – A Protective Shield for Businesses’ Liquidity

The German Federal Ministry of Justice and Consumer Protection announced that it is preparing a legal regulation to suspend the obligation to file for insolvency (relevant period is currently three weeks) until 30 September 2020 for companies that are hit by corona virus implications. The suspension shall enable companies to organize additional state aided financing together with their respective banks in a situation where a substantial demand for additional financing faces institutions operationally impaired by COVID-19.

In order to provide additional financing, existing liquidity assistance programs will be expanded to make it easier for companies to access cheap loans:

  • Conditions for KfW-Unternehmerkredit (business loan for longer existing companies) and ERP-Gründerkredit-Universell (start-up loan for companies that are less than 5 years old) will be loosened by raising the level of risk assumptions (indemnity) for operating loans and extending these instruments to large enterprises with a turnover of up to €2 billion (previously, the limit was €500 million). Higher risk assumptions of up to 80% for operating loans of up to €200 million is expected to increase banks’ willingness to extend credit.
  • In the case of the “KfW Loan for Growth”, the program aimed at larger companies, the current turnover threshold of €2 billion will be raised to €5 billion. In future, these loans will take the form of syndicated loans and will not be restricted to projects in one particular field (in the past, only innovation and digitalization projects were eligible). Risk assumption will be increased to up to 70% (from 50%).
  • For companies with a turnover of more than €5 billion, support will continue to be provided on a case-by-case basis.

For guarantee banks (Bürgschaftsbanken), the guarantee limit will be doubled to €2.5 million. The Federation will increase its risk share in guarantee banks by 10%. The upper limit of 35% of operating resources in guarantee banks’ total exposure will be increased to 50%. To accelerate liquidity provision, the Federal State is giving guarantee banks authority to make guarantee decisions up to €250,000 independently and within a period of three days.

The large guarantee program (parallel guarantees from the Federation and the Federal States), which was previously limited to companies in structurally weak regions, will be opened up to companies in other regions, as well. In this program, the Federation covers operating loans and investments with a surety requirement above €50 million and a guarantee rate of up to 80%.

In the governmental announcement it is explicitly stated that the above mentioned measures are already covered by existing state aid rules.

For companies that are temporarily in serious financial difficulties because of the crisis and therefore do not have easy access to existing support programs, additional special KfW programs will be launched. This will be achieved by increasing the KfW’s risk tolerance. Risk assumptions for investment funds (indemnity) will be improved and will total up to 80% in the case of operating resources and up to 90% in the case of investments. In addition, consortium structures will be offered for these companies. These special programs are being submitted to the European Commission for approval.

FOURTH PILLAR – Strengthening European Cohesion

  • The German government welcomes the European Commission’s idea of a Corona Response Investment Initiative with a volume of €25 billion.
  • It also welcomes ECB banking supervision’s announcement that it will utilize existing leeway to ensure that banks can continue to fulfil their role in funding the real economy, as well as the measures for providing liquidity to banks that were announced by the ECB on Wednesday.

DISCLAIMER: Because of the generality of this update, the information provided herein may not be applicable in all situations and should not be acted upon without specific legal advice based on particular situations.

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