It was a bruising legal battle that carried with it hopes of the entire financial industry. Now, one German bank at the center of the storm has given up the fight.
Dekabank has abandoned its claim that the German government owes it €53 million, or $60 million, in capital gains tax rebates, after a regional fiscal court in Hesse dismissed the bank's lawsuit "in its entirety."
Though the court gave Dekabank the option to appeal the ruling in federal fiscal court, the asset manager of Germany's state-backed savings banks doesn't plan to take the fight any further.
"We will accept the ruling," a spokesman for Dekabank told Handelsblatt.
The case stems from a controversial practice called dividend stripping that has gripped the country's entire banking sector over the past year, and is considered one of the worst cases of tax evasion in post-war German history.
Deka's surrender could cost the entire industry as much as €12 billion in tax rebates they once believed they could claim from the government.
While the government argues that dividend stripping was always illegal, some experts have sided with Dekabank and its cohort.
Under German law, investors are entitled to a rebate for capital gains taxes levied on dividend payments. The trouble is that many banks and investors took this practice in a direction it was never intended.
Dividend-stripping involves buying shares just before a company pays out dividends to shareholders, and then selling them again shortly after. By carrying out these transactions with borrowed money, or short-selling, the customers are able to sell the shares at a loss without losing any actual money.
The “loss” allows them to claim multiple tax exemptions, ultimately lowering the taxes they have to pay on their overall capital gains revenues.
Authorities claim 129 German banks and investors exploited this loophole, defrauding the state of at least €12 billion in revenue over more than a decade.
Whether the practice was truly illegal has been challenged by banks. The loophole that allowed banks to carry out the practice was only formally closed by the German government in 2012. Despite that, Berlin has sought to claim the many billions in taxes back from banks well before then.
Dekabank's own case dates back to 2011. The bank claimed €53 million in capital gains tax rebates on shares it bought from Equinet, and which were managed by Caceis. Even though the loophole was still open at the time, the German government was suspicious of the deal and refused to validate the rebates.
Dekabank filed a lawsuit in a regional fiscal court in the state of Hesse. The lawsuit was widely seen as a test case. Many institutions were crossing their fingers, hoping the bank would prevail and free them from their own legal morass with the authorities.
That another institute will now challenge the government in court seems unlikely. Part of Dekabank's own reason for deciding against an appeal was likely the damage to its public image. The fact that Deka is effectively owned by the state – the hundreds of savings banks that are its shareholders are themselves owned by local communities – has made the scandal that much more uncomfortable. It would rather put the entire matter behind it – and in any case had already written off the €53-million rebate.
Some others banks have also already admitted wrongdoing – Munich-based Hypo-Vereinsbank, HSH Nordbank, LBBW and DZ Bank – and paid millions back taxes.
The ruling does let Dekabank's business partner, Caceis, off the hook. A subsidiary of Credit Agricole, Caceis managed a majority of the shares that Dekabank claimed questionable tax rebates on.
According to Germany's finance ministry, Caceis should have deducted taxes from Dekabank's capital gains. The ministry planned to hold Caceis responsible in the event the court ruled in Dekabank's favor.
While the government argues that dividend stripping was illegal, some experts have sided with Dekabank and its cohort.
The law firm Freshfields Bruckhaus Deringer, for example, conducted several investigations and concluded there was nothing inherently illegal about the practice until 2012, when the government closed the loophole that facilitated dividend stripping.
The practice broke out into the open last year after an anonymous informant sold a CD containing a list of institutions that benefited from the loophole to the state government in North-Rhine Westphalia.
Germany's financial regulator BaFin subsequently sent a questionnaire to 1,800 banks asking about dividend stripping.
In March, a German parliamentary commission launched its own investigation into questionable tax rebate claims from from 2000 through 2012.
Sönke Iwersen runs Handelsblatt's 'Live' App and is part of the paper's investigative journalism team. Volker Votsmeier, also part of the investigative team, focuses on financial irregularities. To contact the authors: [email protected] and [email protected]