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Business

Commerzbank 'dividend stripping' deals revealed

Germany's second-largest bank has reportedly helped foreign investors exploit tax loopholes that cost the state billions of euros. Apparently though, the deals weren't good enough to boost its first-quarter profit.

According to Tuesday's edition of the German business newspaper "Handelsblatt", Commerzbank played an active role in bilking the German state of around 1 billion euros ($1.15 billion) annually through a tax-avoiding scheme called "dividend stripping."

The secret Commerzbank data was first obtained by New York-based non-profit news research group ProPublica from an unnamed source, the German daily reported, and was later analyzed by "Handelsblatt" together with experts from the German public broadcaster ARD and "The Washington Post".

Commerzbank, which is still partially state-owned after receiving a bailout of 18.2 billion euros in the wake of the 2008 financial crisis, reportedly helped foreign investment funds, including US hedge funds Vanguard and Blackrock, in "at least 250 cases between 2013 and 2015" to exploit the legal loophole to the detriment of taxpayers.

'Yield enhancement'

Dividend stripping - also known as "cum-cum trade" - is a once-legal technique, enabling investors to exploit the cyclical variations in a stock's share price before and after a company pays out dividends.

In Germany, investors combined the method with a tax loophole that allowed them to underpay or claim unjustified exemptions from German capital-gains taxes. With the trick, they could lower their capital-gains tax payments and often claim maximum tax refunds from the government.

Experts say the practice allowed foreign investors to avoid paying at least 1 billion euros in taxes each year in Germany for more than a decade. So far it's unclear how much money they saved with the help of Commerzbank. The data obtained by ProPublica suggest the bank played a leading role.

Commerzbank declined to comment specifically on the allegations but told "Handelsblatt": “We ensure through extensive internal systems and controls that all trading activities are in compliance with existing laws."

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Commerzbank - Germany's biggest bailed-out lender

Profit plunge

The revelations came as Germany's second-largest bank unveiled a first-quarter profit that was half as big as in the quarter a year ago, hit by rock-bottom interest rates and a slump on capital markets.

The "difficult market environment" caused profits to plunge to 163 million euros, the bank said in a statement Tuesday. Deposits shrank, while demand for loans stagnated. Business with German mid-sized companies and investment banking had taken especially significant hits, it added.

The shrunken surplus did not come as a surprise to shareholders. Former chief executive Martin Blessing warned investors of less-than-rosy numbers last April, ahead of transferring the reins to his successor Martin Zielke at the start of the month.

The gloomy figures also made for a cautious full-year forecast from the bank. "In view of the subdued nature of the first quarter, it will be more challenging to reach the net profit posted in 2015," the bank said in its statement.

Last year, the bank posted a 1.06 million euro profit, enabling it to keep paying shareholders a 0.20 euro dividend.

uhe/cjc (Reuters, dpa, Handelsblatt)

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