First Cum-Ex-Process Begins in Bonn
Cum-What? Everything about the billions tax trickery
By Christoph Rottwilm
Source: http://www.xing-news.com/reader/news/articles/2581422
It is probably the largest tax scandal in the history of the Federal Republic, with a damage to the Treasury in probably tens of billions. But who could out of the box explain what the tax tricks of banks, advisers, lawyers and investors, who have been raising the public's attention for years with slogans like "Cum-Ex" or "Cum-Cum", actually go in detail?
After many years, during which the financial industry operated the questionable business, and after a few years, the authorities spent trying to counteract it, begins on Wednesday in Bonn, the first lawsuit against actors of the scandal. A good opportunity to take a closer look.
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Here's an overview - all you need to know about the billion-dollar dividend tax trickery a là Cum-Ex or Cum-Cum:
1st part: Cum-What? Everything about the billions tax trickery
Part 2: The overview - what is it all about?
Part 3: And where is the scandal now?
Part 4: How does a cum-ex-business work?
Part 5: How does a cum-cum deal work?
Part 6: Why are the cum-ex and cum-cum deals controversial?
Part 7: What is the process in Bonn?
Part 2: The overview - what is it all about?
Starting point are financial transactions that banks, consultants and lawyers have organized for investors over many years. How long exactly, this is difficult to reconstruct retrospectively. According to archives, there were first warnings of the tax tricks already in the early 1990s.
The approach of these financial transactions were special rules in the German tax law in connection with dividend payments of public limited companies. If an institutional investor (not a private individual!) Pays a dividend, he or she can have the tax office reimburse the proportion of capital gains tax that the company has paid. However, this only applies to investors in Germany - investors abroad do not have the option of a refund.
Many years ago, creative heads of the financial industry invented some sophisticated business models on this basis. In one of them, shares around the day on which the associated company pays its dividend, so quickly change the owner, that in the end several investors can claim a tax refund. So the state pays more money than it has previously received in capital gains tax. This trick has become known as "cum-ex-business" (for details see the chapter on Cum-Ex).
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The "cum-cum-business" is a little different (see the chapter on this). This is always a foreign and a domestic investor involved. However, even in this case, the result is quite unpleasant for the tax authorities: they have to forego tax revenues that they would actually be entitled to with a reasonable assessment of the relationships.
The legal assessment of these transactions seems highly complicated. Initially, both cum-ex and cum-cum deals were tacitly accepted for years, probably because the financial industry spent a great deal of money on lawyers who legalized those practices. Meanwhile, at least the cum-ex-transactions are considered unlawful. The federal government, for example, explicitly stated in 2013 that so-called dividend stripping was "illegal". The lawmakers also took action against cum-cum deals. According to experts, they are still, albeit highly controversial, feasible.
However, one thing is clear: Through these transactions of the financial sector, the German state lost tax revenue in the tens of billions of dollars over the years. The former green finance politician Gerhard Schick, for example, spoke in the autumn of last year of up to ten billion euros in taxation. The Mannheim tax professor Christoph Spengel estimates the total damage even at 32 billion euros, referring to the period from 2001 to 2016. For the years before, depending on your taste, it may even be possible to add an unrecorded number.
Part 3: And where is the scandal now?
Where is the scandal with the whole thing? For some it is of course a huge scandal that the financial sector has brought the treasury billions over years.
But for years, the investment designs, where gaps in tax law were cleverly used, were considered legal. Only late did the legislator put a stop to the activities. Even the years of inaction of the federal government can therefore possibly be described as a scandal.
And anyway: Which country constructs itself already a tax law, which is so complex that such crazy tricks with billions of profits are possible for years? Maybe that's the biggest scandal on the subject.
Part 4: How does a cum-ex-business work?
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Cum and Ex: Simplified model of a dividend deal
The basic principle of the cum-ex-business has already been described. Now to the representation in detail (although this is only partially possible, the reality is obviously much more complicated).
If you want to see through the cum-ex-business, it's best to take a step-by-step approach with five people involved: one company (for example, Allianz Insurance Stock Market Chart), three investors (it must be institutional investors, for simplicity's sake) Let's call them Karl, Franz, and Dieter, for example) - and the state looking into the tube.
