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The German branch of Morgan Stanley was searched by prosecutors in Frankfurt in relation to "past activity" on Tuesday, a spokesperson for the U.S. bank said. ... A large number of banks were involved in the cum-ex deals: In the past few weeks alone there have been raids on the German branches of Barclays and the investment bank Merrill Lynch.
Prosecutors have been investigating the scandal for years, but the inquiry was stepped up last month when a former senior banker from Fortis bank was arrested in Mallorca at the request of Frankfurt prosecutors.
As Reuters noted years ago, this was a legal loophole in Germany until 2012, though courts have ruled otherwise.
German banks exploited a legal loophole that allowed two parties to claim ownership of the same shares. ... The loophole was closed in 2012, with the means of claiming double ownership banned. ... a German regional court ruling in February [2016] found there was no legal basis for the double claiming of rebates, even before it was banned in 2012
The scheme was built around “cum-ex trading” (from the Latin for “with-without”): a monetary maneuver to avoid double taxation of investment profits that plays out like high finance’s answer to a David Copperfield stage illusion. Through careful timing, and the coordination of a dozen different transactions, cum-ex trades produced two refunds for dividend tax paid on one basket of stocks.
The US has a distantly related form of legerdemain. In the EU, these banks took one basket of stocks and pretended (legal fiction) that it had been taxed twice, In the US, mutual funds and ETFs take one basket of stocks, sell it (via redemption in kind), and pretend (legal fiction) that no sales have taken place. Abracadabra. No capital gains recognized (IRC §852(b)(6)), tax averted.
The main difference seems to be that the EU fiction had a fraudulent intent; the US fiction is out in the open - no fraud. Either way, the legal fictions are tax loopholes.
Comments
From four months ago: https://www.reuters.com/world/europe/frankfurt-bank-two-homes-searched-relation-cum-ex-scandal-2022-05-03/
The Financial Times reports that: https://www.ft.com/content/84ad1e87-cad2-47d7-832f-5025b74a081d
(Subscription usually required, though google search may yield access)
As Reuters noted years ago, this was a legal loophole in Germany until 2012, though courts have ruled otherwise. https://www.reuters.com/article/germany-dividends/dividend-tax-scandal-how-banks-short-changed-germany-idUSL8N1991BN
I like the NYTimes description from 2020: https://www.nytimes.com/2020/01/23/business/cum-ex.html
The US has a distantly related form of legerdemain. In the EU, these banks took one basket of stocks and pretended (legal fiction) that it had been taxed twice, In the US, mutual funds and ETFs take one basket of stocks, sell it (via redemption in kind), and pretend (legal fiction) that no sales have taken place. Abracadabra. No capital gains recognized (IRC §852(b)(6)), tax averted.
The main difference seems to be that the EU fiction had a fraudulent intent; the US fiction is out in the open - no fraud. Either way, the legal fictions are tax loopholes.