Schematic view of different ways in which companies can be incorporated in Germany
With its merchant fleet practically reduced to zero, Germany’s ship-owners struggled after World War II to restart their businesses. Capital was scarce and limitations imposed by the Allied Forces narrowed the scope of possibilities. The first few ship orders in the 1950s were placed by entrepreneurial owners, sometimes relying on their own financial resources, but often in partnership with some close associates. The centuries-old system of “Parten” seemed ready for a revival. Associates who grouped together to acquire a ship were strictly entrepreneurs, rarely mixing with institutional investors.
When German merchants started to take a financial interest in owning ships on a wider scale, dating back to the eighteenth century, they had formed a small group of individuals or companies who built or bought a ship. They had to bear all costs and responsibilities of acquiring and operating the vessels directly and, likewise, were the direct beneficiaries of the operating results. Bank finance and other forms of financial resources were not available, wherefore the group had to put up on their own all the monies required to buy, equip, and staff a merchant vessel. They also had to have sufficient expertise in actual shipping matters.
It was not uncommon that the largest or sole shareholder in the ship acted as the master at sea. He/she also often represented the cargo interests and was in charge of negotiating and concluding the sale of the cargo at the port of destination.
A modernized form of Partenreederei survived until 2013,2 though only on a comparatively small scale. In this simple form of ship ownership, each individual stakeholder fully participates in the results of the venture according to his/her share in the company. The downsides of this type of ship ownership include the high capital requirements of the individual participant and that each shareholder (“Partenreeder”) is subject to unlimited liability for the corporate debt, albeit only for the quota corresponding to his share of the total.
The rare examples were chosen by institutional investors and cash-rich individuals during the second half of the previous century, by then often supported by ship-financing banks, which could rely on the financial strength of the individuals or companies behind the owning company.
In this more modern form of the Partenreederei, the stakeholders usually entrusted a professional ship manager to deal with all practical aspects of shipping operations, including chartering. Usually the stakeholders in the modern Partenreederei were no longer identical with the cargo owners. The genuine interest of investors of a Partenreederei was still to simply derive profits from trading.
However, the provision of unlimited liability limited the number of able or interested parties. The traditional system of Parten was an inappropriate model for the mainstream shipping company of the twentieth century in Germany as it could strictly encompass only a single ship. Modern transport, booming trade and the division of labor between continents necessitated larger ships and fleets and thus entailed demands for capital, which asked for new sources of equity and entirely new structures. While the stock market had been tested at the end of the nineteenth century by some shipping companies, German investors remained skeptical of those public markets. The “KG-System” provided the appropriate answer and attracted the needed capital.
4.2 Historic Start with “ABC”
The original idea of attracting a larger group of private investors from outside classical shipping circles was brought to Germany by an outsider. Axel Bitsch-Christensen, often referred to as “ABC”, came from Denmark to set up a company in Hamburg.3 When he moved to start his own passenger liner company in Hamburg, the Hamburg Atlantic Line, he planned to build on the historic success of Hapag and Norddeutscher Lloyd. These two were the leading liner companies before the two World Wars, providing the backbone of transatlantic passenger travel. He acquired the “Hanseatic4” in 1958 and planned for an even larger second ship in the early 1960s. With the German economy gaining momentum, the “Hanseatic” was nicknamed the “Traumschiff des Wirtschaftswunders”, epitomizing the rapid ascent of the German economy after World War II. Being unable to finance the second ship, planned “Hamburg”, out of the cash flow all by himself, he issued a prospectus for possible investors. The target group was a narrow focus group of previous passengers, typically wealthy individuals who had appreciated the amenities of a similar asset. Bitsch-Christensen was successful in raising a staggering DM 30 m from 212 private investors.
However, unfortunate timing resulted in disaster. In 1966, the “Hanseatic” was ruined by a devastating fire in the port of New York. A fluctuating dollar made the bunker very expensive and personnel costs skyrocketed by 70 % in only 4 years. Finally, ABC had underestimated the effects of airplanes on transatlantic travel: Neither business nor leisure travelers remained loyal to ocean travel, abandoning ships for planes. It was little relief to the investors that the bankrupt ship was sold as “Maxim Gorky” to the USSR and played a key role in the movie Juggernaut, which starred Omar Sharif and Anthony Hopkins, and later played host to the Bush-Gorbachev summit in late 1989 in Maltese waters.5 Apart from the inexperienced private investors, high-profile investors such as Reemtsma, Körber and the state government of Hamburg also incurred significant losses on their investments and guarantees provided to support the project.
Though the first project failed, a long-lasting idea was born: The German shipping industry should from now on collect a large share of the equity it needed from private investors to play a pivotal role in world shipping. The typical vehicle should become the legal form of a Kommanditgesellschaftthus the nickname “KG-model”. While the basic legal structure remained steady well into the second decade of the new millennium, the motivation of the investors changed, as was mirrored in the legislation that was adapted. From a purely tax-driven scheme to support the local ship-building industry, it morphed through a phase of massive tax breaks into the local application of tonnage tax to become the major equity source for the German ship-owners.
