date | theme

13. August 2017 | Self-disclosure in case of tax evasion

17. September 2018 | Tax evasion: risk / penalty / intent / perpetrator / statute of limitations / notification

02. December 2020 | Tax evasion and self-reporting – easily explained and solved

12. August 2021 | Legislative procedure: How tax laws are created

28. September 2021 | According to the BGH ruling, Cum-Ex transactions constitute tax evasion (this contribution)

In Cum-Ex transactions, the German state and thus also the taxpayers were betrayed for years. Through special share deals, institutional players could reclaim the capital gains tax several times for the same share package and also receive it unlawfully. Nevertheless, the actors involved always focused on the tax grey area and the Treasury and the courts had done nothing about it for a long time. Recently, however, the BGH has now ruled on the criminality of cum-ex transactions and has thus opened the door to processing the pending criminal proceedings. This finally establishes the attitude of those involved as unlawful. This is therefore about tax evasion. The consequences and effects of the judgment will now be examined in more detail.

First of all, it must be made clear in Cum-Ex transactions that several parties wanted to save taxes in a targeted manner. The legislator enables every taxpayer, this is the focus of the tax to legally reduce his taxes through various constellations. However, many used the patently unlawful tax refunds to make a carefree life at the expense of society. Nevertheless, it is also important to note that it was long to wait for clear guidelines and decisions on the part of the responsible ministries and institutions, although many of these deals became known early on.

The worldwide notorious Cum-Ex transactions have been known by the Treasury, the relevant authorities and the German banking association for quite some time. In particular, the once again infamous role of the Federal Agency for Financial Services Supervision (BaFin), which was also noticed in connection with the Wirecard scandal, will also be examined later. In fact, there was the supposedly first case of Cum-Ex business already in 1990 and the first legal regulation followed only 15 to 17 years later. In 2005-2007, the Ministry of Finance banned transactions via domestic custodian banks in its legislation and, despite warnings, got the deals about foreign custodian banks really rolling. Further attempts to prevent Cum-Ex transactions have been ineffective for a long time, as often hardly any relevant issues were regulated.

Cum-Ex transactions are special share deals, with tax refunds being made several times to the parties involved. Due to short-term deals around the deadline for the dividend payment of joint stock companies, it was possible to conceal from the state, i.e. the tax refunder, who owned the shares at the deadline. It is important to know that institutional investors, such as funds or banks, can legally reclaim the capital gains tax of 25%. Thus, in cooperation with two other parties, they were able to collect the tax twice through these transactions and finally split the amount gained through consultancy contracts and sponsorship revenues.

First of all, at least three actors are necessary for Cum-Ex transactions, which have now been declared as tax evasion in the BGH judgment. Of these actors, as described above, at least two of them must have institutional characteristics. Below is an explanation of exactly how the scenario of Cum-Ex transactions works.

First, Investor 1 holds shares worth EUR 400,000 in a public limited company shortly before its dividend distribution. Another actor, for example another investor 3, now buys shares of the same amount of the same company through a short sale at another investor 2, at least not at investor 1. Here, short selling means that Investor 2 does not yet own the shares. On the dividend date, Investor 1 receives the dividend of, for example, EUR 10,000 minus EUR 2,500 capital gains tax. The public limited company automatically retains the capital gains tax of 25 % and pays it to the Treasury. In addition, the state gives the investor 1 a certificate, whereby he gets the tax refunded, fulfilling various criteria.

Following the dividend date, Investor 2 buys the shares of Investor 1, which now have a value reduced by the dividend paid (ex = without); So in our example, we assume EUR 300,000. Through his short sale, he already has the necessary financial means for it. Then comes the complicated part. Because Investor 2 now passes on the shares just bought to Investor 3, from whom he has already received money for the short sale and thus compensates his outstanding obligation. Since the shares have now only a value reduced by the value of the dividend, Investor 3 receives securities that are worth less than it paid to Investor 2 before the dividend date. Therefore, Investor 2 also pays the net dividend of 7,500 euros to Investor 3. In addition, Investor 3 receives a tax certificate for the missing amount of 2,500 euros from his bank.

