Cum-ex scandal part I: How do the so-called cum-ex transactions work?

Olaf Scholz, Christian Olearius, Peter Tschentscher, Hanno Berger – these names have been in the media again and again in recent years in connection with the infamous “cum-ex transactions”.
Cum-ex transactions became known back in the early 1990s and are part of the biggest tax scandal in German history. In 2021, the Federal Court of Justice classified these transactions as criminal tax evasion.
Since then, numerous criminal proceedings have been ongoing in Germany against those involved.

But what is behind the term cum-ex and how are the respective transactions carried out?
The transactions are based on trading in shares around the so-called dividend record date. A portion of the profit generated by a company is passed on to the shareholders on a certain date. This distributed profit is known as a dividend.
Depending on whether the profit has already been distributed, a share is referred to as a cum-share (= share with dividend entitlement, i.e. before profit distribution) or an ex-share (= share without dividend entitlement, i.e. after profit distribution).
In Germany, dividend payments are generally subject to capital gains tax of 25%. However, under certain circumstances, financial institutions are entitled to a refund of this capital gains tax paid.
Investors took advantage of this refund claim as part of the cum-ex transactions by reclaiming the taxes from the state several times through seemingly pointless “back-and-forth purchases” of shares, even though the taxes had not been paid with the corresponding frequency.

The following example illustrates exactly how the respective players proceeded:
At least three investors or banks were involved in each cum-ex transaction; we will call them A, B and C in this example.
A holds shares in X company totalling EUR 10 million. He is entitled to a dividend of 500,000 euros.
Before the dividend record date, B also buys shares in X from C totalling EUR 10 million. However, C does not yet own these shares, which is why the two parties agree that B will pay immediately, but that C does not have to deliver the shares until later (so-called “short sale”).
On the dividend record date, the X company pays A only EUR 375,000 of the dividend of EUR 500,000 to which he is entitled – the remaining EUR 125,000 is transferred directly to the tax office as capital gains tax.
In the course of this procedure, A receives a document certifying that the tax has been paid to the tax office. A uses this certificate to obtain a refund of the capital gains tax from the tax office.
After the dividend record date, A sells his shares in X company to C. However, the shares are now only worth EUR 9.5 million, as the dividend has already been paid.
C now delivers the shares received from A with a value of EUR 9.5 million to B. As B had already paid a purchase price of EUR 10 million, C makes a corresponding compensation payment.
Now comes the decisive “clou” of the matter: at the time of the dividend payment, B was already considered the beneficial owner of the shares under financial law due to the purchase agreement with C, although C had not yet delivered them and A was still the owner at this time.
B was therefore able to claim that he had acquired a cum share (i.e. a share with a dividend entitlement) and that capital gains tax in the amount of EUR 125,000 would have automatically been paid to the tax office – even though taxes were actually only paid once, when A received a dividend from the X company.
As a result, B then also receives a certificate confirming the alleged payment of these taxes and can have an amount of EUR 125,000 refunded to him without the tax office ever having received this amount.
In the final step, B then sells the shares to A, who originally owned the shares.
In the end, the following situation arises: A was originally the owner of the shares and is now the owner again. The shares were apparently merely “shifted around”.
However, by selling the shares, A, B and C have “generated” a profit of EUR 125,000, which they divide among themselves.

Numerous banks, lawyers and politicians have been involved in this procedure over the past decades.
You can read about what Olaf Scholz, Peter Tschentscher and other well-known people may have had to do with the cum-ex transactions in the second part of this blog post.