The German Federal Fiscal Court (Bundesfinanzhof, BFH) published its long-awaited ruling on the legality of so-called ‘cum-ex’ structures which may have led to multiple refunds of German withholding tax (WHT) that was paid only once. The ruling brings an end to a decades long discussion which culminated in criminal convictions and now the extradition of the German tax attorney Hanno Berger, the alleged ‘mastermind’ of such structures, from Switzerland to Germany where he is set to appear in court from April 2022 onwards.
The ruling is not only relevant for (historical) cum-ex structures, but also for the beneficial ownership assessment in other tax driven structures, such as cum-cum.
A US pension fund entered into single stock future contracts in over-the-counter (OTC) transactions via EUREX. First, the pension fund acquired a long future shortly before the dividend date which was supposed to be settled physically shortly after the dividend date, meaning that the future contract contained the dividend entitlement (cum). In a second step, the pension fund acquired a short future to cover the long future but without dividend entitlement (ex). As intended, the prime broker settled the second future in cash. Subsequently, the pension claimed a full WHT refund from the Federal Tax Office based on article 10(3)(b) of the German/US double taxation treaty since the settlement of the long future was based on the ‘net dividend amount’.
According to the facts found by the court of the first instance, the set-up of the pension fund’s contractual obligations was essentially pre-determined by others such as the liquidity provider who advertised a return on investment of 15.72%. In its description of the facts, the BFH made no statement whether there were short sale transactions or foreign depository banks acting for the sell-side.
The BFH concluded that the pension fund could have claimed a WHT refund if it had been the beneficial owner of the shares (beneficial ownership criterion) and WHT had been deducted and withheld (WHT criterion). These requirements derived from domestic law but were also relevant under the treaty. Neither of them had, however, been met.
On the beneficial ownership criterion, the BFH raised several novel points and provided important clarifications:
In determining whether the pension fund had acquired beneficial ownership, the BFH did not limit itself to looking at each transaction individually, but considered the overall arrangement of pre-determined contractual relationships. The BFH concluded that the pension fund could not exercise any rights and was only involved and compensated for providing formal access to the treaty benefits. The BFH held that these considerations relate directly to the question of beneficial ownership and not to anti-abuse provision under domestic law or the treaty (which could, however, be applicable following an assessment of beneficial ownership).
In relation to the WHT criterion, the BFH included only a few selected remarks. The mere payment of a net amount or the statement by a foreign bank that WHT had been withheld did not suffice to demonstrate its actual payment.
Multiple refunds and short sales did not even matter.
My initial observations on the decision are as follows:
The BFH also did not elaborate on subjective elements such as intent or wilful negligence which may be more relevant for institutions being held secondarily liable. However, it stated in the decision vaguely (and in the press release very clearly) that an earlier decision from 1999 was, as a matter of fact, widely interpreted in a way that an acquirer on the stock exchange could become the beneficial owner before the trade was settled.
Dr Sebastian Heinrichs, Hengeler Mueller
The German Federal Fiscal Court (Bundesfinanzhof, BFH) published its long-awaited ruling on the legality of so-called ‘cum-ex’ structures which may have led to multiple refunds of German withholding tax (WHT) that was paid only once. The ruling brings an end to a decades long discussion which culminated in criminal convictions and now the extradition of the German tax attorney Hanno Berger, the alleged ‘mastermind’ of such structures, from Switzerland to Germany where he is set to appear in court from April 2022 onwards.
The ruling is not only relevant for (historical) cum-ex structures, but also for the beneficial ownership assessment in other tax driven structures, such as cum-cum.
A US pension fund entered into single stock future contracts in over-the-counter (OTC) transactions via EUREX. First, the pension fund acquired a long future shortly before the dividend date which was supposed to be settled physically shortly after the dividend date, meaning that the future contract contained the dividend entitlement (cum). In a second step, the pension fund acquired a short future to cover the long future but without dividend entitlement (ex). As intended, the prime broker settled the second future in cash. Subsequently, the pension claimed a full WHT refund from the Federal Tax Office based on article 10(3)(b) of the German/US double taxation treaty since the settlement of the long future was based on the ‘net dividend amount’.
According to the facts found by the court of the first instance, the set-up of the pension fund’s contractual obligations was essentially pre-determined by others such as the liquidity provider who advertised a return on investment of 15.72%. In its description of the facts, the BFH made no statement whether there were short sale transactions or foreign depository banks acting for the sell-side.
The BFH concluded that the pension fund could have claimed a WHT refund if it had been the beneficial owner of the shares (beneficial ownership criterion) and WHT had been deducted and withheld (WHT criterion). These requirements derived from domestic law but were also relevant under the treaty. Neither of them had, however, been met.
On the beneficial ownership criterion, the BFH raised several novel points and provided important clarifications:
In determining whether the pension fund had acquired beneficial ownership, the BFH did not limit itself to looking at each transaction individually, but considered the overall arrangement of pre-determined contractual relationships. The BFH concluded that the pension fund could not exercise any rights and was only involved and compensated for providing formal access to the treaty benefits. The BFH held that these considerations relate directly to the question of beneficial ownership and not to anti-abuse provision under domestic law or the treaty (which could, however, be applicable following an assessment of beneficial ownership).
In relation to the WHT criterion, the BFH included only a few selected remarks. The mere payment of a net amount or the statement by a foreign bank that WHT had been withheld did not suffice to demonstrate its actual payment.
Multiple refunds and short sales did not even matter.
My initial observations on the decision are as follows:
The BFH also did not elaborate on subjective elements such as intent or wilful negligence which may be more relevant for institutions being held secondarily liable. However, it stated in the decision vaguely (and in the press release very clearly) that an earlier decision from 1999 was, as a matter of fact, widely interpreted in a way that an acquirer on the stock exchange could become the beneficial owner before the trade was settled.
Dr Sebastian Heinrichs, Hengeler Mueller