From the 1960s onwards, the German government decided to cut down on direct help for ship-owners and shipyards, and devised numerous tax-relief schemes. Basically, private investors were encouraged to put their money into ships to gain massive write-offs. Colloquially, this scheme attracted a group of “Zahnwälte” a mix of dentists and lawyers, seeking intelligent ways to reduce their tax burden.
To attract investors from outside the industry, the investors needed to be shielded from unlimited liabilities. The Kommanditgesellschaft as a personal company needed to be amalgamated with the advantages of a Limited company, the GmbH.
The 1970s saw the breakthrough of single-purpose companies using a “GmbH & Co KG” structure to shield themselves from the risk and limit the exposure of investors. Wealthy individuals could be attracted due to the unusual tax breaks. Tax deductions were allowed on unlimited losses, making the gain on the tax side often higher than on the profit of the ship operations themselves.
The newly developing, so-called grey financial market attracted a new breed of intermediaries who liaised between ship-owners and potential investors.6 The well-meant tax incentives created a situation in which the highest loss of a ship in operation could prove most attractive for the loss-seeking investors, who tried to balance high gains in other fields. In certain cases, tax losses exceeding 400 % of the individual investment were declared. These substantial losses were accumulated through a combination of high-leverage bank financing, individual equity financing, accelerated depreciation schemes, and a variety of tax-efficient cost items and fees applied during the early phase of the investment.
However, an important prerequisite for any German ship-owning structure was that the tax authorities had to be convinced that the venture would genuinely aim at making an overall profit. Therefore, the investment plan had to provide for any initial losses to be ultimately set off by profits from trading and disposing of the asset at the end of the investment cycle. Failing that, the entire venture was in jeopardy, set to be viewed as an intentional loss-making structure by the financial authorities. The competent authorities always considered the presumption that some expenses or losses were not eligible for the tax-benefit, and there was a number of cases where the ship investment failed the test resulting in actual, but not tax-effective, losses.7
Nevertheless, this new concept proved highly successful, and consequently, specialist syndicators (“Emissionshäuser”) accordingly started to offer products to a wider range of investors. Since the profitability of the product was of lesser importance to investors, it was possible to create and charge a variety of upfront fees for putting together the shipping project and raising the equity. The usually front-heavy investment schemes allowed equity brokers to be employed to raise equity from end users. However, the fee-driven nature of this revised investment scheme increased the distance between the actual investor and the investment asset.
The legislators tried to stop the over-optimistic tax incentives and reduced them in the 1980s, as the tax-driven nature of the scheme drove the system to absurd heights: it helped to attract investors with a minimum interest in profitable ships. Shipping projects were supposed to attract investors because of the profitability, not for their loss-making capabilities.
In the late 1990s, the overreaching tax advantages were reduced. Finally, in 1998–99, the tax system was overhauled and fundamentally changed. Following the example of other European maritime nations, Germany introduced the tonnage tax. Finally, in 1999, the introduction of the tonnage tax saw the continuous application of the KG-system. Loss-making was no more an option as investors needed a profitable project to be on the upside of the tonnage tax. In 1999, the Pauschale Gewinnermittlung, commonly known as the German tonnage tax, was implemented with the aim of eliminating tax efficient losses from ship investments. However, in return, investors could enjoy the benefit of having profits from the investment being taxed based only on the physical size of the shipping asset. As this nominal tax was limited and well-defined, usually between 1 and 3 % of the expected income from trading, profits from ship investments were often perceived as “tax-free”.
This change in taxation deprived investors from continuing to be able to reduce their tax bill, yet it gave ship investments through the KG scheme a unique position in comparison to other standard means of investment like public stocks, real estate or cash deposits, which were all still liable to standard normal taxation.
While a significant number of doomsayers expected the German fleet to be driven out of the country as a result of the change in taxation laws and operating profitably out of Germany did not seem possible any longer, the opposite materialized: the German merchant fleet has increased almost tenfold in the first two decades of the tonnage tax (see Fig. 4.2). Investors came in droves and enabled German owners to build the largest container fleet in the world.
German merchant fleet in gross tonnage. Clearly visible is the almost exponential growth rate after the introduction of tonnage tax in 1999. Other factors like China’s entry into the World Trade Organization (WTO) helped emphasize the effect. Significant drops in tonnage occurred at the end of both World Wars, and during the severe shipping crisis in the 1980s. Source: VDR
The combination of a Kommanditgesellschaft (with a shielding GmbH) as a legal form plus the application of the tonnage tax enabled a high number of investors to participate in a single ship. The exact structure used in the boom in the first decade of the new millennium is further described below. A large number of investors, estimated to be upward of 500,000, was attracted to the shipping industry. In the year 2007 alone, some €3.5 billion went into the equity side of ship orders (see Fig. 4.3). Altogether, investments from the private side since the mid-1990s added up to some €30 bn.
The equity collected from investors through Emission Houses since the introduction of tonnage tax. Since 2010, a sizeable amount was collected from restructurings or opportunity funds. Source: VGF