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Cum-Ex Trading Schemes Explained & FAQs

The Cum-Ex scandal (sometimes referred to as the "German Dividend Tax Scandal" and "The Cum-Ex Files") is a rapidly-widening cross-border tax fraud probe that is taking in dozens of financial institutions and many individuals.

What is the German Cum-Ex Tax scandal?

The Cum-Ex scandal (sometimes referred to as the "German Dividend Tax Scandal" and "The Cum-Ex Files") is a rapidly-widening cross-border tax fraud probe that is taking in dozens of financial institutions and many individuals.

 

Click play below to listen to this article...

 

What does "Cum-Ex" stand for, and what does it mean?

Cum-Ex (also referred to as "Cum Ex" or "Cumex") is the name given to a huge volume of transactions prior to 2012 that involved exploiting a loophole on dividend payments that enabled a number of parties to claim the same tax refund. It has also been called dividend stripping.

Banks and stockbrokers rapidly traded shares with ("cum") and without ("ex") dividend rights, in a way that enabled them to hide the identity of the actual owner. This meant that they could agree to sell a company stock before the dividend was paid out but then deliver it after the dividend had been paid. This tactic enabled both parties to claim tax rebates on capital gains tax - a tax that had only been paid once – and rapid trading between various parties could give the appearance of numerous owners, creating large profits.

 

What is the estimated size of the Cum-Ex scandal?

German authorities believe this has cost that country’s treasury 10 billion euros in lost revenue. But there may be more than ten other European countries affected; with estimates saying around 55 billion euros may have been lost to those nations’ treasuries.

With a number of banks having been raided as part of Europe’s growing Cum-Ex scandal, investigators are focusing on precisely how (and by whom) the loophole was exploited to benefit so many.

 

How does a Cum-Ex trading scheme work?

Generally speaking, three or more parties are needed for a successful Cumex scheme.

A simplified summary example:

  1. Investor A owns shares in Company X worth 20 million euros.
  2. Investor C sells shares worth 20 million euros to Investor B without owning them himself (short selling).
  3. Investor A receives a dividend payout of 750,000 euros (total dividend - 1 million euros).

    After payout, Investor A's shares are worth 19 million euros.
  4. Investor A receives a tax certificate to reimburse 250,000 euros of dividend tax.
  5. Investor A sells shares worth 19 million euros to Investor C.
  6. Investor C delivers shares worth 19 million euros to Investor B and pays him an additional 750,000 euros.
  7. Investor B sells shares worth 19 million euros back to Investor A.
  8. Investor B receives a tax certificate to reimburse 250,000 euros of dividend tax.

    Investor A, B & C share the tax reimbursements.

 

The infographic below explains the steps involved in a simplified German "Cum-Ex" trading scheme:

Simplified German Cum Ex Scheme v2
Sources/Credits: European Parliament https://www.europarl.europa.eu.

 

About Cum-Ex Investigations

Excerpt From Article: Cum-Ex and Beneficial Ownership of Shares
By author: Legal Director at Rahman Ravelli (20/12/2019) Read the full article here. The article was also featured on Lexology.com.

While investigations into Cum-Ex are still at a relatively early stage, any examination of the beneficial ownership of shares is likely to focus on whether or not beneficial ownership was actually transferred. In the context of Cum-Ex transactions, beneficial ownership of the shares and the rights this carries includes:

  • the right to share in the company's profitability, income, and assets.
  • a degree of control and influence over company management selection.
  • pre-emptive rights to newly issued shares.
  • general meeting voting rights.
The Cologne tax court recently held that under German law, in the case of an over-the-counter short sale, the share purchaser would not become the beneficial owner of the shares to be delivered at a later stage at the settlement of the purchase agreement.

It remains to be seen just how the UK is affected by the developing Cum-Ex investigation. In the UK, the issue of beneficial ownership of shares was addressed in J Sainsbury Plc v O’Connor [1990], in which Millett J said beneficial ownership was “more than equitable ownership. It requires more than the ownership of an empty shell bereft of those rights of beneficial enjoyment which normally attach to equitable ownership.

 


WEBINAR: The Cum-Ex Files: Taking a close look at all aspects of Europe’s biggest-ever tax investigation

30th September 2020

The response of enforcement agencies to Cum-Ex was analysed in depth during Rahman Ravelli’s online event examining the rapidly-developing, Europe-wide tax investigation.

Watch Recording

 

"Cum-ex Trading Scandal Explained"

By Syedur Rahman

Cum-ex Trading Scandal Explained

Cum-Ex / German Tax Scandal Related News & Articles:

Read more Cum-Ex related media coverage and news here.

 

Are you are looking for help or advice in relation to Cum-Ex?

If you are facing a national or international Cum-Ex investigation, you need assistance from those who can quickly discover the full situation on your behalf. By examining your position and the opinions of the investigators, we can give carefully-considered, expert advice on exactly what to do next. Rahman Ravelli's team of Cum-Ex Lawyers are expertly placed to help.

Rahman Ravelli has decades of experience in assessing the problems facing clients and devising the course of action that will gain the best possible outcome. We understand that the best way forward may not always be clear to clients who are facing an investigation. But we identify what that way is for you, and make sure the best steps are taken to protect your interests and your reputation.

Read more about our expertise in relation to Cum-Ex Investigations.

salome lemasson 18

Salomé Lemasson

Of Counsel Head of EU Business Crime and Regulatory Practice Group

salome.lemasson@rahmanravelli.co.uk
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Salomé works on Europe’s most challenging and significant white-collar and complex crime cross-border cases. She leads Rahman Ravelli’s EU Business Crime and Regulatory Practice Group, representing and advising companies and individuals in high-stakes investigations.

A powerhouse and go-to firm for big players in need of representation. Comprehensive. Unbeatable. Exceptionally good.
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Legal Articles

The FCA’s Approach To Cum-Ex
Syed Rahman of Rahman Ravelli details the Financial Conduct Authority’s case against Sapien Capital Ltd in relation to Cum-Ex trading

5 min read - Published May 2021
ESMA and CUM-EX
Syed Rahman of Rahman Ravelli details the main points from the European Securities and Markets Authority report on withholding tax schemes.

4 min read - Published Nov 2020

Events

The Cum-Ex Scandal: Will US Prosecutors Elbow In To Europe’s Greatest Tax Fraud?

This webinar will explain briefly the history and scope of what led to this scandal, and explain the risks of enhanced US enforcement efforts.

30 September 2021

The Cum-Ex Scandal: Will US Prosecutors Elbow In To Europe’s Greatest Tax Fraud?