As the Cum-Ex investigation gathers pace in Europe, Neil Williams of Rahman Ravelli considers the issue of what constitutes beneficial ownership of shares.

With a number of banks having been raided as part of Europe’s growing Cum-Ex scandal, investigators are focusing on the exploitation of a loophole on dividend payments that enabled a number of parties to claim the same tax refund.

Banks and stockbrokers rapidly traded shares with ("cum") and without ("ex") dividend rights in a way that enabled them to hide the identity of the actual owner - they could agree to sell a company stock before the dividend was paid out but then deliver it after the dividend had been paid. As a result, both parties could claim tax rebates on capital gains tax - a tax that had only been paid once – and rapid trading between various parties could give the appearance of numerous owners, creating large profits.

German authorities believe this has cost that country’s treasury 10 billion euros in lost revenue. But there may be more than 10 other European countries affected; with estimates saying around 55 billion euros may have been lost to those nations’ treasuries.

While investigations into Cum-Ex are still at a relatively early stage, any examination of the beneficial ownership of shares is likely to focus on whether or not beneficial ownership was actually transferred. In the context of Cum-Ex transactions, beneficial ownership of the shares and the rights this carries includes:

  • the right to share in the company's profitability, income, and assets
  • a degree of control and influence over company management selection
  • pre-emptive rights to newly issued shares
  • general meeting voting rights.

The Cologne tax court recently held that under German law, in the case of an over-the-counter short sale, the share purchaser would not become the beneficial owner of the shares to be delivered at a later stage at the settlement of the purchase agreement.

It remains to be seen just how the UK is affected by the developing Cum-Ex investigation. In the UK, the issue of beneficial ownership of shares was addressed in J Sainsbury Plc v O’Connor [1990], in which Millett J said beneficial ownership was “more than equitable ownership. It requires more than the ownership of an empty shell bereft of those rights of beneficial enjoyment which normally attach to equitable ownership.’’

Looking for more information? Read about Cum-Ex Trading Scandal, Corporate Investigations.