Germany’s finance ministry is likely to give a pass to banks that helped foreign investors circumvent capital gains taxes. The news could set off a political firestorm with German states that want tax-avoidance practices curbed.
It’s a controversial move that is drawing the ire of some German states, many of which have aggressively gone after tax avoidance and evasion schemes over the past few years.
The loophole in question has to do with capital gains taxes. Last year it was revealed that German banks have been creating domestic vehicles for foreign investors to claim benefits normally reserved only for German investors.
Both domestic and foreign investors have to pay a tax on dividends, but only local investors are entitled to a tax rebate for the lower value of a stock following a dividend payment. By temporarily lending stocks to a domestic entity, foreign investors were able to enjoy the same tax rebate.
The letter might undermine efforts to fight the tax reducing scheme and prosecute banks and investors to pay damages for past deals.
The finance ministry’s letter, posted November 11, said that when banks make a profit on such deals with foreign investors, the tax authorities will approve of them, according to the letter obtained in a joint investigation from Handelsblatt and the Bavarian broadcasting programs BR Recherche and Report München show.
The letter might undermine efforts to fight the tax reducing scheme and prosecute banks and investors to pay damages for past deals. Germany’s Federal Supreme Financial Court in August last year ruled that the so-called “cum-cum deals” aiding foreign investors were unlawful.
Together with another form of dividend stripping known in Germany as “cum-ex,” which involves short selling around the ex-dividend date, the schemes are thought to have cost German taxpayers upward of €10 billion (around $11.3 billion) over the course of a decade. German law explicitly made cum-ex deals illegal in 2012.
Citigroup’s German unit has reached a settlement with German authorities to pay less than €10 million, or $10.9 million, a fraction of the originally estimated sum, in a dispute over alleged tax evasion by clients in dividend-stripping deals, Handelsblatt learned last week.
Norbert Walter-Borjans, finance minister of the state of North Rhine-Westphalia, is especially irritated by the Finance Ministry letter. He has been at the forefront in Germany to crack down on tax evasion.
“The banks have operated in compliance with existing law.”
Florian Lechner, Tax partner, law firm Linklaters
“We are outvoted, much against our clearly voiced opposition,” Mr. Walter-Borjans told Handelsblatt, adding that he had tried to stop the letter from being sent out but failed to convince his counterparts at the federal level.
“I expect that some states, such as the bank location of the state of Hesse, have warmly welcomed the letter,” he added, referring to the state that includes Frankfurt, Germany’s financial capital, and is home to Deutsche Bank, Commerzbank and many other domestic and international financial institutes.
Commerzbank, Germany’s second-largest bank and partially government-owned, played an active role in helping foreign investors exploit a tax loophole that artificially lowered German tax payments by around €1 billion, or $1.1 billion, a year, research by Handelsblatt and a group of global media publications showed in May.
The financial sector and their advisors applauded the Finance Ministry’s letter. “The banks have operated in compliance with existing law,” said Florian Lechner, a tax partner at law firm Linklaters. “I assume that with the Finance Ministry’s letter, the sound structures of cum-cum businesses by banks will no longer be picked at.”
Gerhard Schick, policial spokesman of the opposition party Greens in the Lower House, said the letter may have been motivated by different concerns: “I’m afraid that those involved in this matter were worried about [the health] of some institutions. We cannot, however, let the tax payer bleed to stabilize banks.”
Mr. Walter-Borjans for his part suggested he’s not going to give up the fight just yet, arguing the ministry had gone over the states’ heads.
The Finance Ministry “has ignored the reservations of the Finance Ministers’ Conference. [They] sent out the letter and created new facts,” Mr. Walter-Borjans said. “Of course, we will not just accept this.”