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Step 1: Karl owns Allianz shares worth € 150,000. He is looking forward to the dividend for his share package, which will amount to 5,000 euros this year. Franz has also turned a blind eye to these 5,000 euros, or rather, the tax refund. Therefore, Franz also acquires Allianz shares for € 150,000 immediately before the dividend payment.
Step 2: Franz buys his Allianz shares from Dieter. This is remarkable because Dieter does not own the shares. He is a short seller who initially lends Karl's papers only. That means: He concludes a deal with Karl's shares, which he does not have to do until some time later. And Franz pays Dieter 150,000 euros for a stock package that he gets delivered later.
Step 3: Day of Dividend Payment. Karl gets 5,000 euros (he has only lent his shares, but still owns them) - but not in full amount from the company. The alliance transfers only 3750 euros. Another 1250 euros (25 percent), the company has already paid as capital gains tax to the Treasury. So Karl receives a certificate with which he can get the tax refunded.
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Step 4: Dieter had already sold the shares of Karl "empty" to Franz and received 150,000 euros for it. Now he actually buys the papers from Karl - but not to the original price - "Cum dividend" - of 150,000 euros, but "ex-dividend", so for only 145,000 euros (in the stock market, it is common for the price of a share on the day of the dividend payment, which is almost exactly the amount of the dividend per share).
Step 5: Dieter finally delivers these shares to Franz, who already paid for them. But wait: Franz had paid 150,000 euros, but now receives papers that are worth only 145,000 euros. As compensation, he receives from Dieter another 3750 euros. And more importantly, he receives a tax certificate from his bank, which he can also use to refund the capital gains tax of EUR 1250 from the tax office.
Step 6: Finally, Franz can return the shares to Karl for 145,000 euros. This would have turned the carousel once in a circle and everything would be back to normal. Except for a triviality: The government has collected only once from the alliance in this example, 1250 euros in capital gains tax for this dividend share. However, the Treasury paid the same amount twice.
4
Cum and Ex: Simplified model of a dividend deal
The basic principle of the cum-ex-business has already been described. Now to the representation in detail (although this is only partially possible, the reality is obviously much more complicated).
If you want to see through the cum-ex-business, it's best to take a step-by-step approach with five people involved: one company (for example, Allianz Insurance Stock Market Chart), three investors (it must be institutional investors, for simplicity's sake) Let's call them Karl, Franz, and Dieter, for example) - and the state looking into the tube.
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Step 1: Karl owns Allianz shares worth € 150,000. He is looking forward to the dividend for his share package, which will amount to 5,000 euros this year. Franz has also turned a blind eye to these 5,000 euros, or rather, the tax refund. Therefore, Franz also acquires Allianz shares for € 150,000 immediately before the dividend payment.
Step 2: Franz buys his Allianz shares from Dieter. This is remarkable because Dieter does not own the shares. He is a short seller who initially lends Karl's papers only. That means: He concludes a deal with Karl's shares, which he does not have to do until some time later. And Franz pays Dieter 150,000 euros for a stock package that he gets delivered later.
Step 3: Day of Dividend Payment. Karl gets 5,000 euros (he has only lent his shares, but still owns them) - but not in full amount from the company. The alliance transfers only 3750 euros. Another 1250 euros (25 percent), the company has already paid as capital gains tax to the Treasury. So Karl receives a certificate with which he can get the tax refunded.
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Step 4: Dieter had already sold the shares of Karl "empty" to Franz and received 150,000 euros for it. Now he actually buys the papers from Karl - but not to the original price - "Cum dividend" - of 150,000 euros, but "ex-dividend", so for only 145,000 euros (in the stock market, it is common for the price of a share on the day of the dividend payment, which is almost exactly the amount of the dividend per share).
Step 5: Dieter finally delivers these shares to Franz, who already paid for them. But wait: Franz had paid 150,000 euros, but now receives papers that are worth only 145,000 euros. As compensation, he receives from Dieter another 3750 euros. And more importantly, he receives a tax certificate from his bank, which he can also use to refund the capital gains tax of EUR 1250 from the tax office.