Finally, Investor 3 passes on or returns the shares to Investor 1. Now the starting situation is restored, except that now two tax certificates for the same facts have been handed over, although only once taxes were paid.

The difference between Cum-Cum transactions and Cum-Ex transactions is explained below. In addition, these transactions should be assigned the significantly higher share of taxpayers' money recovered.

This circumvents the regulations in German tax law by foreign shareholders. These shareholders in German companies are prevented from recovering the capital gains tax of 25% in any way from the state. Usually, they usually pay around 15% in taxes on dividends. However, a loan transaction takes place in cooperation with domestic institutions, so that they reclaim the capital gains tax for dividend payments. The foreign shareholder lends his shares directly before the dividend date until after the distribution of the dividend and simply receives a loan fee. Since both parties want to earn something equally, this loan fee is below the value of the dividend. Thus, the illegal tax refund is divided between the parties.

If cum-cum transactions are handled, the aim is to avoid the tax on dividend payments due to DBA, since these are held abroad and thus no refund can be made. Therefore, a domestic investor or a bank takes over these shares and subsequently recovers the capital gains tax. This is different with the much more complicated Cum-Ex transactions, because the tax paid is not avoided, but double reclaimed and thus a profit is achieved.

First of all, the scandal began with the Cum-Ex deals supposedly on the basis of a tax loophole of the legislature, so often the argument of the perpetrators. In addition, it was also possible to avoid tax payments on the basis of cum-cum transactions. Time is not exactly proven when the activities and transactions began, but it is assumed from the first cases from the 1990s. This was still supported by a judgment of the BFH in 1999, whereby it was noted that under tax law shares can have, among other things, two owners.

Between 2007 and 2012, further, mainly ineffective regulations were issued. This was followed by a reform, whereby the capital gains tax will in future be paid by the custodian banks instead of the public limited companies. Thus, it is now only possible to obtain tax certificates for actually paid taxes. As a result, Cum-Ex were at least technically restricted, but Cum-Cum transactions were still feasible. Only in 2016, through a reform of the investment tax law, the cum-cum transactions were also put a stop. The Bundestag had fixed important loopholes of the Ministry in advance.

The behavior of the German banking supervisory authority BaFin is particularly worrying. According to information, they already learned about the Cum-Ex businesses in 2007. In addition, BaFin was probably definitely aware that these types of transactions are unlawful or even criminal. Nevertheless, no such regulation was made and the transactions were still possible. In addition, it would have definitely been their responsibility to bring law enforcement agencies and tax investigators on board to start criminal tax proceedings in time. Through a whistleblower, an earlier start of the investigation was possible, but searches and charges do not begin until the beginning of 2013.

This year, for example, the arrest warrant against Hanno Berger took place. This is regarded as a key lawyer in the context of Cum-Ex transactions. As one of the main figures in the scandal, he has a high priority among German law enforcement authorities. Therefore, it is hardly surprising that great efforts are made to have the lawyer extradited from Switzerland to Germany. Recently, a court in Switzerland has also ruled that the extradition of the lawyer to German authorities should take place. Nevertheless, the investigation of the entire evasion cases will take further years until the majority of the funds are collected.

The German state and thus also the taxpayers were defrauded by Cum-Cum and Cum-Ex transactions for more than 30 billion euros in taxes. The loss due to the Cum-Cum transactions is probably at least twice as high as that due to the Cum-Ex transactions, which is probably also due to the easier handling of the Cum-Cum deals and the earlier legislation on the Cum-Ex transactions.

According to a recent ruling of the BGH regarding the Cum-Ex transactions, these are to be regarded as illegal tax refunds. Thus, the transactions are classified as highly criminal and illegal. Based on this, this judgment is considered to be a decisive guide for recoveries to banks, investment funds and private individuals. But criminal prosecutions also build on this and thus gain the right to a higher use of resources.

Now it is up to the German law enforcement authorities to enforce the prosecution of the Cum-Ex transactions. Because through the judgment of the BGH it is now possible that firstly the lost money is demanded back. On the other hand, the people involved can now be held criminally responsible. In particular, it can be assumed that the German state will recover its unlawfully paid tax money through the process. In addition, similar tax trickery must be made more difficult in the future by more communication and more extensive reporting obligations for the application of tax refunds.