Germany is not the only country to have been affected by the cum ex scheme. The scheme has also hit other countries like Belgium, Denmark, Switzerland, and the Netherlands.
Cum-ex transactions first came to light in , when a whistleblower notified the German authorities. Allegedly, a large network of banks, stock brokers, and lawyers has been involved in defrauding several European tax administrations of billions of euros. Investigations into cum-ex transactions and prosecution of parties suspected of being involved are ongoing in multiple European countries. In response to cum-ex transactions, many European tax administrations have become more diligent in processing withholding tax reclaims.
In short, a cum ex transaction involves three parties that move a share position around just before the dividend payment date. After the transaction, the shares end up with the same party whose position remains the same. A dividend tax refund is claimed not once but twice. As a result, the tax authorities end up levying dividend tax once but refunding it twice, leaving it out of pocket an amount equivalent to the dividend tax.
Cum ex is often referred to as a tax evasion scheme but it is actually more than that. It is tax fraud and it is important for investors to be able to recognize cum ex transactions to avoid becoming part of one. For more detail on how a cum ex transaction works, click here. Cum ex transactions are sometimes confused with cum-cum transactions.
In cum-cum transactions, securities usually shares in publicly listed companies are lent to a party with a better withholding tax reclaim position than the owner of the securities, right before a dividend distribution.
