Definition and Legal Significance of Finance
Finance encompasses all processes, instruments, and legal relationships connected with the financing, management, control, and oversight of money and capital in commercial legal transactions. In a legal context, the term refers to both corporate and private financing transactions and the legal framework that regulates such transactions. Finance plays a central role in corporate law, banking law, capital market law, as well as in tax and accounting law.
Distinction of the Term Finance in Law
Legal Definition
In the narrower sense, finance refers to all transactions and contracts in which financial resources are made available, raised, provided, or transferred. This includes both equity and debt financing measures, financial instruments, as well as related collateral and legal obligations.
Finance in National and International Law
The term finance is not legally defined in German law. In an international context, however, there are numerous directives, regulations, and standards that provide a precise definition as well as binding requirements—for example, within EU financial market regulation or international accounting standards (IFRS).
Legal Fields and Regulatory Areas of Finance
Banking Law
Role of Financial Institutions
Banks and other financial institutions act as key players in financing. They are subject to extensive regulatory requirements, particularly the Kreditwesengesetz (KWG), the Capital Requirements Regulation (CRR), and the Wertpapierhandelsgesetz (WpHG).
Loan Agreements and Law of Loans
The granting of loans requires compliance with numerous legal provisions, for example pursuant to §§ 488 et seq. BGB. Consumer credits, real estate security law aspects, and cross-border lending are also regulated in detail.
Capital Market Law
In the field of finance, transactions on the capital market play a central role. The Securities Prospectus Act (WpPG), the Securities Trading Act (WpHG), and the Market Abuse Regulation (MAR) govern key aspects such as prospectuses, transparency, insider rules, and mandatory disclosures.
Corporate Law
Corporate law regulations determine the forms of financing for legal entities, especially with regard to raising capital, capital maintenance, and restructurings. Section 30 GmbHG, for example, sets out the mandatory capital maintenance obligation for limited liability companies. Stock corporation law contains detailed rules on equity financing and financing instruments, such as convertible or option bonds.
Tax Law
The term finance is closely intertwined with tax implications, particularly questions concerning the tax recognition of loans, the tax treatment of financing expenses (§ 8a KStG), and the deductibility of business expenses as well as the interest barrier (§ 4h EStG).
Insolvency Law
Financing measures are subject to insolvency law restrictions in the event of corporate financial crises. The insolvency administrator can contest financial transactions that are detrimental to creditors pursuant to §§ 129 et seq. InsO. Particular significance is attached to so-called estate protection and equal treatment of creditors in insolvency proceedings.
Contract Drafting in the Field of Finance
Typical Contracts in the Finance Sector
The most important contracts include loan and credit agreements, collateral agreements (such as sureties, land charges), syndicated finance agreements, mezzanine agreements, factoring and leasing contracts. Contract drafting is generally characterized by comprehensive provisions securing and managing the provided capital resources.
Collateral and Its Legal Structure
The provision of collateral is essential for risk management in the field of finance. Typical legal instruments include mortgages, land charges, security assignments, pledges, and guarantees. The formal and substantive requirements for the validity of these securities are comprehensively regulated in the German Civil Code (BGB).
International Finance Law and Cross-Border Regulations
International Standards and Supervision
Internationally, in addition to national law, various regulatory frameworks apply, including Basel III for the banking sector, Solvency II for insurance companies, as well as international accounting standards (IFRS/IAS), all of which address transparency, stability, and risk assessment of financing.
Anti-Money Laundering and Compliance
Within the scope of finance, compliance with anti-money laundering regulations (GwG, AML Directives) as well as extensive compliance requirements is mandatory. This particularly concerns the identification of contractual partners, filing of suspicion reports, and documentation obligations.
Digitalization and New Legal Developments in the Finance Sector
Blockchain, Cryptocurrencies, and Digital Financial Instruments
Technological change gives rise to new legal developments, especially in the area of digital financial products. The Act on the Supervision of Securities Institutions (WpIG) and the Electronic Securities Act (eWpG) create new normative foundations for digital financial instruments and their custody.
Data Protection and Financial Transactions
The handling of personal data in financial transactions is subject to the strict regulations of the General Data Protection Regulation (GDPR) and sector-specific data protection rules of the financial supervisory authorities.
Summary
Finance is a central, multifaceted concept encompassing a wide range of legal aspects. Legal consideration extends from classic financing transactions in civil law to regulatory provisions in banking and capital market law, and to tax and insolvency law issues. The increasing digitalization leads to ongoing development of the legal framework, making finance the subject of continual legal advancements. A comprehensive understanding of legal regulations is essential for the legally compliant structuring and execution of financing processes.
