I find this cum-ex difficult to believe

Cum-ex and its variant cum-cum were highly complex share deals with no economic purpose other than to receive tax ‘reimbursements’ from the state – but for tax that had never in fact been paid. This is how it went. The participants would lend each other shares of major corporations, creating the appearance for the tax authorities that there were two owners of the shares when in fact there was only one. The bank which settled the trades would then issue a ‘confirmation’ to the investor that tax on the dividend payment had been paid to the tax office – when in fact it had not. With this confirmation in hand, the investors were then ‘reimbursed’ by the state. It’s a bit like parents claiming a child benefit for two – or more – children when there is only one child in the family.

I always seriously doubt the ability of journalists to understand financial markets. So I’m not sure I believe this.

The trick seems to be that because the shares were traded on the ex-dividend date then there are two owners of record? Is that right?

Then someone who is righteously dividend tax free – a pension fund say – applies for a rebate?

Is that it? That simple?

Or is it actually not quite that simple. Is it more like dividend washing into tax exempt recipients?

According to Frey, an equity trader at a US investment bank came across the trade accidentally. He had bought shares that were delivered four days later. This interval covered the dividend payment day of the company whose shares he had purchased. This profit is taxed in the domicile of the company (say, Germany). German shareholders can ask for this tax to be reimbursed because they have already paid corporation tax.

The report is long on who went where, who was disguised as what and all that. And very short on actual descriptions of the deals being done. Look at that. That make sense? A dividend isn’t a profit. A shareholder can’t ask for it to be repaid because they’ve paid corporation tax.

A shareholder that is a corporation might gain a credit against a dividend, maybe. But that’s the sort of crucial detail that is important, no?

The trader suddenly realised he had this tax payable in his book without actually owning the shares. The amount was £50 million. It was a very large trade.

The trader wanted to get rid of these funds that were not his. He approached the seller of the shares who had also been reimbursed his tax. The bank’s legal department sought professional tax advice to find out how to return the money to the tax office. The answer came back: “You can keep it.”

If he owes tax then how can he keep it?

I’m just not getting it.

What really worries is that the reporting on how the deal worked is so confused that I’m not sure those doing the reporting grasp it. Which means, well, if they don’t understand it well enough to explain then how can we be sure of what happened?

The general tenor seems to be that if there are two owners on the ex-div date then two tax refunds can be applieed for and they’ll be paid. If so, whose fault is that?


 Investor A (e.g. an asset manager) owns shares worth 20m in listed company X.
 Investor B now buys shares worth 20m from company X as well, just a few days prior to
company X paying out dividend to its shareholders. The shares bought by investor B are
characterized as cum-dividend shares, because these shares will provide the buyer with
dividend. Investor B buys these shares from investor C, who- critically- does not own these
shares himself yet. Investor C is ‘short-selling’, and promises investor B to deliver the shares
at an agreed time.
 Now company X pays out the dividend- worth 1m- to investor A, who receives €750.000,-
directly from company X and a certificate from his own bank to reimburse €250.000,- worth
of dividend tax which has been collected by the German tax authority. As a result, investor
A’s shares are now worth 19m (20m – 1m dividend).
 Investor A now sells these reduced-value shares, characterized as ex-divided shares, to
investor C.
1) Simplified figure representing the German cum-ex scheme
 As agreed before, investor C now delivers these shares to investor B. However, because they
are worth 1m less, investor C pays investor B a dividend compensation worth €750.000,- and
investor B’s bank provides him with a certificate to reimburse €250.000,- of dividend tax.
 Finally, investor B sells his shares (worth 19m) back to investor A. As a result, both investor
A and investor B now own a certificate to reimburse the dividend tax, even though the
German tax authority collected the tax only once.
 The additional reimbursed dividend tax is shared between investors A, B and C.

That does make sense. And now the lovely question – is it illegal?

Not that I’m a lawyer or anything but I would have thought in a common law jurisdiction then yes. But in a Roman Law one? Where they’re not working from general principles but only from the details written down?

