Dividend Stripping

Tax Law Experts Played Along

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German tax professors, teaching future generations how to avoid capital gains payments. Picture source: Reuters

Writing up expert opinions has always been a lucrative way for tax professors to moonlight, but it now emerges that some of Germany’s academic stars are implicated in the controversial tax scam known as “dividend stripping” in ways that are ethically dubious.

These tax law experts provided legal cover for financial institutions who used a short-selling technique to avoid capital gains taxes, essentially enabling two separate shareholders to claim tax rebates from the same dividend payment through short selling around the dividend record date. It is a technique that has cost German fiscal authorities an estimated €12 billion and which they are challenging as illegal tax avoidance.

The scandal has implicated most of Germany’s big banks, and many of the small ones, as well as foreign institutions and investors who sought to boost investment yields at the expense of German taxpayers.

The academic experts, many of whom occupy prestigious chairs in Germany’s public universities, offered legal opinions justifying the tactic, reaping handsome fees for themselves in the process. Some went even further and published these opinions as academic papers without disclosing they had been paid by interested parties.

One expert based his fees for writing these opinions on the typical hourly rate charged by high-powered legal firms, reportedly earning €250,000 for one.

One of the prominent experts called before the parliamentary committee investigating the practice is Joachim Englisch, a professor at the University of Münster. Mr. Englisch based his fees for writing these opinions on the typical hourly rate charged by high-powered legal firms, some €500 to €600 an hour. When questioned by Handelsblatt about reports he had received €250,000 for a single opinion, Mr. Englisch denied getting so much for a single opinion but declined to divulge any further details about his income from moonlighting.

Mr. Englisch has been something of a star among academic tax experts, winning a prize for his dissertation and getting fast-tracked for the prestigious Münster professorship in tax law. In 2009, then, the financial firm Nummus sought him out when its auditors challenged the dividend-stripping practices. Mr. Englisch provided them with an opinion that there were no legal concerns.

Others soon came knocking at his door and he provided them with similarly favorable attestations. It was a lucrative business for the clients. One of them, Valovis Bank, promptly put €50 million into a high-yield dividend-stripping fund.

Mr. Englisch told the parliamentary committee he wrote these expert opinions largely during his vacation, though even at €600 an hour it would take 330 hours to earn a fee approaching €200,000 – a feat difficult to reconcile with his academic commitments.

Under questioning by the committee, Mr. Englisch also acknowledged that he may have on occasion published articles in specialized media at the behest of clients paying him for his opinions. One of these articles justified insufficient withholding of capital gains taxes even in cases of naked short selling. The author did not disclose that he was paid by investors for this opinion.

Mr. Englisch was not alone in defending dividend stripping. Marc Desens, who teaches at the University of Leipzig, this month represented a US pension fund in Cologne’s Fiscal Court as it sued for €28 million in rebates on capital gains taxes. Mr. Desens also seems to have no problem in his publications to not disclose payments he receives for these opinions in his extracurricular activities as a tax expert.

University of Bochum expert Roman Seer was another academic called before the parliamentary committee who may have had at least indirect contact with Hanno Berger, a lawyer who appears as a key figure in the dividend-stripping scandal and who awarded contracts to Mr. Englisch and Mr. Desens.

Mr. Seer published an article decrying the “criminalization” of the dividend-stripping technique after serving as a consultant on the subject. He wouldn’t name the client and said he declined to write an expert opinion. When questioned by Handelsblatt, he acknowledged he should have included a footnote in his article disclosing his consulting work.

Another academic, Karl-Georg Loritz of the University of Bayreuth, did footnote an article on the dividend stripping controversy he published at the beginning of the year, noting that he had on occasion offered legal advice after the fact on such cases, but never in court or as an advisor in planning the strategy.

Now, however, Mr. Loritz has joined Mr. Desens in representing the US pension fund in the Cologne court. It’s a good thing for these investors that the universities have summer vacation.


Sönke Iwersen and Volker Votsmeier reported this story for Handelsblatt. Darrell Delamaide adapted this story to English for Handelsblattt Global. To contact the authors: iwersen@handelsblatt.com, votsmeier@handelsblatt.com

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