This article summarizes the significant German Federal Fiscal Court (BFH) judgment dated 13 November 2024 (I R 3/21), previous instance: Fiscal Court (FG) Munich, judgment dated 14.12.2020 – 7 K 899/19, regarding the tax attribution of shares in dividend-related transactions.
Guiding principle of the BFH: When determining tax attribution of shares under Sec. 39 AO (German Fiscal Code), the focus must be on who objectively and factually holds the essential rights associated with full ownership of shares, regardless of whether the holder subjectively intends to exercise these rights.
When it comes to share transactions around the dividend date, two legal questions usually come up in the tax context: First, it's important to figure out who the shares are attributed to. Second, a so-called “abuse of legal structures” needs to be checked.
The tax treatment of share transactions around dividend record dates has been heavily debated, particularly following the "Cum/Ex" scandal. Three main transaction types are distinguished:
1. Cum/Ex Transactions with Short Sales: These involved selling German shares with dividend rights (cum) shortly before the dividend record date but delivering them after the record date without dividend rights (ex). Through foreign short sellers, it was possible until 2011 to exploit banking system inadequacies, resulting in incorrect tax certificates and improper crediting of withholding taxes.
2. Cum/Cum Transactions (Dividend Stripping): Here, shares are sold with dividend rights and delivered on time with dividend rights intact. The goal is to help foreign shareholders avoid definitive tax burdens by temporarily transferring shares to domestic persons who can fully credit withholding taxes.
3. Structured Securities Lending: These transactions involve lending shares from entities where dividends are not tax-exempt to borrowers who can claim tax exemption under Sec. 8b KStG (Corporate Income Tax Act), artificially creating deductible business expenses.
The topic of dividend-related share trading has a longer history in case law. In its first of several rulings, the BFH recognized that in the case of transactions after the dividend record date, the economic ownership of the acquirer may generally still exist in accordance with Section 39 AO (BFH, ruling dated 15 December 1999 – I R 29/97). In the judgment dated 18 August 2015 – I R 88/15, the BFH restricted this in individual cases, but modified the criteria again in its judgment dated 29 September 2021 – I R 40/17.
The German Federal Ministry of Finance (BMF) issued a letter in 2021 regarding these transactions, which, however, does not yet incorporate the new case law since then (BMF letter dated 09 July 2021, BStBl. I 2021, pages 995 and 1002).
The case involved structured securities lending with British shares, which is the third constellation mentioned above. The BFH mainly dealt with the legal question of economic ownership:
However, the BFH remanded the case to the Fiscal Court for examination of a potential abuse of legal structures (Sec. 42 AO), noting that if the security arrangement served no purpose beyond tax advantages, this could indicate abusive structuring.
This decision significantly impacts past Cum/Cum transaction assessments:
The decision also affects criminal tax law assessments, as recent court decisions based on different economic ownership criteria may need reconsideration in light of the BFH's clear guidance.