Tax Break

John Fisher, international tax consultant

Archive for the category “Germany”

Bad Cumpany


‘Come, come Mr Bond’

If, like me, you have been wondering for decades what the European Parliament is there for, wonder no more. Following a recent vote, the august institution is considering  setting up an investigations unit to tackle two humongous European fraud schemes  named improbably  ‘cum-cum’ and ‘cum-ex’. The first warning that something was afoot came in 1992, and the fan turned brown in 2017, but the wheels of power turn slowly in Strasbourg. (Or was it Brussels? Or Luxembourg?)

For those without a Latin education, the schemes translate as ‘with-with’ and ‘with-without’. It would be nice to leave it at that, but I had better explain.

Both schemes revolve around dividends on stocks. A stock is cum-dividend when a securities buyer is destined to receive a dividend that a company has declared but not paid. That is the status quo (more Latin) until the date at which the stock trades ex-dividend – when the dividend will go to the seller. Thanks to lacunae (Latin noun – first declension nominative plural, like mensa/mensae) especially in German law, but evidently in about ten other European jurisdictions, bankers and the other usual suspects were (possibly still are) able to bleed national treasuries of scarcely imaginable sums.

The cum-cum smacks more of an old-style tax avoidance scheme than hardcore evasion. Stocks of German companies held by foreigners who were not eligible to  dividend witholding tax exemption were ‘lent’ (effectively sold with an agreement to repurchase , – but it isn’t written that way) to bona fide German banks shortly before a payment date. The stock went back at a lower price without the dividend. Naughty, but with loud protests that it only made hay while the legislators slept. There was one exemption, and the bank had a technical right to it.


He knew how to make sure a secret was kept

Cum-ex was a far dodgier form of exploitation, which did not rely on foreigners. It did, however, require collusion and, on the grounds that ‘two people can keep a secret as long as one of them is dead’, it was bound to be found out eventually (having said which, the German and other authorities seem to have made gargantuan efforts to miss what was going on beneath their noses). Basically, a bank would ‘borrow’ stocks cum-dividend within two days of the dividend payment date and would sell them (short) to a third party. Delivery was required in two days, by which time the stock had gone ex-dividend. The procedure in force until 2011 in Germany (and heaven knows what is still happening elsewhere) was that the bank had to make a compensatory transfer between the seller and the buyer for the net after-tax amount of the dividend, and then issue a certificate of withholding to the buyer even though he did not actually receive the dividend. The theory went that the seller would no longer be entitled to that withholding as he had transferred the dividend amount to the buyer, and therefore would not receive a withholding certificate. Aye, and there’s the rub. The short seller of the stock was not the ultimate owner and had not suffered the withholding tax. The ultimate owner also received a witholding tax certificate (if handled correctly, the number of withholding tax certificates could be multiplied) enabling two or more ‘owners’ to cash in on the same tax benefit. This is not clever tax avoidance. It is clearly tax evasion. And it has cost European state coffers an estimated €60 billion.


The words ‘company’ and ‘companion’ derived from the Latin ‘cum panis’ – with bread

But, at least we know we can now sleep safe at night in the knowledge that the European Parliament is on to it. It has only taken them 26 years. Rumour has it that MEPs are soon to issue a communique announcing the end of the Second World War. The suspense is killing.


House warning

Moving house knocked her out completely

The expression “Moving House” is the sort of English up with which Winston Churchill would, famously, not have put. In point of fact, moving a house is exceptionally difficult and,  other than in natural disasters, very rare. Believe me – I know. Every weekday evening for a year and a half I used to speed out of the office car park only to be halted by the horrendously slow traffic lights at the end of the street.  As a matter of habit, I would turn my head and observe the snail’s pace progress in arranging the moving of a couple of remarkably unremarkable houses a distance of no more than twenty metres to permit the widening of the road that was the raison d’être for the traffic lights.They spent millions upon millions to dig under the foundations and put a few 100-year-old houses on rails. Preserving 100-year-old houses of the German Templars in Israel, a country that boasts its fair share of genuine antiquities (just last week I stood in the middle of a sea-front Roman Hippodrome imagining chariots racing around me) was undoubtedly an act of folly. Indeed the houses were (and, if you swing your gaze twenty metres, are) reminiscent of  the sort of buildings on the other side of Berlin’s Brandenburg Gate that a United Germany has not yet got round to demolishing.

Precisely because houses are so hard to move they are exceptionally popular when governments are, like now, looking to replenish the national coffers with giant helpings of  taxes. After all, when was the last time you heard of a semi-detached in your neighbourhood disappearing overnight and turning up on a sand dune in the Cayman Islands? And what about all those nice tax planning devices to reduce profit or, indeed, induce losses? With real estate, even if you improbably find ways to avoid capital gains tax, there is always property transfer tax (under one of its many aliases) and annual property taxes that date from time immemorial when nobody worried about progressive tax rates and the redistribution of income.

Fortunately for the owner, his tax adviser could not find a big enough envelope

Britain and Germany are taking part in the latest game of “Plug the Deficit with Bricks and Mortar”. This week sees the deadline for public comment on the British Treasury’s Consultation Paper “Ensuring the fair taxation of residential property transactions”. The proposal is aimed at nuking the ‘enveloping’ of high value residential properties in corporate structures so as to avoid Stamp Duty Land Tax on sale and, in the case of foreign residents – exemption from capital gains tax. The SDLT to be paid by a non-individual buying a residential property valued at more than £2 million is a whopping 15% of the value of the property. Meanwhile, wrapping such properties in an envelope will – from 2013 – attract an annual charge of between £15,000 and £140,000. In feeling the need to justify the imposition of capital gains tax on enveloped properties held by foreign residents (virtually every other country in the world already charges tax on the basis of where the property is situated) the paper seems to miss several beats – but it does not really matter. What is pretty clear is that, if this proposal becomes law, the days of non-commercial corporate ownership of residential properties  are numbered and everybody is going to be paying 7% SDLT (up from 5%) which is quite a lot really.

The Germans are also at it. In between dealing with the woes of the Euro, they found time to come up with a series of proposals to close annoying  tax loopholes that have been costing them a cent or two. Buried deep and largely out of sight is a suggestion to clobber an almost ubiquitous device to avoid Real Estate Transfer Tax (RETT). The transfer of properties in corporate structures by sale of shares has been widespread in Germany for some years and has traditionally succeeded in avoiding the RETT. However, the indirect transfer of at least 95% of a property also triggers the RETT . To avoid this, Germans started establishing RETT blockers – entities that facilitate a split in ownership 94.9:5.1 and avoided the problem. Well, it looks like that one may be on the way out if the Bundestag and Bundesrat can get their act together when Mrs Merkel returns from her Italian walking tour in September.

Mutual Friend? Never mind. Even the greatest novelist of all time could have bad grammar days.

While abuses of language  roll on unhindered, this year the Oxford English Dictionary, to my absolute chagrin, ditched the word “Growlery” from the English lexicon. The most famous Growlery was the wealthy, benevolent and cheerful John Jarndyce’s private room at Bleak House where he allowed himself to be angry and depressed. There will be a lot of wealthy people in England shutting themselves off in rooms in their mansions angry and depressed over their frustrated property tax avoidance schemes. What a pity that they will not have a name for the room. Mind you, at least they will be able to think about “Moving house”.

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