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Rapid Response Team: 0800 559 3500
Switchboard: +44 (0)203 947 1539
Rapid Response Team: 0800 559 3500
Switchboard: +44 (0)203 947 1539


Author: Syedur Rahman  24 November 2020
4 min read

Syed Rahman of Rahman Ravelli details the main points from the European Securities and Markets Authority report on withholding tax schemes.

Following a formal inquiry by the EU Parliament into withholding tax (WHT) schemes, the European Securities and Markets Authority (ESMA) produced a report.

The report detailed the findings of the formal inquiry (under article 22(4) of the ESMA Regulation concerning Cum-Ex schemes); providing an updated analysis on this subject and building on its July 2019 report. 

Among other things, ESMA:

  • Outlined the general functioning of dividend arbitrages and WHT schemes.
  • Described the experiences of national competent authorities (NCAs) regarding their market surveillance activities and any specific analysis carried out at a national level to assess the presence and the impact of WHT schemes in their jurisdictions.
  • Collected information from NCAs on the status of current criminal investigations across the EU.
  • Considered WHT schemes from the perspective of regulated firms' obligations under the MiFID II legal framework. Particular reference is made to the obligation for investment firms to ensure they act honestly, fairly, professionally and in a manner that promotes the integrity of the market and also to the requirements regarding the suitability of their management bodies, whose members are required to act with integrity.

ESMA concluded that WHT schemes are primarily a tax-related issue, meaning a response should be mainly sought within the boundaries of the tax legislative and supervisory framework. As part of its inquiry, ESMA identified a number of measures adopted by various member states to limit the risk of WHT schemes.

In its report, which was published in September, ESMA recommended legislative change to remove the legal limitations on NCAs exchanging information with other NCAs and the tax authorities. Additionally, it said a common legal basis should be developed to ensure a consistent approach on the exchange of information directly acquired by NCAs in their supervisory activity with tax authorities.

ESMA also identified best practices taken from the experience of those NCAs that, because of an extended reach under national legislation, carry out supervisory activity for WHT schemes.

ESMA considered whether any potential solution to contribute to the detection and prosecution of WHT schemes could be achieved through an amendment to the Market Abuse Regulation (596/2014) (MAR). It included the outcome of this analysis in a dedicated section in its final MAR review report, which it submitted to the European Commission.

The Implications

While it does not fall within the remit of ESMA to assess what is illegal, the report argued that “Cum-Ex schemes may represent a fraud, as they involve a false representation to tax authorities in order to receive a reimbursement of a WHT which was not paid in the first place.’’

Notwithstanding this, the report also stated that trading shares in a way that is favourable in a tax jurisdiction to “obtain a tax refund on tax which was actually paid, may well not be a fraud”.

The report acknowledged that the legality of Cum-Ex practices is not the subject of ESMA’s assessment. Instead ESMA has offered an EU-wide updated picture of the structure and distribution of Cum-Ex schemes from the securities regulators’ perspective. This was with a view to identifying gaps, best practices and potential solutions when it comes to identifying and preventing multiple WHT reclaims. 

ESMA has also encouraged NCAs to carry out an enhanced legal analysis and to remove legal limitations to exchanging information with tax authorities. The report encourages cooperation between NCAs within the EU. 

Potential amendment to Market Abuse Regulation 

While ESMA has indicated that the multiple WHT reclaim schemes do not typically involve violations of the Market Abuse Regulation, the report highlighted concerns that the practice is incompatible with market integrity. 

ESMA has recommended that the Market Abuse Regulation is amended in the following ways:

  1. To give NCAs the power to investigate and sanction unfair practices carried out by regulated entities that ultimately cause a threat to the integrity of the financial markets as a whole. This goes beyond insider trading and market manipulation.
  2. Should an NCA suspect that a regulated entity’s practice may represent a threat to the integrity of the financial markets, (such as the use of multiple WHT reclaim schemes), it should be entitled to scrutinise the matter further, using traditional market surveillance tools.
  3. To grant NCAs the opportunity to cooperate and share information with tax authorities upon request, including an exchange of information across the EU.
  4. Where an NCA concludes that a regulated entity’s practice may represent a threat to the integrity of the financial markets, it should be given the power to request that the regulated entity ceases that activity and to issue adequate sanctions;

What steps can corporates/regulated entities take following the ESMA findings? 

What needs to be appreciated here is that capital markets are global; trades cross borders in milliseconds. With ESMA recommending a legal format for European countries to exchange information and for securities regulators to cooperate with each other, this will only enhance their investigatory powers. The regulators in their respective countries will be in a position to identify what they consider “bad practices”. With this is mind, there is no doubt that NCAs will create frameworks so that corporate entities can face allegations that relate to threatening the integrity of the financial markets.

The international nature of capital markets will be capable of prompting multi-agency and multi-jurisdictional investigations where there are suspicions of unethical trading. We are already aware of Cum-Ex trading schemes and WHT reclaims. The “bad practices” referred to by ESMA could, among other things, include, the use of “reverse market schemes” and “Cum-Cum” trading. 

Internal investigations 

Any fraud prevention system is only as strong as its weakest link. Where there are concerns, regulated entities should consider how to best determine the exact nature of the problem. Corporate entities and their directors or in-house counsel will have to consider the best course of action, and how to minimise any damage.

An internal investigation into an area that may have cause for concern is the most appropriate step to take. 

A successful internal investigation will depend on the following:

  • A robust legal strategy to ensure that the regulated entity is in a position to stand up to any scrutiny from the securities regulators, such as the Financial Conduct Authority (FCA). 
  • The collection, preservation and management of documentation and evidence.
  • A systematic review of the evidence.
  • Decision making if and when findings need to be reported to regulators in order to secure credit and a reduced penalty.
  • Proposals for improvement from an internal perspective, such as educating staff on poor practices and providing practical advice. 


It is clear that companies and regulated organisations will be facing further legal and regulatory scrutiny. ESMA did not make clear what potential penalties and sanctions should be imposed for bad practices but they are likely to be substantial. 

If a company knows or suspects unfair trading practices, a proactive approach should be taken. This will enable corporate entities to effectively manage, mitigate and take control in addressing the problem from a legal and regulatory perspective. 

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Syedur Rahman is known for his in-depth experience of serious fraud, white-collar crime and serious crime cases, as well as his expertise in worldwide asset tracing and recovery, international arbitration, civil recovery, cryptocurrency and high-stakes commercial disputes.

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