German pension funds have come under renewed scrutiny as financial supervisor BaFin examines the impact of ‘cum-ex’ and ‘cum-cum’ withholding tax fraud, while a court case has highlighted the sector’s links to the long-running scandal.
‘Cum-ex’ and ‘cum-cum’ are complex, predatory dividend tax arbitrage and tax evasion schemes that exploited loopholes in European dividend withholding tax systems. Both terms originate from Latin, where ‘cum’ means “with” (shares with dividend rights) and ‘ex’ means “without” (shares ex-dividend).
Last week, the regional court in Bonn sentenced a former banker to one year and eight months’ probation for aiding and abetting attempted tax evasion in a ‘cum-ex’ case, a court spokesperson told IPE.
The banker worked for a foreign bank with a branch in Germany, while the case involved a US pension fund, according to the spokesperson.
The ruling is one of a number of cum-ex proceedings heard by the Bonn court, where the German federal tax office (Bundeszentralamt für Steuern) is based.
The federal and local tax offices refunded withholding tax on equity transactions conducted with and without dividend rights, with refunds allegedly claimed multiple times.
According to a government reply last year to a parliamentary inquiry by The Left party, tax authorities had processed suspected withholding tax fraud cases worth €10.5bn as of 2023.
A German lawyer representing defendants in criminal investigations relating to ‘cum-ex’ and ‘cum-cum’ told IPE that the federal and local tax offices have so far recovered only a few hundred million euros.
The tax authorities are seeking to reclaim money paid to banks, insurers, investment companies and pension funds, as well as from suspects and convicted individuals, the lawyer added.
According to the lawyer, more than 1,700 individuals in Germany are under criminal investigation, but only 10-15 have so far been indicted and around 30-40 convicted in relation to cases dating from 2005 to 2011.
The lawyer added that only a small number of tax refund applications submitted by US pension funds were approved in 2011, whereas before 2010, substantially more refunds had been granted in what he described as the “cum-ex market”.
BaFin survey
The withholding tax fraud scandal, regarded as one of the largest in German history, has also prompted BaFin to assess the potential financial impact of ‘cum-cum’ and ‘cum-ex’ arrangements on supervised firms.
According to BaFin’s analysis published last week, the total potential financial burden for insurers and pension funds, credit institutions, and securities firms amounts to €7.01bn.
The total comprises 41% potential future liabilities and 59% payments already made, BaFin said.
In a statement to IPE, the supervisor said the survey’s findings “do not indicate an immediate threat” to individual companies.
However, BaFin said it will use the survey’s findings in its supervisory work, examining the results in greater depth and, where necessary, reviewing governance, tax risk management and the role of specific individuals.
“We take action whenever we become aware of supervisory irregularities. Ultimately, this depends on the specific circumstances of each individual case,” BaFin said.
Volker Meusers, head of funding vehicles at WTW, said some German pension funds were included in the survey, but all reported negative findings to BaFin.
Responding to the survey was “quite a complex task” for individual pension funds, he said, because it is not easy to rule out potential passive, unintended ‘cum-cum’ or ‘cum-ex’ scenarios.
