Prosecutors Open Dividend-Tax Probe After Commerzbank Report

  • Investigators open `cum-cum' tax review after media reports
  • Trades give foreign investors share of tax breaks for locals

Frankfurt prosecutors opened a probe into loopholes that are used to reduce taxes on dividends after media reports linked Commerzbank AG to the controversial trades.

A special unit targeting tax evasion and other business crimes is looking into transactions handled by a lender, Alexander Badle, a spokesman for the General Prosecutor’s Office, said in an e-mail. He declined to name any suspect or bank involved.

German newspaper Handelsblatt reported last week that Commerzbank used the so-called cum-cum trades that allow foreign investors to profit from tax breaks shareholders based in Germany get on dividends. The revelations sparked anger across the country, with German Finance Minister Wolfgang Schaeuble saying excessive use of the practice isn’t “legitimate.”

Margarita Thiel, a spokeswoman for Commerzbank in Frankfurt, declined to comment.

While Badle had said last week that his office wasn’t reviewing the trades, he now said "this has changed." The unit is handling a total of five probes connected to transactions that made use of tax rules for dividend payments. The first probe is dating back from 2012 and concerned so called "cum-ex" transactions. The deals were also the target in two probes disclosed last year when banks and private homes were raided as part of the cases.

Law Changes

Cum-ex transactions used loopholes in German tax laws that allowed short-sellers and the actual holder of shares to all claim tax credits on a dividend that was only paid once. The strategy made use of tax certificates issued by the banks involved as custodians in the trades. Germany eliminated the controversial rules in 2012.

Cum-cum transactions, which are still being done, involve a domestic bank taking over the shares of a company from a foreign investor shortly before the dividend is paid. That enables it to claim a tax break that the foreigner can’t get. Schaeuble is seeking to amend laws to also ban these practices.

Cum-ex deals have been haunting German banks that had relied on lawyers’ advice that the trades were legal only to later face scrutiny by prosecutors. UniCredit SpA’s Hypovereinsbank unit settled with Cologne prosecutors over theses trades last year. The unit is still facing a probe in Frankfurt. Ex-Deutsche Bank employees are being investigated in one of the Frankfurt cum-ex cases while Maple Bank’s German unit went bust after Frankfurt prosecutors raided it over the issue.

Until now, cum-cum deals haven’t yet been targeted by prosecutors and even Schaeuble didn’t call them illegal when speaking to reporters last week.

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