CL-2018-000297, CL-2018-000404, CL-2018-000590, - [2025] EWHC 2364 (Comm)

In the descriptions I have given above, I have not mentioned the other major element of most of the trading models in this case, namely matched price hedges using exchange-traded futures or over-the-counter forwards put on by B and V as part of the initial phase, traded on the same day as the initial equity trade, reversed by opposite-direction matched futures or forwards as part of the unwind. Those hedges, where used, served a function in the trading models, but they do not affect anything in what I have said as to whether any of B, V or L ever held, acquired or transferred any shares.

At the heart of the validity issue was an idea stated in Sanjay Shah’s PowerPoint slides referred to in paragraph 81 above. One of those slides said this:

“Explanation of dividend compensation payments

Short sellers who sell shares cum-div and settle ex-div are liable to pay a dividend compensation payment to their custodians. …

Long buyers who buy shares cum-div and settle ex-div must receive a dividend compensation payment from their custodians. Such payments are documented as dividend credit advice notices. Under Danish Tax Law, these payments are considered dividend income for tax purposes.” (underlining for my emphasis);

and the slide before the diagram reproduced at paragraph 81 above asserted that “Even though shares and cash are not created or destroyed, the existence of the “legal loophole” results in long buyers becoming entitled to WHT reclaims due to the presence of short sellers”. The “legal loophole”, as Mr Shah called it, was a proposition he stated that, “Under Danish Tax Law, a buyer of shares becomes the legal and beneficial owner on the contract date, the date when he/she enters an irrevocable contract to buy shares.”

Applying the preliminary issue decisions made upon the Validity Trial, the proposition that a dividend compensation payment by a short seller who sells cum-div for settlement ex-div was considered dividend income for tax purposes under Danish tax law was wrong at all material times. It was wrong, if taken literally, because Danish dividend tax attached to the accrual of a right to a dividend, not to the receipt of a payment. It was still wrong if, allowing for that first point, we say the proposition is that a cum-ex buyer’s contractual right to a dividend compensation payment was dividend income for Danish tax purposes. Danish dividend tax did not apply to such a right. Whether at the time Mr Shah or others thought otherwise, or had any basis for doing so, does not affect the true position under Danish tax law as determined for these proceedings by the Validity Trial.

Under SKAT (Validity Issues), it is possible to describe a cum-ex trade (which may or may not be a trade anyone would ever do), where a seller that is short on the trade date completes the trade on the settlement date by a transfer of shares as a result of arrangements made after the trade was executed, but before the dividend was declared, such that (a) the only dividend-related payment the buyer receives is a dividend compensation payment from the seller, but (b) the buyer was the party liable to Danish dividend tax on the real dividend. That is a possibility because of the complexities I found to exist, to which I referred in paragraph 59 above. On the facts, however, the short seller was always short until after the ex-date, and always did not complete the cum-ex trade by a transfer of shares anyway.

In the diagram at paragraph 61 above, B might receive a CAN issued by C4 to reflect a payment credit on B’s account at C4 derived from B’s contractual right to a dividend compensation payment, although C4 would be under no obligation to issue a CAN to report that credit over and above recording it accurately in periodic account statements issued to B. Or in Mr Shah’s diagram (paragraph 81 above), the 71 Investors might each receive such a CAN. But that would not mean they had received or been entitled to a dividend (or a dividend payment) a right to which attracted Danish dividend tax.

In the actual trading activity, B was always an entity capable in principle of qualifying for relief from Danish dividend tax under a DTT between its tax domicile and Denmark. For the most part, B was either a USPF or a LabCo that could have been entitled to relief in full. In some of the Klar Model trades, B was a UK or Luxembourg entity capable in principle of being entitled to relief against tax above 15%. However, none of them had been taxed by Denmark, so none of them was entitled to any tax refund, and therefore in each case the tax refund claim that was made was an invalid claim that SKAT was not obliged to accept and pay.

The final conclusion to identify at this stage, as it follows from the analysis I have set out above, although the invalidity of the tax refund claims in the case does not turn on it, is that all the short selling activity from 1 November 2012 was in breach of Article 12(1) of the EU Short Selling Regulation (‘SSR’), which applied from that date: see the SSR (Regulation (EU) No 236/2012 of 14 March 2012), Article 48, for the commencement date. That is because:

If the sellers had been covered short sellers by virtue of Article 12(1)(a) or 12(1)(b) of the SSR who settled their sales by transferring shares to their buyers, there would have been scope for the buyers to have been entitled to a dividend tax refund under the rules of Danish tax law that I found to exist in SKAT (Validity Issues), supra. Provisionally, I consider the same would not be true for Article 12(1)(c). Its entire purpose, and effect, is to define limited circumstances in which a short seller will be considered to have sufficient cover for a trade that it ought not to be prohibited even though there is not, at the time of the trade, a final and binding right to acquire (in this case) a sufficient shareholding for the trade to settle. In SKAT (Validity Issues), however, I found that such a right in the seller was required for the contract accruals rule to treat the buyer as having become a shareholder for the purpose of Danish tax law. I do not need to make a final decision about that, however, because whether or not the sales here were covered short sales in terms of Article 12(1) of the SSR, they were not performed by any share transfer to the buyers.

To establish any given cause of action pursued against a trial defendant, SKAT had to prove, if it could, the necessary ingredients, as pleaded, of that cause of action, and any pleaded defence on which the defendant in question bore the burden of proof (e.g. time bar or contributory negligence, where either of those arose) had to fail. Without losing sight of that, a general allegation by SKAT was that defendants (a) must have realised that the equity buyers never acquired any shares, so (b) must have understood that those buyers could not be entitled to a dividend that might attract Danish dividend tax, and therefore (c) could not have thought that those buyers were or might be entitled to a tax refund from SKAT. Therefore, a main thread running through the trial, in submissions on the documentary evidence and in the trial evidence of the factual witnesses called by defendants, was the pursuit by SKAT, and the testing by defendants, of that allegation. Another main thread, in submissions on the documents and in the trial evidence of SKAT’s factual witnesses, was whether SKAT was misled, as it claimed to have been, in making decisions to pay out on the tax refund claims submitted to it. Inevitably with such a large trial and many different defendants, there were also specific points relevant only to some of the defendants and the claims pursued by SKAT against them. For the purpose of considering any and all points arising, however, the underlying invalidity of the tax refund claims submitted to and paid by SKAT was established.