It’s one of the biggest tax scandals since World War II: Investigators say unwarranted tax refunds from so-called dividend-stripping have deprived the state of billions of euros over the years.
Rough estimates put the damage at €12 billion. Some believe it’s far more than that.
Now, a German parliamentary committee will launch an enquiry into the controversial practice.
Dividend-stripping involves buying shares – sometimes worth billions of euros – just before a company pays out dividends to shareholders, and then selling them again shortly after. By carrying out these transactions with borrowed money – short-selling – the customers are able to sell the shares at a loss without losing any actual money. The “loss” allows them to claim multiple tax exemptions, ultimately lowering the taxes they have to pay on their overall capital gains revenues.
The parliamentary committee, set up last week on the initiative of the opposition Greens and Left Party, will start work Thursday to find out how the refunds were possible.
Part of the reason is already known: The government neglected to forbid the practice for many years. The law wasn’t changed until 2012 to make it illegal.
Investigations by prosecutors and tax authorities have concluded that many bankers and tax advisors evaded tax and systematically defrauded the state. A number of investigations are underway. Some have been going on for years. It remains unclear if any criminal charges will be filed.
Dekabank isn’t the only bank with a dividend-stripping problem. Handelsblatt has a list of 129 banks and financial service providers that took part in such deals.
There have already been civil penalties: Regional bank HSH Nordbank, Hypovereinsbank and most recently cooperative bank DZ Bank settled disputes with the government and repaid hundreds of millions of euros.
But Dekabank, the fund manager for Germany’s savings banks, dug in its heels. It filed a lawsuit in 2014 to force the government to repay €50 million the bank said it was owed. The dispute dates back to 2011 when the government refused to pay out a capital gains tax refund because it suspected the claim resulted from dividend-stripping deals.
Now the Financial Court of the state of Hesse, home to the financial capital Frankfurt, has dismissed Dekabank’s claim, and the reason it gave should worry the country’s financial industry.
Dekabank isn’t the only bank with a dividend-stripping problem. Handelsblatt has a list of 129 banks and financial service providers that took part in such deals. The list came from an anonymous informant who sold his information to the tax authority in the state of North Rhine-Westphalia for €5 million.
The method isn’t new to the state, which has in the past resorted to buying CDs with tax data stolen from Swiss banks, enabling it to pinpoint and fine tax dodgers and enforce tax repayments.
Furnished with the list, North Rhine-Westphalia is now preparing the biggest trawl for unpaid tax ever launched by German tax investigators. Insiders estimate that the culprits will have to repay €700 million in taxes, plus fines.
The ruling by the Hesse court plays into the investigators’ hands because it appears to undermine the legal basis of dividend-stripping deals. The court’s detailed explanation for the ruling hasn’t been released yet but the judges gave an advance release declaring: “The ownership of shares is only transferred at the time they are delivered.”
That sentence is potential dynamite because it refutes what had been the principal supposed advantage of the controversial deals – that in certain types of share trades a share could temporarily have two owners: the party that held it and had promised to sell it; and the party that didn’t hold it yet but had promised to purchase it.
A ruling in 1999 by Germany’s Federal Finance Court, the country’s highest court in tax and customs matters, had indicated that that approach was permissible, opening the floodgates for share deals worth hundreds of billions of euros.
In some cases the deals were accidental. In the case of Dekabank, the shares were bought ahead of the dividend payout date and were due to be transferred ahead of that date. But they only arrived after the date, when the dividend was already excluded.
It was an accident, but not a bad one, the bank thought. It had the deals checked out and experts from Deloitte and the law firm Freshfields Bruckhaus Deringer deemed the deals legal. So the bank insisted it had a right to claim a capital gains tax refund.
But the Hesse court disagreed, with a common sense argument: A tax that was never paid mustn’t be repaid.
“The ruling is spectacular,” said Detlef Haritz, a tax lawyer. “It means that it no longer matters whether the shares were purchased by a short-seller or by an owner. In both cases, the buyer has no claim to capital gains tax if the shares weren’t delivered before the dividend cut-off date.”
The Hesse court added a few more hurdles for tax claimants. It said Dekabank as the purchaser of the shares must prove that it really paid capital gains tax. In the past, owners seeking to prove they had paid tax had simply handed over a tax certificate from the bank, which in many cases earned a cut from such deals.
Experts said the structure of dividend-stripping deals makes it almost impossible to prove that taxes were really paid.
While the experts are arguing over the details, Dekabank has to ask itself how far it intends to take its dispute with the taxman. The government’s stance is clear: Dividend-stripping deals are not just immoral, but also illegal. Dekabank could take the case to the Federal Finance Court. But in the current charged climate, it hasn’t decided yet whether it will.
A further high-profile case is Frankfurt-based Maple Bank, the German unit of Canada’s Maple Financial, which was closed by Germany’s Federal Financial Supervisory Authority Bafin on February 7 because of looming over-indebtedness related to tax-evasion investigations.
The bank faced millions of euros in tax repayments because of dividend-stripping deals.