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A groundbreaking decision by the Higher Regional Court of Frankfurt a.M. could significantly advance the criminal investigation of cum-cum transactions. For the first time, charges of tax evasion have been admitted in this context – with potential consequences for numerous parties involved.
For a long time, cum-cum transactions (also known as “dividend stripping”) were considered the “neglected big brother” of cum-ex transactions, which are better known to the public. Although the German Federal Fiscal Court had already denied the admissibility of cum-cum models under tax law in a decision from 2015 (case no. I R 88/13), public prosecutors and courts were rather hesitant to address the issue from a criminal law perspective. A decision by the Higher Regional Court of Frankfurt a.M. could now change this and is likely to have a signal effect for the criminal investigation of cum-cum transactions.
In cum-cum transactions, shares are sold or lent by foreign shareholders to domestic corporations, usually banks, for a limited period after the dividend record date. Such arrangements are used because German tax residents can claim a refund or credit of capital gains tax on dividends. For foreign shareholders, however, this option is severely restricted.
In a further step, the banks then have the capital gains tax refunded or credited by the German tax authorities. Once the tax has been refunded, the shares are transferred back to the foreign shareholders together with the refunded tax. The cum-cum transaction results in a de facto tax-free payment of the dividend, although non-residents would normally have to pay 15 % tax in accordance with the law and taking into account Income Tax Treaties.
The main tax-related challenges of these transactions are the transfer of beneficial ownership to the domestic institution and the question of whether the transaction is abusive and therefore invalid under Art. 42 AO (German General Tax Code). In its letter dated July 9, 2021, the German Federal Ministry of Finance (“BMF”) takes the view that the tax resident does not generally become the beneficial owner of the transferred share. However, this would be a prerequisite for the crediting or refund of capital gains tax. The BMF even assumes a notification and correction obligation in accordance with Art. 153 (1) sentence 1 no. 1 AO.
In its decision dated December 10, 2024 (case no. 3 Ws 231/24), the Higher Regional Court of Frankfurt am Main admitted the charges of tax evasion through cum-cum-schemes against five former executives of a German bank. According to the Higher Regional Court, based on the current status of the investigations, it can be assumed that a conviction for tax evasion is more likely than not. The decision is noteworthy because the Wiesbaden Regional Court, as the lower court, had still refused to open main proceedings in its decision of February 12, 2024 (case no. 6 KLs 1141 Js 23920/12). The main proceedings will now have to answer the following questions in particular:
The decision by the Higher Regional Court of Frankfurt am Main is likely to bring the issue of “cum-cum” back into the focus of the investigating authorities. It can be assumed that further charges will follow throughout Germany. However, it will ultimately be a question of the individual case as to whether beneficial ownership has been transferred and what role an expert opinion has played. For this very reason, anyone involved in cum-cum transactions should urgently seek expert advice in order to check whether tax returns should be corrected or whether it might even be advisable to submit a voluntary self-disclosure as a precautionary measure.
Dr. Rahel Reichold
Partner
Attorney-at-Law (Rechtsanwältin)
Simon Bloch
Manager
Attorney-at-Law (Rechtsanwalt)
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