dividend stripping

The Art of Evasion

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Revelations of tax evasion haven't humbled Frankfurt, investigators say. Source: Picture Alliance

For 25 years, Clemens Hahn* was interested in one thing: Finance. He enrolled in the Frankfurt School of Finance at 20, and at 26 he began a career at a major bank in southern Germany. After more than a decade, the banker moved to a Frankfurt investment boutique. The company was already losing money when Mr. Hahn arrived and was liquidated three years after he was appointed director. Fortunately for him, he had provided for his future by establishing a new company of his own. What was surprising, however, was the industry he chose: Art.

Mr. Hahn was now managing director of a “charitable entrepreneurial company,” whose purpose was “the altruistic support and promotion of art and culture.” It organized exactly one exhibition. But it was busy on the stock market. The Frankfurt public prosecutor’s office claims the art company was a façade to evade capital gains tax to the tune of €30 million, or $34 million.

Over the years, banks and investors reportedly evaded over €30 billion in dividends taxes through cum-cum or cum-ex transactions. German shareholders are required to pay capital gains tax and, in return, can obtain tax credits at a later date. Foreign shareholders are also subject to capital gains tax, but they don’t get tax credits, or at most are eligible for partial credits.

By selling or lending shares before the dividend ex-date to German business partners who then return them, foreign investors avoid paying capital gains tax. For years, banks and investors were also claiming double or multiple dividend tax refunds — a practice known as dividend stripping.

According to research by Handelsblatt and Bavarian Broadcasting, Mr. Hahn appears to have developed his own twist on dividend stripping, using his company’s non-profit status to evade capital gains tax.

In his capacity as managing director, Mr. Hahn opened a portfolio with Munich-based Dero Bank in late March 2016. Between April and August 2016 share transfers passed through the account generating dividends of €117 million. At an average return of 4 percent, this means the art company must have had shares worth about €3.8 billion in the portfolio.

Even as Mr. Hahn’s art company traded huge volumes of shares, an investigative committee of the German parliament was meeting in Berlin to examine the political ramifications of the tax authorities tolerating dividend stripping for so long.

“We have to expect there are still other ways of evading taxation that we have yet to recognize.”

Gerhard Schick, fiscal expert, Green Party

In the spring of 2016, with the scandal at its public peak, Mr. Hahn applied for, and received, a notice of desistance from capital gains tax exemption for his company. Dero Bank refrained from retaining the capital gains tax. The firm later claimed reimbursement of €30 million in taxes it had never paid.

The case was a sobering reminder to the investigative committee. Andreas Schwarz, a member of Social Democratic Party said he’s seen so much financial fraud nothing shocks him anymore. “I would have hoped, however, that establishing an investigative committee should have gradually returned humility to the financial world.”

A vain hope, it seems. “Exploitation of non-profit status appears to be a new tax construct we’ve been completely unaware of until now,” admits Green Party fiscal expert Gerhard Schick. “We have to expect there are still other ways of evading taxation that we have yet to recognize.”

Mr. Hahn confirms that his art firm was trading stock but disputes the details. “The company engaged in transactions to generate income,” he wrote to Handelsblatt, denying the charges of multi-million-euro tax evasion. “The amounts mentioned have absolutely nothing to do with reality,” he wrote. “The fiscal classification still needs to be clarified.”

According to insiders, the dispute over how much money was involved comes down to highly elaborate transactions structuring. Associates of the accused say once attorneys, brokers, portfolio managers and investment bankers had been paid, only a low six-figure sum was left for the company, so the alleged tax loss was much smaller than €30 million.

The prosecutor’s office argues it must have been clear to Mr. Hahn, as well as to Dero Bank, that stock trading was in no way a charitable activity. Investigators are treating Dero Bank board member Andreas Grosjean and the bank’s capital market director as suspects. The authorities have already conducted searches.

Dero Bank was unwilling answer questions about the case. In general, it argues, a bank cannot withhold capital gains tax once it has received a desistance notice from the tax office.

But this isn’t the only scandal to cast suspicion on Dero. The Munich-based bank also had close ties to Sanjay Shah, accused of being Europe’s largest tax evader having dodged more than €1.6 billion in taxes in Denmark and elsewhere.

Mr. Shah held shares in Dero Bank through intermediary companies and became a member of its supervisory board on August 1, 2015. According to the bank, he resigned on March 16, 2016. At that point, he had been wanted for suspected fraud and money laundering for more than a year. Mr. Shah has been living in Dubai for some time. And now, Clemens Hahn lives there, too.

*Name changed

 

Sönke Iwersen leads Handelsblatt’s team of investigative reporters. Volker Votsmeier has been an investigative reporter with Handelsblatt since February 2015. To contact the authors: iwersen@handelsblatt.comvotsmeier@handelsblatt.com

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