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.