Step 6: Finally, Franz can return the shares to Karl for 145,000 euros. This would have turned the carousel once in a circle and everything would be back to normal. Except for a triviality: The government has collected only once from the alliance in this example, 1250 euros in capital gains tax for this dividend share. However, the Treasury paid the same amount twice.
Part 5: How does a cum-cum deal work?
The cum-cum business is much easier to understand than the cum-ex business. There are only four parties involved in this transaction: the company (let us take the alliance again), an institutional investor domestically (let's call it Karl), an institutional investor abroad (his name is George) - and again the state that belongs to the Tube looks.
Step 1: George owns an Allianz Share Package worth € 150,000. The day of the dividend payment is due, for this package it should be 5000 euros this year. The problem: As a foreign investor, George can not recover capital gains tax from the German Treasury. He does not want to give up the money.
Step 2: George lends his Allianz shares to Karl shortly before the dividend date. The latter collects the dividend including the certificate for the tax credit. With this he can have the capital gains tax returned by the tax office.
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Step 3: Immediately after the dividend date, Karl returns the shares to George. He also pays him a rental fee, for example in the amount of the dividend received, as well as a part, for example, half of the tax refunded. After all, everyone should benefit from the deal - except the state, of course.
Part 6: Why are the cum-ex and cum-cum deals controversial?
Legal exploitation of loopholes in tax law or criminal tax evasion - the legal assessment of cum-ex and cum-cum deals, which will be the subject of upcoming litigation, may not be easy. After all, the financial industry has been able to pursue these practices fairly undisturbed for many years.
For years, tax experts, for example, considered cum-ex trades to be a potentially morally questionable but legally flawless tax trick. Only in 2013 did the federal government describe the "operated models" of dividend tripping as "illegal" in a response to a parliamentary question. In the meantime, investigators and prosecutors of cum-ex businesses are usually stealing tax evasion and are forging ahead with their investigations. In the recent past, numerous raids on banks such as the Deutsche Bank stock exchange chart have been shown, the Commerzbank stock market chart or the DZ Bank and other financial companies carried out. Recently, the investigators paid a few days ago the Deutsche Börse subsidiary Clearstream in Eschborn near Frankfurt an unwelcome visit.
Even the controversial cum-cum business wanted to legislate already created by the world. Whether this succeeded, however, seems unclear. According to tax experts, at least until recently, there seemed to be still scope for legalizing these questionable transactions.
Part 7: What is the process in Bonn?
On Wednesday starts in Bonn, the nation's first trial in connection with the Cum Ex scandal. Two former securities dealers of Hypovereinsbank are charged. The allegation of the Cologne public prosecutor's office is based on heavy tax evasion, divided into 34 individual cases. Overall, the dealers are said to have inflicted damage of around € 447.5 million on the Treasury. In the worst case, the defendants face imprisonment of up to ten years.
Christoph Rottwilm on Twitter
In addition, it was recently announced that the Bonn court also brought in five finance houses to the process. They are not sitting in the dock. However, they are said to have helped with the controversial practices - and could theoretically be asked to pay for the damage. According to media reports, the companies are the holding company of Hamburger Privatbank M.M. Warburg, whose subsidiary Warburg Invest, a fund company of the French major bank Société Générale, a subsidiary of the US Institute BNY Mellon and the Hamburg company Hansainvest.
On Wednesday starts in Bonn, the nation's first trial in connection with the Cum Ex scandal. Two former securities dealers of Hypovereinsbank are charged. The allegation of the Cologne public prosecutor's office is based on heavy tax evasion, divided into 34 individual cases. Overall, the dealers are said to have inflicted damage of around € 447.5 million on the Treasury. In the worst case, the defendants face imprisonment of up to ten years.
Christoph Rottwilm on Twitter
In addition, it was recently announced that the Bonn court also brought in five finance houses to the process. They are not sitting in the dock. However, they are said to have helped with the controversial practices - and could theoretically be asked to pay for the damage. According to media reports, the companies are the holding company of Hamburger Privatbank M.M. Warburg, whose subsidiary Warburg Invest, a fund company of the French major bank Société Générale, a subsidiary of the US Institute BNY Mellon and the Hamburg company Hansainvest.
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