During and after the cum-ex scandal was exposed, a so-called cum-cum scheme was used by investors
in Germany and beyond as well. For a cum-cum scheme, a minimum of two parties is needed,
although the traders cooperating in the scheme are often supported by a bank. Below a simplified
example how the cum-cum scheme works in practice.
 Investor A owns 20m in shares in company X but has no legal right to reimburse dividend
tax, e.g. because he is resident in a different country.
 Investor A temporarily sells his cum-dividend shares to investor B who does have the right to
reimburse the dividend tax. Such a temporary sale is known as a ‘loan’.
 Investor B then receives €750.000,- in dividend payments from company X and a certificate
to reimburse €250.000,- worth of dividend tax.
 Investor B sells the shares ex-dividend, now worth 19m, back to investor A, who retained the
contractual right to buy back his shares. Through this construction, investor A retains his
shares, without suffering the negative consequence of losing €250.000,- on the total value of
his shares because he cannot reimburse the dividend tax. Investor A pays investor B a
compensation for his help.

And can’t see that as being illegal at all. Nor even immoral to be honest.

12 thoughts on “I find this cum-ex difficult to believe”

  1. Pingback: Banker rhymes with what likely word? - Hong Kong Forums - GeoExpat.Com

  2. Tim, I think that you can clear up the issue but by adding that investor B, resident in Germany, gets a certificate that entitles him to get a reimbursement of the withholding tax paid on the dividends.

    The only loser in this case is the German Tax authorities, and we all feel so sad for them having to be out of pocket.

    This used to be an issue with Shell A and B shares.

  3. Incidentally, my head hurts. Why are all these people paying dividend taxes but then suddenly being able to get the money back from the tax authority? I never get any of my taxes back from HMRC.

  4. The flaw is here:

    investor B’s bank provides him with a certificate to reimburse €250.000,- of dividend tax.

    Why is B’s bank providing a dividend reimbursement certificate, when B never actually owned the shares on the given date? This sounds like shoddy IT/accounting systems at B’s bank, not a tax loophole.

  5. Andrew M; investor B does own the shares when they go ex – but they are obliged to sell them back to A after that, due to the repurchase agreement.

    Investor B receives the divi as they are on the register at the ex date. Quite why his “bank” is issuing a certificate, as opposed to the registrar, god only knows.

  6. “The trick seems to be that because the shares were traded on the ex-dividend date then there are two owners of record? Is that right?”


    If there are two owners of record, at the registrar, for the same shares, then the registrar should notice that the total share holdings reported on the register is over the number issued and outstanding. If they don’t, and I wouldn’t put it past some of them, then they’ve fucked up and will be on the hook.

    When the cheques go out, the issuer will suddenly discover that they’re a bit light on the cash front. There will be more than few people engaging in some full and frank discussions quite quickly.

    Anyway, there’s the ex-date, but the shares will be trading ex at the open on the following trading day. Delivery will be T+3 (not sure where T+4 comes from, could just be a balls up, could be the Hun being unusually inefficient), so market counterparties have got three days to sort themselves out.

    Payment dates can be some weeks after the trades are settled.

    So, for the strategy to exist for the above reason, every possible registrar and issuer, and probably tax authority, would have to be wildly incompetent, consistently.

    Seems a bit difficult, that.

  7. The gap between the shares going ex-div is usually more than a few days, which helps to contain such situations and preventing them. Mostly it is around a month. One company I know regularly has a gap of 12-14 days but that is very exceptional.

  8. Basically: When you can play with large sums of money using complicated rules, you *can* pull the tablecloth fast enough…

  9. There used to be a perfectly legal scheme where a fund (e.g a Pension Fund) that was not liable to tax on income would buy the gilt/bond/share cum-dividend from another fund that was liable to tax on dividends and then sell it ex-dividend to a different taxable fund so both taxable funds avoid paying tax on the coupon/dividend. Since gilts held for more than one year were exempt from CGT a taxable fund that bought a gilt-edged stock ex-dividend and sold it 366 days late “special cum-dividend” could make a tax-free gain [it would have to pay tax on the middle dividend but only on that].
    Definitely tax avoidance rather than evasion.
    Buying company shares cum-dividend and selling them ex-dividend can be used by tax-exempt funds to take a thin slice of difference in tax rates on income and capital gains as the difference between cum- and ex-dividend prices is somewhere between the gross and net values of the dividend.
    Reclaiming tax that you haven’t paid is quite simply fraud and get a jail sentence.

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