Opinion of the European Central Bank of 29 July 2021 on deferred tax assets of Greek credit institutions (CON/2021/25)

OPINION OF THE EUROPEAN CENTRAL BANK of 29 July 2021 on deferred tax assets of Greek credit institutions (CON/2021/25) Introduction and legal basis

On 22 July 2021 the European Central Bank (ECB) received a request from the Greek Ministry of Finance for an opinion on certain draft amendments (hereinafter the ‘draft amendments’) to Article 27 of the Greek Tax Code (law 4172/2013) on the carry-forward of losses and deferred tax assets (DTAs) arising from debit differences. The ECB’s competence to deliver an opinion is based on Articles 127(4) and 282(5) of the Treaty on the Functioning of the European Union and the sixth indent of Article 2(1) of Council Decision 98/415/EC , as the draft amendments relate to rules applicable to financial institutions insofar as they materially influence the stability of financial institutions and markets, and to the tasks conferred upon the ECB pursuant to Articles 127(6) and 128 of the Treaty. In accordance with the first sentence of Article 17.5 of the Rules of Procedure of the European Central Bank, the Governing Council has adopted this opinion.

1. Purpose of the draft amendments

1.1 As explained in the consultation letter, the draft amendments aim to remove any tax impediments to a potential acceleration of Greek banks’ non-performing exposures (NPE) reduction plans and to facilitate their participation in the recently adopted prolongation of the Hercules Asset Protection Scheme (HAPS II). The draft amendments are also deemed necessary in order to mitigate any repercussions from the deleveraging of the Greek banking system. 1.2 The Greek Tax Code currently allows credit institutions to deduct from their gross tax revenue, and thus amortise: (i) the debit difference resulting from the exchange of Greek sovereign-issued or -guaranteed bonds in the context of a sovereign debt restructuring scheme. This difference may be deducted in 30 equal annual instalments, starting in the financial year in which the securities were exchanged; and

priority of debit differences carried forward, older debit differences will take precedence over newer ones. 1.7 Lastly, the draft amendments provide that if at the end of the 20-year amortisation period balances remain that have not been offset, these balances will constitute losses that will be subject to the basic 5-year carry-forward rule. 1.8 It is proposed that the draft amendments apply retroactively from 1 January 2021 to the debit differences referred to in paragraph 1.2(ii), which have accrued on or after 1 January 2016. In this regard, the consultation request letter states that the draft amendments should be adopted before Greek credit institutions announce their interim financial statements for the first half of 2021 (interim statements are expected to be published in August) and their participation in HAPS II.

2. Observations on the draft amendments

2.1 The ECB understands that the draft amendments propose to amend the currently linear 20-year amortisation period for debit differences generated by credit institutions due to losses arising from the write-off or restructuring of debt and/or the transfer of loans, in three respects: firstly, to explicitly provide for the amortisation of such debit differences after the amortisation of differences resulting from losses incurred due to sovereign debt restructuring, and therefore over the later years of the amortisation period; secondly, to allow the remaining annual deduction that was not offset to be carried forward for amortisation (deduction) in subsequent fiscal years within the 20-year amortisation period if there is a residual taxable profit following the annual deduction of the debit differences referred to in paragraphs 1.2(i) and (ii) that corresponds to those fiscal years; and thirdly, to provide that if at the end of the 20-year amortisation period balances remain that have not been offset, these balances will constitute losses that will be subject to the basic five year carry-forward rule. 2.2 The ECB notes that the reduction of NPE by Greek systemic credit institutions currently remains the principal supervisory priority. In that respect, the ECB understands that the objective of the draft amendments is to facilitate the significant deleveraging initiatives undertaken by Greek credit institutions. The ECB also understands that the draft law does not amend Article 27A of the Greek Tax Code on the eligibility of DTAs for conversion to deferred tax credits (DTCs), a provision that is relevant to the requirements of Article 39(2) of Regulation (EU) No 575/2013 of the European Parliament and of the Council . In this regard, the ECB reiterates its expectation that if in any circumstances a lack of profitability is observed, the DTAs are replaced with a direct claim on the Greek Government . 2.3 The ECB observes that the high percentage of DTCs in the CET1 ratios of Greek systemic credit institutions, for which no further reduction is envisaged in the medium-term, remains a point of supervisory concern and notes in that respect that the draft amendments will further delay the

derecognition of DTCs from the institutions’ balance sheets. The proposed new amortisation mechanism does not exclude the risk that in 20 years’ time the DTCs will not have been absorbed fully or partially. In the same vein, the ECB invites more generally the consulting authority to review the Greek DTC framework in the short or medium term in order to provide a more comprehensive and structural solution. The consulting authority is also invited to consider the cliff-off effect that the one-off write-off of outstanding unabsorbed DTCs could have on the capital positions of the banks. 2.4 The ECB takes note of the proposed retroactive effect of the draft amendments that are proposed to apply to debit differences which have accrued on or after 1 January 2016. The ECB is of the view that the draft amendments should only apply to the amortisations of DTCs related to debit differences accruing on or after 1 January 2021, so that amortisations booked in the previous years are not reversed and the impact on the capital ratios is only forward-looking. 2.5 The ECB recommends that the consulting authority carefully assesses the implications of the draft amendments for the risks stemming from the nexus between the Greek banking sector and the Greek sovereign, inter alia via its impact on sovereign contingent liabilities and debt sustainability . It is also for the consulting authority to assess the implications of the draft amendments for the incentives of Greek banks to raise capital on the market. 2.6 It is for the European Commission to assess the draft law’s compliance with Union state aid rules.

This opinion will be published on EUR-Lex.

Done at Frankfurt am Main, 29 July 2021.

[signed]

The President of the ECB

Christine LAGARDE