Tax scandal: Why nothing happens when Cum-Cum is exposed

Judge Helmut Lotzgeselle is one of the most renowned financial judges in the country. Before his retirement, as chairman of the 4th Senate of the Hessian Finance Court, Lotzgeselle played a leading role in groundbreaking judgments on cum-exchange.Tax scandal and later, in 2020, also involved in so-called cum-cum transactions.

His ruling from 2020, which once again expressly declared cum-cum transactions to be illegal, led to a tightening of the handling of tax transactions and prompted this Federal Ministry of Finance to revise his opinion on cum-cum. In an interview with stern, Judge Lotzgeselle explains why cum-cum transactions have been problematic since the turn of the millennium, what excuses politicians and banks use and expresses incomprehension as to why the state has hardly focused on recovering the billions to this day.

Mr. Lotzgeselle, after your Senate had already issued two fundamental judgments on cum-ex transactions, you also made a groundbreaking judgment on cum-cum transactions in 2020. What actually makes the difference between these stores?
Let me start with the similarities. In both cases, with the significant involvement of banks, billions of euros in taxes were evaded from the tax authorities through share transactions around the dividend record date. The damage caused by cum-cum transactions is significantly higher at at least 28 billion. The difference between the transactions lies in the manner in which the crime is committed. While capital gains tax paid once in cum-ex transactions is reimbursed several times through hidden arrangements, the abusive arrangements in cum-cum transactions lead to a refund of capital gains tax, although there is no entitlement to it.

Since when have such illegal cum-cum businesses been going on?
They were already in operation in the 1970s. Even back then, the administration saw this as an abuse of legal options. The transactions were then carried out on a large scale by the banks in the early 2000s after the Federal Finance Court, citing Section 50c EStG, considered such transactions to be legal. In response to the ruling, the legislature deleted the norm of Section 50c EStG in 2001, and the Federal Finance Court’s ruling was also accompanied by a non-application decree. As a result, since 2001, cum-cum transactions that only aimed to avoid dividend taxation for foreign shareholders were to be classified as abusive and not recognized for tax purposes. That was also the agreed opinion of the BMF and the state finance ministries at the time.

Can you explain why no one checked the transactions? After all, the tax damage is now estimated at 28 billion euros.
No, it is completely incomprehensible to me how the tax investigation investigations could not focus on these transactions. Maybe they didn’t recognize the financial magnitude, or maybe they just wanted to protect the banks or not endanger Frankfurt as a banking location? At the latest after the immense amount of tax damage to those responsible for politics was known, which was probably the case in 2015/2016, increased efforts would have been necessary to specifically uncover these cases and to get back the billions in evaded taxes. At this point in time, the Federal Finance Court had already not recognized cum-cum transactions for tax purposes.

Politicians and tax officials today point out that the legal situation at the time was not clear.
I have dealt with the topic in detail, both in terms of tax law and criminal law, and have also justified this in detail in my judgments and essays on the topic. And I can only say: The legal situation, at least for tax purposes, was clearly seen as an abuse of legal design options from 2001 onwards when the provision of Section 50c EStG was repealed. This also corresponded to the agreed view of the BMF and the state finance ministries. Insofar as affected bank representatives in particular point out that these were normal banking transactions, these are protective claims. It must have been clear to anyone who dealt with the issue in a professional manner that transactions that only aimed to circumvent the statutory dividend taxation for foreign shareholders in domestic stock corporations were abusive and therefore not recognized for tax purposes. The mere existence of prosecution deficiencies in which the tax authorities and public prosecutors do not fulfill their obligation to uncover illegal criminal transactions for whatever reasons does not lead to the legalization of these transactions.

Chancellor Olaf Scholz recently told an investigative committee that cum-cum transactions were not an issue at all during his time as mayor of Hamburg. Does that surprise you?
When you say that Mr. Scholz moved to Berlin as Finance Minister in April 2018, that surprises me. Cum-cum transactions were not only a topic in the Bundestag’s investigative committee on cum-ex, whose work was completed at the beginning of 2017, but also in 2015/2016 in comprehensive reports in the business press and on television. The reports at the time spoke of a tax loss of 30 billion. I think that for someone who was personally confronted with influencing illegal cum-ex transactions and who is aiming for the office of finance minister, the discussion about cum-cum transactions would certainly have been an issue.

A cum-cum case involving HSH Nordbank recently became public in Hamburg, which is said to have carried out such transactions worth 275.2 million euros. However, the bank is said to have only made its deals public to the tax office following the so-called BMF letter from 2017. The letter legalized their past dealings.
On closer inspection, this so-called legalization of transactions is a legal misinterpretation of a ruling by the European Court of Justice and, as an incorrect instruction, does not have a binding effect on the tax authorities. This means that the cases can in principle still be taken up for both tax and criminal purposes. Nevertheless, I cannot understand how such an instruction could be given at the time.

Following its groundbreaking ruling on cum-cum deals from 2020, the Federal Ministry of Finance classified cum-cum deals as fundamentally illegal in a new letter. What has happened since then?
The judgment and at the latest the subsequent BMF letter should have actually been a reason for the tax authorities to specifically take up the cum-cum cases on a large scale. Specific instructions from the state finance ministries would be required in the form of investigative priorities for tax investigations and tax audits as well as the provision of the necessary personnel. Because of the complexity of the transactions, they are not even discovered during a normal external audit. My experience has also shown that the banks involved have not exactly promoted information.

When you say that the verdict and the letter should have given rise to clarification, do you mean that this clarification was not provided?
Yes, when cum-cum transactions are uncovered, hardly anything happens and that is a scandal. The amount of tax damage alone, which runs into the billions, is worth every effort. Time is also slowly running out; the recently passed Bureaucracy Relief Act, which shortens the retention period for business documents, does not achieve any noticeable relief for the economy, but there is a risk that the evidence required to clarify illegal transactions will be destroyed. According to a Bafin survey (Editor’s note: Federal Financial Supervisory Authority) As of 2021, a large number of banks have already voluntarily reported provisions for tax refunds from cum-cum transactions amounting to around 5 billion as open. Why don’t we start here and demand the billions in taxes back? It is also incomprehensible to me why the public prosecutor’s office has still not brought charges for cum-cum proceedings, although the criminal relevance for those responsible is quite obvious and similar proceedings have long been underway in other countries, such as France.