New Card in Town – Legal Aspects of City Cards

New Card in Town - Legal Aspects of City Cards | PayTechLaw | Christian Walz | Cover picture:

City cards as a solution to strengthen the retail trade?

The increasing desolation of our city centers is a growing concern for many politicians and representatives of the retail industry. There are many ideas to counter this development. Some think that levying a parcel tax on shipments of goods from online stores would be a good solution. Others believe that the government should give money to local retailers in the form of tax breaks. Still, others believe that payment cards that can only be used with local retailers are part of the solution. These payment cards, also known as City Cards, have the appeal of not requiring a new tax to be invented or existing taxes to be reduced. However, the question arises as to the legal implications of such products. After all, they work in a similar way to (prepaid) credit cards, and our attentive readers know that in many cases a license is needed to issue such cards. Reason enough for us to take a look at how things work with city cards from a legal perspective.


City Card and City Pass – not everything is for payment

Since the term “City Card” is not defined by law, it is not clear what it means. Some understand a City Card to be an instrument that allows you to get a certain discount at local retailers or service providers (e.g. 10% off everything at a certain bakery). Such instruments are also called “city pass”. In this article, however, we will deal exclusively with instruments that can be used to pay locally. In this article, the term “City Card” refers only to those instruments with which one can pay. If you want to pay with a City Card, usually you have to load a credit on a plastic card or an app. When you pay with the card or the app, the credit is reduced by the payment amount. Because you can pay with such City Cards, they are also referred to as payment instruments.


License requirement – no rule without exceptions

In Germany, you actually need a license from BaFin to issue payment instruments. This is because this activity is a payment service. If a credit balance is stored on the payment instrument, it may even be e-money. Payment services and the e-money business are subject to authorization in Germany. Since it takes quite a lot of effort to get and keep such a license, this requirement would not be very interesting for many issuers of City Cards. It is therefore a good thing that an exception exists for these cases. This exception is only described in abstract terms in the law. However, a BaFin circular provides clarity. In this circular, BaFin states that payment instruments that can only be used in a narrowly defined postal code area can fall under the exemption. For this reason, many City Cards in Germany are issued by companies that do not require a license. However, if a company makes use of the exemption, it must notify BaFin of this under certain conditions. If it fails to do so, it will be subject to a fine of up to 100,000 euros. Affected companies should know that the European Banking Authority (EBA) is currently developing guidelines on the exemptions. These guidelines are intended to bring about an alignment of the legal interpretations of the supervisory authorities in the EU. To this end, the EBA has issued draft guidelines. This draft contains some guidance in relation to City Cards, which differs a little from what BaFin has published in this regard. Not only for this reason, one should keep an eye on the further development of the EBA guidelines.


Benefits in kind – City Cards as a tax-saving model

If a City Card can be issued without a permit, this has another advantage in many cases. Many City Cards are recognized for tax purposes as a so-called benefit in kind. This means that, under certain conditions, companies can give their employees City Cards worth up to 50 euros without incurring income tax. Unfortunately, in the legislative process it was stated that the regulatory requirements for the exemption from a license and the tax law requirements for benefits in kind are not necessarily concurrent. This opinion is strange because both legal issues are based on the same regulation in the German Payment Services Supervision Act (Zahlungsdiensteaufsichtsgesetz). It is even stranger when one knows that the same authority is responsible for both the payment supervisory law and the tax law: the Federal Ministry of Finance. Despite these uncertainties of interpretation, however, the fact remains that City Cards are an interesting and versatile product. What other product can claim to promote local retailers and save taxes at the same time?


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