German banks exploited a legal loophole that allowed two parties to claim ownership of the same shares, the financial watchdog will tell lawmakers this week, in schemes that could have cost the state billions of euros in tax over many years.
This double ownership allowed both parties to claim tax rebates. It has provoked public anger in Germany and is an embarrassment for the Berlin government, which has campaigned for years to root out tax evasion around the world.
The loophole was closed in 2012, with the means of claiming double ownership banned. But an analysis of documents related to a lawmakers’ investigation—seen by Reuters but not publicly available—suggests the finance ministry may have missed a chance to end the practice several years earlier, instead accepting a banking lobby proposal that allowed it to continue.
The finance ministry told Reuters that it had done all it could to end what it regarded as a criminal practice.
Such schemes centered around “short sales”—the sale of borrowed shares. A bank would loan out the stock in a way that made both the bank and the eventual buyer appear briefly to be simultaneous owners of the shares. This allowed both parties to receive a dividend tax rebate.
Not Many
The financial watchdog BaFin estimates “a small double-digit number” of German banks were involved in such schemes, but has not named them. Many Germans have been particularly angered that Commerzbank—bailed out in the financial crash and still partly state-owned—has said it used the arrangement.
Commerzbank said there had been “some violations” but said it had not been involved in “systematic participation in such business”.
The debate over the so-called “Cum Ex” trades has gained fresh momentum following a German regional court ruling in February that found there was no legal basis for the double claiming of rebates, even before it was banned in 2012.
Public prosecutors have embarked on more than a dozen investigations in Frankfurt, Munich and Cologne to pursue banks for any rebates received through this loophole.
“Cum Ex” deals were known by state officials to be problematic more than a decade ago but the finance ministry accepted a banking industry plan to change the law—a plan which opened another loophole, documents seen by Reuters show.
The documents, which track the conception in 1997 of the rule changes, through the drafting process, to a final law passed in 2007, show the ministry picked up and eventually implemented the proposal.
