As the European Securities and Markets Association tries to clamp down on fraudulent schemes linked to dividend transfers, a German court has ruled that the Hamburg private bank MM Warburg cannot hold Deutsche Bank (as the custodial bank) jointly liable for unpaid capital gains taxes in the context of so-called cum-ex transactions.

ESMA's desire is to persuade the decision-makers of the European Union to give national regulators more power to share information to combat fraudulent schemes linked to dividend transfers, which have deprived the European Union of €55 billion (US$63.8 billion) in taxes.

ESMA said in a recent report to the European Parliament that co-operation between these authorities is important if they are to detect and prosecute taxpayers who claim refunds of capital gains taxes that were never paid, known as cum-ex transactions.

Meanwhile, the Frankfurt am Main regional court has ruled that the Hamburg private bank MM Warburg cannot hold Deutsche Bank (the custodial bank for its deals) jointly liable for unpaid capital gains taxes in the context of these so-called cum-ex transactions. It has stated: "The Warburg private bank is the original tax debtor and therefore has to bear the taxes primarily in relation to Deutsche Bank."

Deutsche Bank acted as the custodian of the share seller in around 400 share transactions by Privatbank Warburg between 2007 and 2011 that occurred around the dividend dates. Since Privatbank Warburg bought the shares with (“cum”) dividend entitlement before the respective dividend cut-off date, but only received them after the dividend cut-off date without (“ex”) dividend rights, compensation was credited to it. The private bank did not pay any capital gains tax on this, but had it offset against its corporate income tax. The Hamburg tax office later demanded capital gains tax of around €167 million from Warburg. Before the regional court in Frankfurt am Main, the private bank demanded compensation from Deutsche Bank for these tax debts (under the doctrine of “joint debt compensation”). The court dismissed this claim.

The 18th civil chamber of the Frankfurt am Main regional court said: "The original tax debtor was the plaintiff. In principle, the tax debtor has to finally bear his tax liability himself."

The district court's website states: "It is true that Deutsche Bank was fundamentally obliged to pay capital gains tax on the sales of shares to the tax authorities. This follows from its role as the custodian of the seller of the shares. The legislature regulated this in the income tax law in 2007. The judges stated that Deutsche Bank, as custodian bank, was obliged to pay the tax alongside Privatbank Warburg as the purchaser of the shares, "only serves to secure the tax claim in favor of the state". However, this does not justify Deutsche Bank's obligation to compensate Warburg Bank as the primary tax debtor.

"The share transactions relevant here were also largely the subject of criminal proceedings against two London stock dealers before the Bonn Regional Court under file number 62 KLs 1/19. With a judgment of 18 March 2020, the private bank Warburg was ordered to collect contributions from “cum-ex deals,” also amounting to around €167 million. In its lawsuit before the Frankfurt am Main Regional Court, the private bank Warburg demanded exemption from Deutsche Bank for these collections. The 18th civil chamber of the Frankfurt am Main regional court also rejected this claim by the private bank Warburg."

The Chamber of the Regional Court expressed doubts about the representation of the private bank Warburg, according to which there had been no agreed "cum-ex deals". However, according to the rules of civil proceedings, the court did not have to rule on this. Warburg can appeal to the Higher Regional Court in Frankfurt am Main if it so chooses.