The 12th Criminal Division of the Regional Court of Bonn gave its judgement in the first criminal trial on cum/ex transactions in Germany on 18 March 2020 (it had found a rather sudden end due to the COVID-19-Lockdown in Germany). On 25 June 2020, the Bonn Court published an anonymized version of its decision which spans 299 pages.
Cum/ex transactions were a form of dividend arbitrage in Germany, in which trading and lending of securities and derivatives were constructed around the dividend date (trading with (cum) and settlement without (ex) dividend entitlement) with the intention of generating multiple refunds of German withholding tax that had only been paid once. The practice ended in 2012 when the German withholding tax provisions were revised.
Both defendants in the case before the Bonn Court were British citizens and central figures in cum/ex transactions for several years. In the decision the Bonn Court laid out why the investigated cum/ex transactions violated then applicable tax law and why the participation of the defendants meant that they committed the crime of tax evasion and/or of aiding and abetting tax evasion.
Decision of the Bonn Court
The Bonn Court conducted an analysis of the underlying tax questions in cum/ex transactions and a criminal law assessment of the two defendants' participation in these transactions. The Bonn Court based its decision on the confessions of both defendants as well as the opinion of an expert witness, the hearing of multiple witnesses and the reading of multiple documents, especially tax returns, transaction documents, notes and emails.
It found that both defendants had committed the crime of tax evasion and/or of aiding and abetting tax evasion. Both defendants made full confessions and testified for months before the public prosecutor of Cologne prior to the trial. In return for their statements and their incrimination of other persons, they were given lenient sentences:
- a suspended sentence of one year and ten months for the first defendant for tax evasion in ten cases and aiding and abetting tax evasion in one case, and
- a suspended sentence of one year for the second defendant aiding and abetting tax evasion in five cases. (The second defendant was acquitted with respect to several additional cases since the required intent had not been proven. The required intent could, however, be proven where the second defendant had been involved in the drafting of a legal opinion based on an incomplete set of facts because disclosure of the full facts was expected to result in a negative legal assessment.)
Underlying tax questions
With respect to the underlying tax questions in cum/ex transactions, the Bonn Court followed the arguments of the German tax authorities and the fiscal courts of Cologne (decision dated 19 July 2019) and Hesse (decision dated 10 March 2017).
Since there is no decision of the Federal Fiscal Court on the underlying tax questions in cum/ex transactions, these aspects will, however, remain disputed (noting that fiscal trials and criminal trials are separate jurisdictions).
The Bonn Court decided that a purchaser of shares cannot acquire beneficial ownership of the shares from a short seller before/on the dividend record date. Legal and beneficial ownership in the shares was only transferred when the shares were settled in the account of the purchaser. Therefore, the Bonn Court rejected the view of some authors in German legal literature that a tax voucher (Steuerbescheinigung – i.e., a certificate stating that tax had been withheld on the real dividend at some stage) was sufficient and therefore the only prerequisite for an entitlement to a withholding tax credit/refund.
The Bonn Court shared the view of the fiscal court of Hesse (and other authors in legal literature) that a tax voucher is only one of several prerequisites for the entitlement to a withholding tax credit/refund.
Criminal law assessment
As regards the criminal law assessment, the Bonn Court held that the tax returns which were filed in respect of shares acquired in cum/ex transactions and in which the tax credits or refunds were claimed (and granted) were false or incorrect, as there was no additional disclosure that the underlying tax had not been paid to the tax authorities.
In order to assess whether the two defendants committed, or aided and abetted, tax evasion, the Bonn Court examined the criminal liability of certain other participants in the transactions who were not defendants in the present trial, but will be in other (subsequent) cum/ex trials.
The Bonn Court concluded that the tax credit was not justified and that the two defendants committed the crime of tax evasion and/or of aiding and abetting tax evasion. The fact that the Bonn Court acquitted the second defendant in several cases underlines that, in respect of each case, it must be shown that there was a specific act contributing to the offence and that the defendant acted intentionally. The Bonn Court denied the application of the principles of "neutral" acting since it doubted that the defendants' activities could be compared to ordinary trading transactions and could, therefore, be seen as typical professional behaviour for a trader. The Bonn Court acknowledged their confessions and their cooperation which has contributed significantly to investigations in other cum/ex cases in the defendant's favour.
Recovery of criminal proceeds
The Bonn Court ordered the first defendant to pay an amount of € 14m, representing benefits derived from the relevant transactions.
The Bonn Court had originally initiated proceedings against five financial institutions (four capital management companies and one bank) for the recovery of their proceeds from the relevant transactions. But, during the trial, the Bonn Court decided to discontinue the procedures with respect to the four capital management companies for the time being (presumably due to COVID-19). The Bonn Court did, however, order the bank to pay an amount of € 176.5m. The bank had executed cum/ex transactions as proprietary trading and obtained tax refunds.
According to the press release of the District Court of Bonn dated 24 June 2020, both defendants as well as the respective financial institution and the public prosecutor appealed the decision. Therefore, the case will be heard before the German Federal Court of Justice.
Additionally, three other criminal law trials on cum/ex transactions are about to start before the District Court of Wiesbaden, the District Court of Frankfurt and another before the District Court of Bonn. In the Wiesbaden trial, Hanno Berger and five former traders (including the two defendants from the Bonn trial) are charged with (inter alia) tax evasion by the Frankfurt Public Prosecutor. The Wiesbaden trial is expected to start in October 2020, although there are press reports that Berger would not participate for health reasons. In the Frankfurt trial, six former bankers of Maple Bank and two tax advisors are charged with (inter alia) tax evasion. Now that the Bonn Court has affirmed the accusation of tax evasion, further charges and convictions will probably follow.