Eight months after the Implementation Day and we have witnessed improving trading relationships between Germany and Iran. In the first six months of this calendar year the export from Germany to Iran has increased by 15% compared to the last year. Several business delegations from the states of Bavaria, Hesse, and Baden-Württemberg have traveled just recently to Iran and the eagerly anticipated German business delegation – led by the German Minister for Economic Affairs and Energy, Sigmar Gabriel – will soon make its way to Tehran.

However, all these business improvements can not cover the lack of a proper functioning financial infrastructure for trade business between Germany and Iran. Due to still existing US banking rules many German banks do not dare to facilitate any Iran business.

As we were recently informed by the Bavarian business delegation – which was led by Bavarian Minister of Economic Affairs, Ilse Aigner – three Iranian banks (Sina Bank, Middle East Bank, and Parsian Bank) are planning to enter the German market through Munich. These banks will aim to provide banking facilitation to all German and Iranian trading customers which are already active in the market. Sina Bank, Middle East Bank, and Parsian Bank will then join the Iranian banks currently existing in Germany (Europäische Iranische Handelsbank, Sepah Bank Branch, Melli Bank Branch, Saderat Bank Branch). However, only one of these Iranian banks is today able to provide banking facilitation (Europäische Iranische Handelsbank). Hence, further trading banks are necessary to cover the great demand.

Having said this, any foreign bank entering the German market has to consider many legal and strategic issues. With respect to the Iranian banks coming to Germany one strategic question is the selection of the location. Munich is indeed a good selection since no Iranian banks are currently established in the Bavarian capital and due to the geographical closeness to the German Mittelstand and Italy. However, Frankfurt as the banking capital of Germany might be a better choice since it covers all necessary economic and regulatory requirements (e.g. the European and all German supervisory authorities are represented in Frankfurt plus the increasing importance of this city after BREXIT). But that is enough on the strategic topic. Let us face the more interesting regulatory question of branch vs. subsidiary.
Branch vs. Subsidiary

As heard from the Bavarian business delegation and confirmed by several newspaper articles, at least two out of the three Iranian banks intend to set up a branch in Germany. Setting up a branch in Germany may be practical if the host authorities only allow a branch outside of the country rather than a subsidiary. With respect to Iran this is not the case. Setting up a branch in Germany is regulated by Section 53 German Banking Act (see also our publication “Banking Business in Germany, Market Access to Germany – legal and regulatory implications” – for more in detail information and our market entry flyer ). As a rule-of-thumb, branches of foreign banks (non-EEA Member States) are treated in the same manner as subsidiaries (without benefiting from the Passporting Privilege) under European regulatory aspects.
Licensing Procedure

The licensing procedure, i.e. the necessary documents to be submitted and the provisions to be fulfilled in order to receive the banking license, is almost identical with respect to the procedure of establishing an institution / a subsidiary:

The entity must apply for a license to establish a branch in Germany, plus the branch’s two managing directors have to be trustworthy in the same manner as the managing directors of subsidiaries.
The license application must be enclosed with a regulatory business plan which is equivalent to the business plan of a subsidiary.
The competent authority is the Federal Financial Supervisory Authority (BaFin). The managing directors (at least two) shall undergo the same trustworthiness test as requested for managing directors of subsidiaries. The head office and the shareholders must prove to be reliable.
In addition to the required documents for a subsidiary, BaFin may ask for further documents and information especially with respect to the head office.

The European Passporting Privilege

The so-called passporting procedure is based on the Banking Directive 2006/48/EC. This provision established the ‘supervision by the State of origin’ and settled the issue that the branches of CRR credit institutions from EEA-Member States may operate within the EU and EEA without the need of an additional license. However, this Passporting Privilige only entitles a CRR credit institution form an EEA-Member state to establish branches within the EU and EEA without the need to apply for additional permission. This Passporting Privilege is not available for banks of non EEA-Member States such as Iran. Therefore, if the Iranian banks intend to set up only a branch in Germany they will close the door to the European market.

Iranian banks may consider strategic issues (e.g. selection of the location) and regulatory rules before planning the market entry to Germany.

As we have seen here the regulatory rules for setting up of a branch are more or less identical with the requirements for setting up a subsidiary. However, only a subsidiary of a bank of a non-EEA-Member State can benefit from the Passporting Privilege rather than a branch of a bank of a non-EEA-Member State. Therefore, one may choose to set up a subsidiary in Germany and to benefit from the Passporting Privilge. Only by doing this the German market entry may become an European market entry.

Source » pwc