German tax case puts entire finance industry on trial

Bloomberg

Germany’s most convoluted tax case in recent memory gets a human face when two former investment bankers make their debut in court. But more than the duo’s dealings, it’s the role of the financial services industry at large that will come under scrutiny.
The two men, Martin S, 41, and Nicholas D, 38, are charged with helping orchestrate transactions in the latter part of the last decade involving corporate shares and their dividends that resulted in more than 400 million euros ($443 million) in tax losses. Both are cooperating with authorities in a bid to avoid jail time.
The former bankers will be equal parts defendants and star witnesses in a trial starting from September 4 that’s been one year in the making. Their case is part of a previously widespread trading practice across the industry known as Cum-Ex. Lawmakers estimate the financial engineering cost the government more than 10 billion euros in lost revenue, a shortfall the treasury is keen to recoup from those involved.
“It’ll be a pilot case that’ll write legal history and break ground for others to come,” Gerhard Schick, a former German lawmaker who has followed the Cum-Ex case for years. “The criminal clean-up is finally entering its crucial phase.”
The charges were brought by Cologne prosecutors, who are leading the biggest of several Cum-Ex investigations in Germany. Hearing the case is a court in nearby Bonn, home to a
special tax authority that’s handling issues involving foreign investors.
The Cum-Ex transactions, spawned from various forms of dividend stripping, relied on the sale of borrowed shares just before a company was scheduled to pay dividends. This allowed more than one investor to claim a refund on a tax that was normally paid only once, effectively double-dipping at the expense of the state. Given the complexity and high volumes involved, Cum-Ex required participation from many players. They all profited one way or the other from the deals, the cooperating suspects have told investigators, according to court documents viewed by Bloomberg News.
There’s potentially much to gain from helping authorities shed light on the dealings, given the outsize financial damages involved.
Under German law, schemes with tax losses exceeding 1 million euros usually carry jail time with no suspension possible — the higher the amount, the longer the term.