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Legal Update

Upcoming new dividend stripping tax rules regarding trades with German stock over the record date

10 December 2015
Mayer Brown Legal Update

According to market sources, the German Ministry of Finance is going to issue a draft tax bill covering new rules on the tax treatment of so-called cum/cum transactions shortly before Christmas. Such transactions are signified by stock trades over the dividend record whereby the stock purchaser acquires the stock shortly before the dividend record date including dividend entitlement (cum dividende) and is also getting the stock delivered into his portfolio by the stock seller with the dividend claim. This situation is different to cum/ex transactions where the stock is bought cum dividende but delivered ex dividende. The latter kind of transactions carry the risk that both stock seller and buyer claim the withholding tax refund which is in fact withheld just one time. While cum/ex transactions have become unlawful and shut down by the tax legislator some years ago cum/cum trades were not found illegal although disliked by the German tax authorities. Now, the German tax legislator is about to introduce for a certain kind of withholding tax refund method rules which seek to abandon these kind of tax motivated trades or at least make them more expensive.

It is anticipated that these new rules will come into force along with the reform of the taxation of investment funds. As far as cum/cum transactions are concerned, it is reported that Germany will follow the Australian model which will imply a holding period for stock trades around the dividend record day of 45 days along with the requirement of a minimum risk exposure vested in the portfolio of 30% to reduce the ability to swap out the equity risk by means of derivatives or other techniques with similar results.

As far as information could be obtained, these new rules will be implemented in Section 36 of the German income tax code (“ITA”). Section 36 paragraph 2 No. 2 ITA allows German taxpayers (applicable to corporate entities, individuals, partnerships with German resident members) to credit withholding tax on dividends against their German income tax liabilities. Primarily, German banks (German domiciled corporate taxpayers) are in the focus of the new rules as they are said to be the major players in the cum/cum market. Reportedly, the date of effectiveness shall be January 1, 2016 to cover the upcoming dividend season.

On the basis of the above described set of rules, there would be no limitation on tax exempt organizations such as investment funds and pension funds as they are seeking withholding elimination by way of tax refund or by tax exemption at source instead of tax credits. As far as investment funds are concerned their current tax system will be repealed and recast throughout a broader reform which will imply the replacement of the exiting tax exempt status of the investment fund by the imposition of corporate income tax on the funds earnings. However, different to the anticipated changes to the tax credit system in Section 36 ITA, this new tax regime for fund taxation shall apply from January 1, 2018.

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