Frequently Asked Questions
Do I have to pay taxes on capital gains from securities transactions in Germany?
Capital gains from the sale of securities such as shares, bonds, or funds are generally subject to the so-called flat-rate withholding tax in Germany. This currently amounts to 25% plus solidarity surcharge and, if applicable, church tax, so that the total tax rate may sum up to approximately 26-28%. For private individuals, the saver’s allowance applies, which is currently 1,000 euros (or 2,000 euros for jointly assessed spouses). Gains that exceed this amount must be taxed. Taxation is usually carried out at source by the custodian bank, which remits the tax directly to the tax office. In the case of foreign brokers, investors are responsible for the correct taxation themselves and must declare the gains in their tax return. Losses from securities transactions can be offset against gains from capital investments; however, restrictions apply, as only income of the same type can be offset.
What legal requirements must I fulfill to obtain a business loan?
To obtain a business loan, certain legal requirements must be met. First, a company must have its own legal personality, for example as a GmbH, AG, or registered merchant (e.K.). Banks require proof of proper business registration and request access to current commercial register excerpts and articles of association. Furthermore, the identity and authority of the applicants must be evidenced by identification documents and, if applicable, shareholder resolutions. Credit institutions also assess the company’s financial situation and creditworthiness based on annual financial statements, business management evaluations, and tax assessments. In many cases, collateral must also be provided, the legal value and ability to register of which must be verified (e.g., land register excerpt for real estate liens). Compliance with anti-money laundering regulations is mandatory, which is why an anti-money laundering identification process has to be carried out.
When is a license required for financial service providers under the Kreditwesengesetz (KWG)?
Financial service providers who commercially conduct banking transactions or financial services in Germany generally require a license pursuant to Section 32 of the Kreditwesengesetz (KWG). Activities subject to licensing in particular include the management of securities accounts, investment advice, proprietary trading, or operating a payment service. Before granting a license, the Federal Financial Supervisory Authority (BaFin) examines, among other things, the reliability and professional suitability of the managing directors, the company’s financial resources (capital requirements), as well as the existence of organizational arrangements for risk control and anti-money laundering. Violations of the license requirement are prosecuted as criminal offenses and may lead to a prohibition of business activities by BaFin.
How must documentation and record retention obligations in the financial sector be legally structured?
Documentation and record retention obligations in the financial sector are governed by a variety of statutory provisions, in particular the German Commercial Code (HGB), the Fiscal Code (AO), the Kreditwesengesetz (KWG), as well as specific industry regulations (e.g., Securities Trading Act – WpHG). Essentially, business-relevant documents such as accounting records, business correspondence, customer contracts, or advisory protocols must generally be retained for ten years (§ 257 HGB, § 147 AO). Retention may also be in electronic form, but must comply with the principles of proper accounting and audit security. Statutory reporting obligations, such as those under anti-money laundering law, also require ongoing and traceable documentation of all transactions, including identity verification and proof of origin of funds.
What are the legal requirements for investment advice?
The legal requirements for investment advice are primarily set out in the Securities Trading Act (WpHG) and the Financial Investment Intermediaries Regulation (FinVermV). Investment advisors must disclose conflicts of interest and may only recommend products whose characteristics they have demonstrably understood and reviewed. Prior to advising, the customer’s knowledge, experience, financial circumstances, and investment objectives must be ascertained through a so-called advisory meeting and comprehensive protocol. Incorrect advice may give rise to liability claims. Commercial investment advice is also subject to licensing and is supervised by BaFin or the competent Chamber of Industry and Commerce. In addition, there are extensive information, disclosure, and documentation obligations towards the customer.
What statutory regulations apply to the accounting of companies in the financial sector?
The accounting of companies in the financial sector is governed by special statutory requirements, as set out, for example, in the German Commercial Code (HGB), the Kreditwesengesetz (KWG), the Regulation on the Accounting of Credit Institutions (RechKredV), and the Securities Institutions Act (WpIG). Banks and financial service providers must regularly prepare annual financial statements, observe specific formatting requirements for balance sheets and income statements, and in some cases provide additional information in the notes and management report. There are also requirements regarding the audit and disclosure of these documents. Publicly traded institutions must also apply the International Financial Reporting Standards (IFRS). Violations of these requirements may result in sanctions by the Federal Financial Supervisory Authority (BaFin), such as fines or prohibiting business activities.
