Deutsche Bank must pay Cum-Ex tax bill, Warburg says in lawsuit

M.M. Warburg & Co., a private bank under investigation in Germany over a series of controversial tax deals, has opened a new legal front by suing Deutsche Bank AG to pick up the bill.

Warburg filed a suit in Frankfurt in December to force Deutsche Bank to pay a 46 million-euro ($53 million) tax bill the company received over so-called Cum-Ex transactions, it said in a statement Thursday. The private bank says Deutsche Bank failed to transfer the taxes to revenue officials when it worked for the seller on a stock sale where Warburg was the purchaser.

The civil lawsuit expands the Cum-Ex worries for Deutsche Bank, which has always tried to stress it never participated as a seller or buyer in the trades. Prosecutors around the country are investigating the role of dozens of lenders and hundreds of bankers who handled the transactions, which took advantage of how Germany dealt with refunds on dividend payments in 2012.

Deutsche Bank headquarters in Frankfurt, Germany
Traffic passes outside the Deutsche Bank AG headquarters in Frankfurt, Germany, on Thursday, Nov. 29, 2018. Photographer: Andreas Arnold/Bloomberg

Deutsche Bank said there’s no basis for the allegations that Warburg “distributed to the media” even though the suit hasn’t been served yet. The duty to transfer the tax to the Hamburg authorities in these deals was solely on Warburg, which had no contract with Deutsche Bank in the matter, a spokesman for the Frankfurt-based bank said.

Societe Generale

The suit echoes a similar case in which two banks clashed over Cum-Ex: In April, Heleba won a damages award of 22.9 million euros against Societe Generale SA in the Frankfurt Regional Court. The ruling, which Societe Generale has appealed, was expected to kick off more suits, and Warburg may have been encouraged by the judgment. However, in that case the court said Societe Generale was liable under a sales agreement with Heleba and should have transferred the tax to the authorities.

Last year, Deutsche Bank agreed to pay 4 million euros to end a probe by Frankfurt prosecutors into Cum-Ex deals, people familiar with the case said in December. Cologne authorities are still looking into Deutsche Bank’s role in some Cum-Ex transactions.

Cologne prosecutors are looking at Warburg as part of its larger Cum-Ex investigations. While Warburg is also contesting the multi-million-euro tax bill, the private bank can’t challenge tax authorities in court until an internal review at the agency is completed.

Instead, Warburg is suing Deutsche Bank to lay out in court that it acted legally, the bank said.

"To speed up the clarification, to protect the good reputation of the bank and to preserve damages claims, Warburg has decided to rebut the allegations by legal actions," the lender said.

Cum-Ex transactions took advantage of how Germany once handled tax refunds on dividends. The deals involved a type of short sale made just before a company was due to pay a dividend.

When German companies paid dividends at the time, they withheld about a quarter of the money to cover any taxes the shareholder might later owe. Shareholders received certificates from their custodian banks showing how much was deducted, and the amount could be credited against their tax bill or, if they owed no additional taxes, refunded.

In Cum-Ex transactions, short sales were set up in a way that led to double refunds of tax over the same set of shares, German authorities say. In some instances, three or more investors may have received certificates for the same withholding tax, they say.

The practice ended in 2012, when Germany revised its tax laws. Some banks and other groups still argue that Cum-Ex deals were legal because tax authorities paid out the refunds for years.

The issue may eventually be resolved by Germany’s top courts.