FSO Germany Tax Controversy News Alert

Current investigations

German fiscal authorities and departments of public prosecution are currently conducting systematic investigations against domestic and foreign banks on suspicion of tax evasion due to what are known as cum/ex share trades.

In the course of these investigations, criminal tax proceedings are currently being commenced and searches are being conducted of the banks concerned, their executive boards and directors as well as of bank employees and investors.

Foreign banks which allegedly undertook cum/ex trades have found themselves faced with written requests for information from the Federal Central Tax Office (Bundeszentralamt für Steuern).

Cum/Ex trades: Investigations against banks Domestic and foreign banks need to take action

Background The cum/ex trades that are being challenged are allegedly tax-driven share transactions around the dividend record date, which were allegedly executed by banks predominantly between 2001 and 2011 trading for their own account or on behalf of third parties.

Cum/ex trades involved the acquisition of shares with (cum) a dividend on or just before the dividend record date and delivery of these shares after the dividend record date without (ex) dividend which, in

certain constellations, apparently made it possible to obtain multiple refunds of capital gains tax that had only been paid to the German fiscal authorities once.

The investigations notably focus on cum/ex trades that were processed as short sales or over-the-counter (OTC) transactions.

These trades are said to have led to tax losses running into billions. ■

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Cum/Ex trades: Investigations against banks

Evaluation Cum/ex trades raise a number of questions that, to date, have not been dealt with in tax or criminal case-law at the highest judicial level.

Ultimately, fiscal and criminal courts will have to rule on whether the cum/ex trades under investigation are legal or improper tax arrangements or whether tax offences may have been committed.

In our view the different ways of structuring cum/ex trades and the constantly developing legal position in the period currently under observation (approx. 2002 to 2012) requires a

differentiated evaluation of the risks under tax and criminal law.

The evaluation in terms of tax and criminal law will depend, among other things, on the legal structuring and actual implementation of the specific cum/ex trade in question. One determining factor will be, for instance, when the respective tax declarations were submitted and when tax assessment notices and credit notices were announced. In addition, the evaluation will depend on the details that were provided in the tax declarations and tax assessment notices regarding the cum/ex trades. ■

Risks The stance taken by the fiscal authorities, i.e. that the cum/ex trades under investigation constitute improper tax arrangements and tax evasion, carries substantial risks in terms of tax and criminal law:

Risks for banks:• Refusal to refund capital gains tax and

solidarity surcharge. • Repayment of tax refunds already

received back to the tax authorities plus 6% interest p.a. In extreme cases, tax refunds may be reclaimed for the past 13 years.

• Administrative offence proceedings entailing fines and asset seizures running into millions.

• Negative consequences with respect to annual financial statements: In addition to the question of whether

corresponding provisions need to be made, in extreme cases there is a threat that annual financial statements that had already been audited may be declared invalid or that the audit of the current annual financial statement is questioned under going-concern principles.

Personal risks for current and former board members and executives as well as for certain employees of the affected banks (e.g. head of the tax department, head of the trading department):• Criminal proceedings on suspicion of a

particularly serious case of tax fraud and money laundering. In the event of a conviction, those offences are punishable by fine and/or imprisonment of up to 10 years.

• Tax liability for the recovery of tax refunds. ■

Scope of application of German criminal law

The cum/ex trades under investigation were often processed via foreign custodian banks. The investigations are therefore targeted at banks in Germany and abroad.

For banks abroad it is important to note that German criminal law and German law pertaining to administrative offences is applicable simply due to the fact that the tax evasion takes effect in Germany.

As a general rule, the risks of criminal prosecution therefore also apply to banks and their board members, executives and employees who (exclusively) reside and operate abroad. A participation in cum/ex trades abroad may suffice; there is no need for a further physical reference point in Germany. ■

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Domestic and foreign banks need to take action

Recommendation for action

In view of the significant financial and personal risks, banks concerned should conduct an in-depth analysis of the tax and criminal law risks faced by the bank, its managers and employees due to cum/ex trades.

Should such risks be found to exist, appropriate measures of risk prevention and or risk reduction should be taken and, if necessary, such measures should be asserted in administrative or judicial

proceedings vis-à-vis the tax authorities and public prosecutors.

In order to prevent the risk of tax prosecutions, it is particularly necessary to assess the necessity of amending any tax declarations (section 153 German General Fiscal Code [Abgabenordnung]) or the option of filing a voluntary disclosure of tax liabilities (sections 371 or 378 (3) German General Fiscal Code). ■

Our Services EY‘s Tax Controversy Practice Group specializes in preventing, advising on and resolving tax controversies in the financial services sector.

The group comprises experienced tax attorneys and tax advisors with many years of experience in procedural tax law, criminal tax law as well as in tax & legal risk management.

We offer comprehensive legal advice and legal representation in order to prevent any tax and criminal law risks due to cum/ex trades, etc.• We offer legal advice and legal

representation of German and foreign banks and financial service providers, their board members, executives and employees vis-à-vis the fiscal and law enforcement authorities as well as before fiscal and criminal courts.

• We advise German and foreign banks and financial service providers in relation to written requests for information from the Federal Central Tax Office (e.g. risk of criminal self-incrimination, lifting banking

secrecy in tax matters).• We provide forensic analyses of any cum/

ex trades conducted, in order to assess any possible tax and criminal law risks. If required, we work in multidisciplinary teams with our German and international colleagues in the areas of tax, assurance and advisory as well as the experts in our international Tax Controversy Practice Group.

• We assess the prospects of success of any actions against the refusal or recovery of tax refunds by the German fiscal authorities.

• We assess the extent to which there is any need to amend tax declarations and tax assessment notices due to any cum/ex trades conducted. In order to prevent the risk of tax prosecutions, it is particularly necessary to assess the necessity of amending any tax declarations (section 153 German General Fiscal Code [Abgabenordnung]) or the option of filing a voluntary disclosure of tax liabilities (sections 371 or 378 (3) German General Fiscal Code). ■

Your contacts

Martin H. Seevers LL.M. Tax (USA) Attorney (Germany), Tax Advisor (Germany), EMEIA FSO Tax Controversy LeaderPartner

Telephone +49 40 36132 16438martin.seevers@de.ey.com

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