Provisions for dividend gambit

Inside Commerzbank’s Trading Floor
What making money looks like: the Commerzbank trading floor. Source: Hannelore Foerster/Bloomberg

Commerzbank sent out a nine-page press release on its third-quarter figures and posted twin 49-page presentations on its website. But the lender hid the most explosive news of the day in its interim report on Thursday: On page 69, the bank admits that it now takes a different view of some controversial dividend transactions. It’s now set aside €10.5 million ($12.2 million) for possible payments of back taxes.

Until the end of 2015, many investors and banks had used so-called cum-cum transactions to reduce their tax burden. The background: Foreign investors are liable for a capital gains tax on dividends paid by German companies, which they can generally reduce from 25 percent to 15 percent through double taxation agreements. German shareholders, on the other hand, can fully recover the capital gains tax – to avoid the tax liability, many foreign investors lent or sold their shares to German banks shortly before the dividends were paid. The lenders collected the dividend and then transferred the shares back to the foreign investors, together with the dividend. The banks and investors split the tax savings.

In July, the German finance ministry sent a letter to banks stating that, in most cases, it considers so-called cum-cum transactions made between 2013 to 2015 to be illegal. This came as a shock to the industry. Commerzbank has examined the letter carefully and has approached the issue again with a “conservative view of things,” said Chief Financial Officer Stephan Engels. “We have identified a number of narrowly defined cases for which we have now formed a €10.5-million provision as a precautionary measure,” he said, noting that from Commerzbank’s point of view, most of the transactions examined were completely lawful.

10 p34 Banks in Comparison-01

The bank as well as private homes were raided Tuesday, Nov. 6, by Frankfurt prosecutors, tax authorities and the federal police seeking information on a similar kind of dividend stripping, known as cum-ex. The bank is accused of using the business to take illegal deductions on its tax returns from 2006 to 2010.

Experts like tax professor Christoph Spengel of the University of Mannheim are surprised that the provision is relatively small since Commerzbank was one of the most active banks when it came to dividend stripping transactions. “The provision of only €10.5 million is minimal under these circumstances,” Mr. Spengel said. He estimated that the German state has lost a total of €25 billion since 2001 due to the deals.

Commerzbank is still not in the clear when it comes to this issue. “Since the development of these proceedings is subject to considerable uncertainties, it cannot be ruled out that the provisions that were formed may prove to be insufficient in some cases following final procedural decisions,” the bank warns in the interim report.

The Federal Financial Supervisory Authority (Bafin) has requested information from all German banks on their cum cum-cum transactions and financial burdens. Some regulators believe that back taxes and penalties could be painful for large banks and potentially deadly for small institutions.

The bank, like its large neighbor Deutsche Bank, is suffering from low interest rates and fierce competition.

Commerzbank’s financial results in the summer quarter were mixed. The bank achieved a profit of €472 million after experiencing a loss of €288 million a year ago. However, this is largely due to special effects. The sale of Commerzbank’s office tower, the dissolution of a joint venture with major French bank BNP and the sale of a stake in payment service provider Concardis generated extraordinary income of around €500 million.

In its operational business, on the other hand, the bank – like its large neighbor Deutsche Bank – is suffering from low interest rates and fierce competition for German corporate customers. Income adjusted for non-recurring effects fell by nine percent to €2 billion.

CFO Engels asked for patience, saying it would take some time before the reorganization of the bank announced in the fall of 2016 would pay off. Since then, the private customer segment has gained 587,000 new customers. But according to Commerzbank, it takes an average of one and a half years before new customers become profitable for a bank. Investors expect customer growth to be reflected in higher profits in 2018. “The figures should improve significantly next year,” said a major shareholder.

Handelsblatt reporter Andreas Kröner covers banks and financial markets in Frankfurt. Volker Votsmeier is an editor with Handelsblatt’s investigative reporting team. To contact the authors: votsmeier@handelsblatt.comkrö

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