Dividend Taxation, Cum-Cum Transactions and the Free Movement of Capital in Germany

In order to avoid the definitive burden of German withholding tax on dividends received from a corporation resident in Germany, foreign shareholders have, in the past, carried out “cum-cum” transactions whereby the shares were temporarily transferred to a legal entity resident in Germany. The German tax authorities refuse tax recognition of such transactions; on the one hand, they deny the domestic legal entity’s beneficial ownership of the shares, and, on the other hand, they assume that the arrangement is abusive. In addition, the German legislature has introduced two special anti-abuse provisions to combat cum-cum transactions. This article critically evaluates the German tax authorities’ views and the two new provisions of German law, particularly taking into account the free movement of capital under article 63 of the Treaty on the Functioning of the European Union.