Olaf Scholz, Christian Olearius, Peter Tschentscher, Hanno Berger – these names have repeatedly haunted the media in recent years in connection with the notorious “Cum-Ex transactions.”
Already in the early 1990s, Cum-Ex transactions became known and are part of the largest tax scandal in German history. In 2021, these transactions were classified by the Federal Court of Justice as punishable tax evasion.
Since then, numerous criminal proceedings have been initiated in Germany against the individuals involved.
But what exactly does the term Cum-Ex mean, and how are these transactions carried out?
The basis of these transactions is the trading of shares around the so-called dividend record date. A portion of the profit generated by a company is distributed to shareholders on a specific date. This distributed profit is referred to 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, capital gains tax of 25% is generally levied on dividend payments. However, financial institutions are entitled to a refund of this paid capital gains tax under certain circumstances.
Investors exploited this refund claim within the framework of Cum-Ex transactions by repeatedly reclaiming taxes from the state through seemingly pointless “back-and-forth purchases” of shares, even though the taxes had not been paid with corresponding frequency.
The exact procedure of the respective actors is explained in the following example:
At least three investors or banks were involved in every Cum-Ex transaction; in this example, we will call them A, B, and C.
A holds shares in Company X amounting to 10 million Euros. A is entitled to a dividend of 500,000 Euros.
Before the dividend record date, B also buys shares in Company X from C for 10 million Euros. However, C does not yet own these shares, which is why the two parties agree that B will pay immediately, but C will only deliver the shares later (a so-called “short sale”).
On the dividend record date, Company X pays A only 375,000 Euros of the 500,000 Euro dividend to which A is entitled – the remaining 125,000 Euros are transferred directly to the tax office as capital gains tax.
In the course of this process, A receives a document certifying the payment of the tax to the tax office. With the help of this certificate, A has the capital gains tax refunded by the tax office.
After the dividend record date, A sells his shares in Company X back to C. However, the shares are now only worth 9.5 million Euros, as the dividend has already been paid.
C now delivers the shares received from A, valued at 9.5 million Euros, to B. Since B had already paid a purchase price of 10 million Euros, C makes a corresponding compensation payment.
Now comes the crucial “trick” 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, even though C had not yet delivered them and A was still the owner at that time.
B could therefore claim that he had acquired a Cum-share (i.e., a share with dividend entitlement) and that capital gains tax of 125,000 Euros would have automatically flowed to the tax office – even though taxes were actually only paid once, when A received a dividend from Company X.
As a result, B also receives a certificate for the alleged payment of these taxes and can have an amount of 125,000 Euros refunded, even though the tax office never received this amount.
In the final step, B then sells the shares to A, who originally owned the shares.
Ultimately, the following situation arises: A was originally the owner of the shares and is now again. The shares were seemingly merely “circulated.”
However, through the sale of the shares, A, B, and C have “generated” a profit of 125,000 Euros, 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 prominent individuals may have had to do with the Cum-Ex transactions in the second part of the blog post.
Should you have further questions or be accused in criminal proceedings or tax proceedings (tax criminal proceedings), please feel free to contact us.