Beneficial ownership of shares transferred as collateral

Oct 30, 2025

The Federal Finance Court (BFH) had to rule on the following case: In 2006, the plaintiff, a public limited company, carried out extensive securities repurchase transactions and securities loans with a bank. In doing so, the bank received British shares as collateral and, in return, issued fixed-income securities to the plaintiff. After a short time, the collateral was exchanged for other high-dividend shares.

The plaintiff received dividends from the shares, treated them as tax-free, but deducted the related compensation payments in full as operating expenses – resulting in a considerable tax advantage. The tax office considered this to be an abuse of the law, the Munich Tax Court (FG) dismissed the action in the first instance, but the BFH has now overturned this ruling.

In the opinion of the BFH, shares transferred as collateral are attributable for tax purposes to the collateral taker, in this case the plaintiff, if the latter can actually and legally exercise the essential rights, such as disposal and voting rights, from the transfer of ownership onwards, regardless of whether a collateral event occurs. The fact that it did not exercise voting rights is irrelevant. The transfer was not structured as a classic security transaction, but functionally as a securities loan – with acquisition of ownership.

A provision introduced later to prevent abuse cannot be interpreted retrospectively to mean that a comparable situation cannot have constituted abuse in the past.

Since the arrangement enabled the plaintiff to receive tax-free dividends and generate deductible expenses at the same time, the facts of the case must be clarified in more detail to determine whether there has been an abuse of the law.

The case was therefore referred back to the Munich Fiscal Court. It must clarify whether the arrangement had non-tax reasons (e.g. regulatory advantages). If there are no such reasons, it is likely that there has been tax abuse.

The Federal Fiscal Court clarifies that tax attribution is independent of the subjective use of the rights. Even transfers declared as ‘collateral’ can be fully attributable to the collateral taker for tax purposes if they are actually used by the collateral taker. The ruling strengthens the obligation to examine tax avoidance structures such as ‘cum/cum’ for abuse of legal form.

Source: Federal Fiscal Court, judgment of 13 November 2024 – Ref. I R 3/21