Paragraph 1 (I) (ii) of Article 28 Regulation (EU) No. 575/2013 (CRR) states that “the instruments are not secured, or subject to a guarantee that enhances the seniority of the claim by the parent undertaking of the institution”. The question is, whether a contractual obligation of the majority shareholder of a credit institution to pay a compensation to the minority shareholders even in loss years (by reason that the majority shareholder and the credit institution have entered into a profit and loss transfer agreement) is permissible according to paragraph 1 (I) (ii) of Article 28 CRR? In more general terms, what is the meaning of the word “claim” in paragraph 1 (I) of Article 28 CRR (claim only to the substance/equity of the credit institution, or also to a dividend or to a compensation payment or all)?
The majority-shareholder and the credit institution have concluded a profit and loss transfer agreement to make use of preferential tax regulations (group taxation). In the concerned case the minority-shareholders of the credit institution are the owners of the majority-shareholder of the credit institution.
Article 28(1)(l) of Regulation (EU) No. 575/2013 (CRR) prohibits the enhancement by the issuer or related entity, as specified in points (i) to (v), of any claim on an instrument to payment vis-à-vis unsecured/-guaranteed claims or claims of more senior positions in the institution's creditor hierarchy. The claim on an instrument includes, inter alia, the payment of principal, dividends, or in the event of the institution's liquidation, its residual assets.
An arrangement, contractual or otherwise, whereby the issuer or related entity guarantees to pay a compensation to shareholders even in loss years enhances the seniority of those shareholders and therefore is non-compliant with Article 28(1)(l) of the CRR.
Update 26.03.2021: This Q&A has been reviewed in the light of the changes introduced to Regulation (EU) No 575/2013 (CRR) and continues to be relevant.