Foreign institutional investors with portfolio holdings in shares of a German company are familiar with the issue: dividends are subject to an initial withholding tax (WHT) of usually 26,375 %. While German-resident investors can fully offset or reclaim this tax as part of their tax assessment, for many foreign investors – such as institutional investors, pension funds, investment funds and insurance companies – the tax remains a final, definitive burden. This unequal treatment was the starting point for so-called "cum-cum" arrangements in the past.
We refer to a recent tax-technical article in English language: Prof. Dr. Michael Stöber, European Taxation, June 2026, p. 255 ff.).
Cum-cum transaction
Put simply: before the dividend record date, the foreign shareholder transfers shares – often by way of a securities loan – to a German institution, typically a bank. The German borrower is entitled to credit or reclaim the WHT. After the dividend is paid, the shares are transferred back, with the foreign lendor receiving a so-called dividend compensation payment. The economic effect is that the foreign lendor ends up in (almost) the same after tax position as a similar German investor.
The EU law background
One aspect that often gets too little attention in the public debate is particularly noteworthy: the right to act in self–defence. The definitive burden of German WHT on foreign investors is itself questionable under EU law. Under the case law of the Court of Justice of the European Union, such unequal treatment regularly infringes the free movement of capital. If a cum-cum arrangement ultimately achieves what EU law already requires – namely, equal treatment with domestic investors – it is not convincing to argue that this arrangement amounts to a tax advantage "not provided for by law". In such cases, Germany arguably suffers no real loss of tax revenue to begin with, since it was never entitled to that revenue under EU law in the first place.
The specific anti-abuse rules introduced in 2016/2017
Since 2016 and 2017 respectively, the legislature has introduced two special provisions specifically targeting cum-cum arrangements (sections 36a and 50j of the German Income Tax Act). In essence, they require a minimum holding period for the shares and genuine economic risk on the part of the investor before WHT can be fully credited or refunded beyond the treaty-reduced rate. If these conditions are not met, the law presumes abuse across the board.
It is precisely this blanket approach that is legally questionable: the rules give taxpayers no opportunity to demonstrate, in an individual case, that there was in fact no abuse. This approach is difficult to reconcile with the requirements of EU law and the German constitutional principle of proportionality. In addition, these provisions only apply from 2016/2017 onwards – for earlier periods, there is no sound legal basis for treating such arrangements as abusive as a matter of course.
What does this mean in practice?
For foreign institutional investors, like pension funds, investment funds and insurance companies that were involved in securities lending or similar arrangements around dividend record dates in the past, a close look at the specific facts of each case is worthwhile. Blanket refusals by the German tax authority to refund WHT are by no means automatically lawful – neither at the level of beneficial ownership nor at the level of the abuse allegation. The broader question of whether the ongoing unequal treatment of foreign shareholders is even compatible with EU law can, in itself, provide a separate basis for a refund claim.
