Cum-Cum Trading Explained: What You Need to Know

What is Cum-Cum? 

Cum-Cum trading is a practice that involves shareholders moving stock to someone in another country in order to avoid paying a dividend tax.

The name Cum-Cum comes from the Latin for “with-with’’. While Cum-Cum is closely associated with Cum-Ex – which involves the transfer of shares to enable multiple tax rebate claims – it is a different activity.

In Cum-Cum transactions, a person who is not resident in the same country as the company in which they hold shares transfers the shares to someone based in that country.

This is done before a dividend is set to be paid on the shares. The shares are then returned to the original owner after the dividend has been paid.
This is done to exploit the different tax regulations that apply to resident and non-resident taxpayers.

How does Cum-Cum work?

To give an example of how this fraudulent trading scheme works:

• On a date before the share dividend is due to be paid, foreign investor F sells his share in corporation C to bank B. This sale is done at price P.
• When a dividend in the amount of D is paid on the shares, it will go to B. But B must then pay a dividend withholding tax, T.
• As a result, B receives D-T and also receives a capital gain tax certificate.
• The gain from the taxable dividend of D is reduced by a capital loss in the same amount once the bank then sells the share back to F at a price of P – D.
• As the bank has then made zero taxable profit, it receives a full refund for T.
• This procedure means that F has achieved a gain equal to the dividend, which is then usually shared with the bank.

The majority of Cum-Cum transactions involve this practice of securities lending - where the owner of shares or bonds transfers them temporarily. There is a variation of this that sees the two parties entering into a non-cash lending agreement.

In this situation, the bank borrows the shares from an investor and agrees to return shares of the same quantity, quality and type upon termination of a security loan, in a way that enables the investor to obtain a tax-free dividend on the shares.