When the 150 investigators deployed in the La Defense business district in Paris this week, they had five targets: HSBC, Société Générale, BNP Paribas and its subsidiary Exane, and Natixis, the investment bank of the French savings banks and cooperative banks. They are all said to be involved in the scandal surrounding so-called cum-cum deals, with which – similar to cum-ex deals – massive taxes are said to have been evaded.
With the exception of Société Générale, none of the financial institutions initially wanted to confirm the searches to the media. According to the French public prosecutor’s office, the proceedings in the matter have been ongoing since December 2021. It involves allegations of serious money laundering and, in some cases, serious tax fraud.
“The ongoing procedure required several months of preparation and is being conducted by 16 investigating magistrates and over 150 investigators,” said the French authority. Six public prosecutors from Cologne are also involved, because the problem is not exclusively French, but Europe-wide.
Cum-cum deals are different than cum-ex deals, though both happen around a stock’s dividend record date. With Cum Ex, institutional investors move shares back and forth by short selling and – to put it briefly – have the capital gains tax of 25 percent reimbursed several times, even though they only paid it once on the dividend. In Germany, both the Federal Fiscal Court (BFH) and the Federal Court of Justice have made it clear that cum-ex deals are illegal. The BFH came to the same conclusion in 2015 for cum-cum deals, which it also classifies as inadmissible. In the meantime, the Federal Ministry of Finance also sees it that way.
Cum Cum, also known as dividend stripping, works like this: Similar to Germany, only domestic investors in France can have the capital gains tax refunded in full by the tax office. Some foreign shareholders of companies listed in France therefore lend their shares to a French bank around the dividend record date, for a fee. The French bank receives the full dividend, pays 30 percent capital gains tax on it and then has it refunded. Shortly after the dividend record date, the bank returns the share to the shareholder, together with most of the dividend, without the latter having to pay taxes for it. The bank and its customer then split this tax profit between themselves.
According to research by the AFP news agency, the sum of tax evasion due to the alleged cum-cum deals of the five banks is said to amount to more than 1 billion euros. The newspaper “Le Monde” cites sources that speak of 3 to 4 billion euros a year.
“Cum Cum is, so to speak, the big brother of Cum Ex,” says Gerhard Schick from the Finanzwende association. “The damage with Cum Cum is much greater than with Cum Ex.” The Mannheim finance scientist Christoph Spengel agrees. He calculated how high the fraud on the German tax authorities really is: According to him, the state lost almost 30 billion euros between 2001 and 2021 through cum-cum transactions alone.
The situation is “unbearable,” said Spengel in 2020 at a meeting of the finance committee in the German Bundestag. The then grand coalition had made cum-cum deals considerably more difficult by law retrospectively from January 1, 2016. But despite this change and court rulings, it appears that business is still possible today.
A survey by the financial regulator Bafin in 2017 revealed that the deals were also common among German banks. 85 financial institutions state that they do such cum-cum deals. Around 90 percent of the German banks involved expect additional financial burdens as a result of capital gains tax reclaims. Even in 2019, the Bafin still put the risks of the deals at 610 million euros.
This risk has already become real for several institutes: the Volksbank Heilbronn, for example, had to be supported with millions because of cum-cum transactions. The group of Volks- und Raiffeisenbanken (BVR) gave the reeling bank almost EUR 18.3 million in 2021. In 2018, Deka set aside EUR 64 million for potential additional payments.
Unlike Cum Ex, where there are now more than 100 cases against more than 1,000 suspects, there is only one charge against Cum Cum: The Wiesbaden public prosecutor’s office is suing five former employees of the Deutsche Pfandbriefbank (Depfa) in front of the local district court.
“The handling of cum/cum transactions by the tax authorities is not transparent,” said Spengel 2020 in his statement. “You have to get the impression that the BMF only wants to question cum/cum transactions from 2013 and then only if there is an abuse of paragraph 42 of the tax code.”
Gerhard Schick from Finanzwende therefore complained to the EU Commission. “From our point of view, the state’s inaction is illegal aid,” Schick recently told the “Handelsblatt”. If the state does not punish illegal transactions, it penalizes the banks that abide by the law and do not practice cum-cum transactions. If Brussels actually wants to take action, it should do so quickly – because the offense of tax evasion expires after ten years.
This article first appeared here at Capital.de.
