OLG Frankfurt a. M.: No reclaim of compensation payments after change in taxation credit for Cum/Cum transactions
The Higher Regional Court of Frankfurt am Main rendered a significant decision for the capital market on August 11, 2023 (Case No. 10 U 7/20) regarding compensation payments in connection with so-called Cum/Cum transactions. The primary issue in the proceedings was whether compensation payments agreed and made as part of these transactions can be reclaimed retrospectively due to a change in legal regulations concerning the tax credit obligation on dividends.
Background: Structure and objectives of Cum/Cum transactions
Operation of Cum/Cum transactions
Cum/Cum transactions initially developed as a legitimate structuring form in institutional securities trading. They aimed to enable foreign investors to optimize their tax burden related to domestic dividend payments. To this end, securities were transferred to domestic credit institutions shortly before the dividend record date to make use of their ability to credit capital income tax. After the dividend distribution, the securities were retransferred, and a financial settlement (compensation) was made.
Typical contractual structures
Key regulatory contents of these transactions included, among other things, the temporary transfer of shares and the agreement of a compensation payment by the foreign institution to the domestic credit institution. This payment was intended to economically offset the tax advantage resulting from the creditability of capital gains tax for the domestic institution.
Legal dispute over compensation payments after change in tax crediting
Legislative intervention and elimination of credit possibility
With the introduction of § 36a of the German Income Tax Act (EStG) in 2016, the legislature largely curtailed the structuring options through Cum/Cum transactions by eliminating the crediting of capital gains tax on dividend payments for corresponding structures for domestic banks. As a result, the question arose whether, based on the new legal situation, compensation payments made before the enactment of this regulation could be reversed or reclaimed.
Decision of the Higher Regional Court of Frankfurt am Main
The Higher Regional Court of Frankfurt a. M. clearly denied this question in the present case. Even the subsequent elimination of the legal creditability of capital gains tax does not justify the reclaim of a compensation payment made pursuant to a contractual agreement. According to the court, the compensation agreement was not contingent upon the continuation of the tax framework. The parties had consciously assumed the existence of tax advantages at a certain point in time according to the content and purpose of the contractual agreements but did not include a reservation for adjustment in the event of later legal changes.
Focus of the court’s reasoning
Risk allocation and contract interpretation
The court particularly focused on the risk distribution between the contracting parties. The payment obligation should remain according to the conviction of the judges independent of any later tax law changes, as the structuring was exclusively related to the actual conditions at the time of the transaction execution.
No supplementary contract interpretation
The Higher Regional Court of Frankfurt also saw no room for supplementary interpretation suggesting that in the case of later legal changes, a claim for contract adjustment or restitution of compensation would exist. If the parties had not explicitly provided for such developments, no such subsequent source of claims could be constructed. This decision aligns with fundamental civil law standards on contractual binding and risk assumption.
Practical implications for the capital market
Significance for involved market participants
The decision clarifies that compensation payments agreed upon in the context of securities transactions based on certain tax frameworks can remain valid even under changed legislative conditions. For credit institutions, institutional investors, and other market participants involved in comparable contractual structures, the ruling underscores the high importance of clear regulations on risk allocation in the event of tax law changes.
Requirements for contract design
Against the backdrop of the judgment, it can be derived that the inclusion of adjustment clauses concerning possible changes in the tax legal framework can be of significant importance to avoid retrospective uncertainties and disputes. However, each case remains to be assessed individually and depends on the specific contract design.
Civil law claims for refund
The judgment of the Higher Regional Court of Frankfurt am Main emphasizes the fundamentally existing binding effect even against changed external circumstances, provided that no differing risk allocation arises from the agreement made. If there is no statutory or contractual basis for repayment, corresponding refund claims are generally excluded.
Further information
The proceedings and underlying facts reflect the multifaceted issues at the intersection of tax law and civil contractual binding, which can trigger significant upheavals in the capital market through the development of tax law and regulatory interventions.
Note on ongoing legal developments
In view of ongoing legislative and judicial developments in the field of capital market law and tax regulations, it is advisable to continuously monitor further decisions and possible changes to the legal framework.
Should legal questions arise in connection with compensation payments, Cum/Cum, or similar capital market transactions regarding contractual risk allocation, refund claims, or tax implications, attorneys from MTR Legal are available as contacts and assist in the analysis and assessment of complex issues.
