Criminality of Cum-ex trade officially upheld by federal court.
Germany's Top Court Declares Cum-Ex Transactions Criminal
In a landmark decision, the Bundesgerichtshof (BGH), Germany's Federal Court of Justice, has ruled that Cum-Ex transactions constitute criminal tax fraud. This ruling marks a significant milestone in German and European tax law, dealing with sophisticated tax fraud schemes involving dividend withholding tax refunds.
What are Cum-Ex Transactions?
Cum-Ex transactions are complex short-term trading strategies around dividend payment dates designed to create multiple refund claims for dividend withholding tax that was paid only once or not at all. These schemes exploited loopholes in tax law to claim multiple tax rebates on a single dividend tax paid, causing massive losses to tax authorities. The term "Cum-Ex" relates to stock trades that occurred either with ("cum") or without ("ex") dividend rights, timed to confuse tax authorities about who was the actual owner entitled to reclaim withholding tax.
Timeline and Development
The abuse was suspected and reported in the early 2010s, with significant attention by German tax authorities and prosecutors. Cum-Ex deals reportedly cost German taxpayers billions of euros (estimates range up to €10 billion or more lost in Germany alone). Initial legal actions were complex, as the law was ambiguous, and these transactions operated in a legal gray area, sometimes exploiting loopholes or weak enforcement rather than explicit illegality.
BGH Judgment: Pioneering Criminalization
In December 2020, the BGH confirmed that Cum-Ex transactions constituted criminal tax fraud, and prosecutors could pursue criminal charges against individuals and institutions involved. The court clarified that these schemes were intentionally designed to deceive tax authorities, amounting to fraudulent conduct rather than lawful tax planning. The court held that participants knowingly exploited the system to claim tax refunds fraudulently, reinforcing the scope of criminal liability.
Affected Parties
Banks, investors, brokers, auditors, and tax advisors involved in orchestrating or facilitating Cum-Ex trades were investigated and prosecuted. Several high-profile cases targeted bank employees and executives, asset managers, and even lawmakers who allegedly benefited or turned a blind eye. Tax authorities and prosecutors launched numerous proceedings across Germany and Europe against parties engaged in these schemes.
Impact on Tax Evasion Laws and Enforcement
The ruling significantly clarified the legal boundaries regarding tax refund claims and tax fraud. It paved the way for intensified prosecutions and recovery of fraudulently claimed amounts. The decision influenced legislative reforms in Germany to close loopholes exploited by Cum-Ex and similar transactions, including stricter reporting obligations and oversight of complex securities trades. It had a deterrent effect on aggressive tax planning schemes across Europe, signaling zero tolerance for manipulative tax fraud involving financial markets.
Summary
| Aspect | Details | |----------------------------|-------------------------------------------------------------------| | Type of Scheme | Complex trading to claim multiple tax refunds on single dividend withholding tax payment (Cum-Ex) | | Court | Bundesgerichtshof (BGH) – Federal Court of Justice, Germany | | Judgment Date | December 2020 | | Legal Finding | Cum-Ex transactions constitute criminal tax fraud | | Affected Parties | Banks, brokers, investors, advisors involved in Cum-Ex trades | | Financial Impact | Multi-billion euro losses to German tax authorities | | Outcome | Legal clarification leading to intensified criminal prosecutions and legislative reforms | | Broader Impact | Set precedent in European tax law enforcement against abusive tax schemes |
This ruling has become a precedent in European tax fraud jurisprudence, encouraging other jurisdictions to pursue similar cases aggressively. The BGH's decision sets a precedent for future cases involving Cum-Ex transactions and sends a clear message that such manipulative tax fraud will not be tolerated.
Other financial institutions and businesses, such as banks, investors, brokers, auditors, and tax advisors, need to be vigilant in their practices to avoid getting entangled in similar tax evasion schemes like Cum-Ex transactions. This ruling has far-reaching implications for the business world, especially in the realm of finance, where it may lead to increased regulation and scrutiny.
