CDR Magazine quotes Stewart Hey on the cum-ex scandal

The cum-ex scandal has been making headlines for years and the sums involved are eye watering – estimated to be in the region of 55Billion Euros.

The cum-ex scheme involved the trading of shares for the purpose of claiming multiple refunds of the same withholding tax. In the affected European countries withholding tax was levied on the payment of dividends. However, certain investors were entitled to reclaim such withholding tax (typically under a double tax treaty). The scheme sought to exploit the refund system by arbitraging the time lag between executing a share sale and its settlement around dividend record dates (the date for determining who is on the share register and entitled to a dividend).

By way of a very simplified summary, one investor would agree to a short sale of shares (i.e., a sale when it did not own the shares) to another investor immediately before the dividend record date (when the shares were ‘cum dividend’). However, the settlement process meant that the shares would be delivered to the new investor shortly after the dividend record date (when the share was ex-dividend). To fulfil that transfer, the short seller would need to borrow the shares from a third party (who actually owned the shares at the dividend record date), and also pay a further amount to compensate for the dividend that had been paid.

Stewart Hey, Partner, explains to CDR Magazine:

The rapid nature and close proximity of these transactions resulted in it being unclear to the tax authorities who owned the shares at the relevant time. Although tax was only paid once, multiple parties would reclaim it. Complicated structures were put in place - sometimes purportedly legitimised through accompanying written advice from professional service firms including lawyers and accountants/tax advisers – involving multiple share transfers around the dividend record date, thereby facilitating large numbers of tax reclaims. While the arrangements were undoubtedly artificial, it is reported that many institutions were advised at the time by lawyers that the trades were a legitimate means of exploiting what was effectively a deficiency in tax laws.

Read the full piece in CDR Magazine here.