Cum/Cum transactions result in a limited taxpayer being able to offset capital gains tax paid in Germany. The Federal Ministry of Finance (BMF) has issued a new BMF letter in which the financial administration explains how it treats these transactions. There is a particular focus on the transition of economic ownership and misuse of design.

We explain Cum/Cum and Cum/Ex transactions and how affected persons should act now.

Better known as Cum/Cum shops are probably the Cum/Ex shops. The latter are roughly declared short sales, the purpose of which is a multiple refund of capital gains tax paid only once. On the other hand, the starting point of Cum/Cum transactions is the intention to circumvent the limited tax liability of a foreign shareholder in connection with dividend payments by domestic companies by a temporary transfer of shares to an unrestricted taxable person. For this purpose, German shares of foreign shareholders are first lent or sold to domestic companies, mostly banks, before the dividend date. After the dividend date, these are transferred back again. The transactions are called Cum/Cum transactions because the shares are both sold under debt and transferred under property law. Under civil law, the domestic bank has therefore become the owner of the share.

The starting point of a cum/cum business is that a foreigner holds a share in a public limited company located in Germany and wants to save capital gains tax in some way. If the dividends are distributed, the foreign shareholder is subject to a 15 % capital gains tax when applying a double taxation agreement. Although the capital gains tax is 25%, it is regularly reduced to 15% for foreign taxpayers in the case of double taxation treaty rules on dividends.

For a tax resident, i.e. an unlimited taxpayer, there is, on the other hand, the possibility to have the capital gains tax paid in accordance with § 36 (2) no. 2 EStG fully counted against his tax income, so that it can come to a tax refund. Taking over can prove to be lucrative for a tax resident if he can collect the dividend income tax-free. Then there is a full refund of the capital gains tax. This is the case in particular for box holdings within the meaning of § 8b KStG. Overall, the tax burden on dividend income is then reduced. The result is a far-reaching tax refund, which the bank and the shareholder usually divide among themselves.

Various design possibilities are conceivable within the framework of Cum/Cum shops. Therefore, it is not possible for the tax administration to finally determine and then regulate all possible cases of Cum/Cum transactions. Rather, the tax administration bases its considerations on the above-mentioned core structure of the Cum/Cum business.

The core idea of Cum/Cum transactions is that the foreign holder of the shares of a domestic company who is not entitled to reimbursement of domestic capital gains tax will nevertheless receive a part of the capital gains tax originally paid without interrupting his material, economic shareholder position.

In the case of Cum/Cum transactions, the problems therefore revolve in particular around the assessment of the economic ownership (section 39(2) no. 1 AO) of the shares and the question of when misuse of design (section 42 AO) is acceptable.

In principle, assets are attributable to the civil owner in accordance with § 39 (1) AO. By way of derogation, the attribution of an economic good pursuant to § 39 (2) no. 1 AO takes place if an owner other than the civil-law owner exercises effective control over the economic good, so-called economic property. Consequently, in order for the domestic recipient of the shares to recover or offset the capital gains tax, it must be the beneficial owner. If he is not, he is certainly not entitled to recover or offset the capital gains tax. However, if he is a beneficial owner, the question arises in the further course whether there could still be misuse of design.

§ 36a EStG is the central abuse prevention norm for Cum/Cum transactions. It establishes conditions for the tax eligibility of the capital gains tax according to § 36 (2) no. 2 EStG. First, a minimum holding period of 45 days must be reached within a period of 45 days before and 45 days after the maturity of the investment income. During this minimum holding period, the eligible taxpayer must also have had uninterrupted economic ownership of the shares and assumed the minimum risk of changes in value. In addition, the taxpayer entitled to an offset must not be obliged to reimburse other persons.

If the requirements of § 36a EStG are not fulfilled, no complete exclusion of credit is imposed. Rather, only 3/5 of the capital gains tax is not eligible. This is only intended to neutralize the tax advantages resulting from the design.

The old BMF letter stipulated that Cum/Cum transactions must only be examined against the background of misuse of design according to § 42 AO. However, the BMF has now departed from this principle. Now the current BMF letter provides for a decided examination of the transfer of economic ownership of the securities to the domestic acquirer.

However, in the context of Cum/Cum transactions, the financial administration now assumes in principle that the acquirer of the shares does not make a final transition from the economic opportunities and risks usually associated with holding securities. The reason for this is that the recipient must transfer the shares back to his contractual partner promptly after the dividend distribution. Until the transfer back as a result of a contractual arrangement, he shall not bear any price risks for the intermediate performance. Rather, on the basis of the transaction concluded between the parties, the beneficiary is legally shielded from the economic risks normally associated with holding shares. In return, however, the acquirer of the securities does not receive the income of the full dividend payment that can actually be achieved from the shares during the holding period.

The result is an attribution of economic property deviating from civil property. The acquirer has become the owner of civil law. In economic terms, however, the seller remains the owner.

A short-term holding period of the shares around the dividend date should be an indication of the existence of a cum/cum business. However, Cum/Cum transactions are also possible with a longer holding period. Nevertheless, it is of course conceivable that, even in a cum/cum business, the economic property passes to the acquirer. In these cases, however, it bears the burden of proof. Nevertheless, the financial administration has established certain criteria for this. Relevant factors are the measurement of remuneration, the exercise of voting rights, any liquidity benefits to the recipient and any other strength of the recipient’s legal position.

In addition to the question of economic ownership in Cum/Cum cases, the question of misuse of design according to § 42 AO still remains. After the first BMF letter, it should be decidedly checked whether there is misuse of design. Under the new BMF letter, however, this takes place only in addition. Rather, the central question is whether the economic property has passed to the acquirer. Only if the economic ownership has passed, the question arises whether there is misuse of design. In individual cases, it has to be checked whether there is a design that makes no economic sense, but only serves the goal of saving taxes.

The recipient of shares following a Cum/Cum transaction, if he has not become a beneficial owner, is not considered a tax shareholder within the meaning of § 20 (5) EStG. Therefore, it is not entitled to offset or refund the capital gains tax paid on the dividend payment. If no capital gains tax has been deducted during the dividend payment or the capital gains tax withheld has been refunded, the capital gains tax is to be paid retrospectively by the purchaser of the shares.

If there is misuse of design within the meaning of § 42 AO, but the economic property has actually passed, the tax liability should arise as it would have arisen in the case of an appropriate design.

The BMF assumes that, without an abusive arrangement, the dividend income would have been attributed to the tax alien as the relevant beneficial owner of the shares. The capital gains tax would then have been withheld on behalf of the tax shareholder, i.e. not on behalf of the recipient of the shares. Therefore, the beneficiary is in particular prohibited from crediting or recovering.

The new BMF letter is applicable for all still open cases. Therefore also for already completed Cum/Cum business. If the recipient of the securities subsequently recognizes before the expiry of the statutory determination period that he has so far objectively incorrectly or incompletely declared Cum/Cum business, there is an obligation to correct it in accordance with § 153 AO. § 153 AO is therefore centrally concerned with the correction of a tax return once already submitted.

In addition to the obligations under § 153 AO, the notification and correction obligations of § 36a (4) EStG occur. Accordingly, income taxpayers and corporate taxpayers who have not been deducted or who have been refunded a tax deduction even though they do not meet the requirements of § 36a (1) to (3) EStG have to report this circumstance to their competent tax office and pay the non-deductible tax deduction. Consequently, § 36a EStG aims at the subsequent payment of the tax deduction originally not paid in due time. It shall do so within 10 days of the end of the marketing year concerned.