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Tax Engineering

What is dividends cum/ex trading scheme?


Question

What is dividends cum/ex trading scheme? Is it legal?

Answer

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A recent fraud scheme has alerted the fiscal agencies of all European Union countries. German tax authorities have uncovered a group of individuals, that included bankers, shareholders and traders, who came up with an illegal way of dividends repatriation. The name of this scheme is dividends cum/ex trading.

Is it legal to distribute the dividends through cum/ex scheme? Of course, NO. Tax agencies of all European countries persecute this kind of schemes and this technique is totally forbidden for any dividend’s repatriation.

How does dividends cum/ex trading scheme work?

A group of investors, let’s call them Investor 1, Investor 2 and Investor 3, because usually there are at least 3 of them, join together to carry out the fraud plan. They generally operate with offshore companies that have little taxation liability in the EU, enough to be able to claim tax refund.

The steps of the dividends cum/ex trading scheme are the following:

  • The Investor 1 has shares of a particular company listed in FTSE 20 that he bought long time ago for a total amount of 10 million EUR.
  • The Investor 2 buys 10 million EUR in shares of the same company, but the difference is that he buys them few days before this company decides to distribute the dividends among its shareholders. That is, the acquisition takes place just before the dividend record date, which is called “cum dividends”.
  • To execute the fraudulent scheme, the Investor 2 also buys the shares of the Investor 3, which he owns from the same company. But, the Investor 3 doesn’t have these shares yet. However, this is not a problem because the sahed can be handled in later. This type of purchase is called “short sale”.  

Then the company prepared for the repatriation of dividends between the shareholders and the following fraud takes place:

  • Imagine that the company repatriates 1 million EUR of dividends which correspond to the first Investor. He keeps 750.000 EUR for himself and other 250.000 EUR (25%) are paid as tax to the fiscal agency.
  • This Investor 1 receives a certificate from the corresponding tax agency for the payment of 25% of tax, that gives hims a right to request a refund of this payment in case this tax liability doesn’t correspond him.
  • Once the Investor 1 has this certificate, he sells the shares to the Investor 3 for 9.000 million (because after the repatriation of the dividends the shares cost less), who in its turn gives them to the Investor 2 (you remember that Investor 2 bought the shares from Investor 3 but never actually received them, right?). The shares that were sold by an Investor 1 to Investor 3 are called “ex dividend” because they were sold right after the company repatriated the dividends.
  • The Investor 3 handles the shares to the Investor 2, but since the Investor 2 bought them for 10.000 EUR and now its value is 9.000 EUR, the Investor 3 pays additional 750.000 EUR to the Investor 2 and for resting 250.000 EUR the Investor 2 receives another tax certificate from the fiscal agency.
  • In the end the Investor 2 resells the shares to the Investor 1 and everything returns back to how it was before.

The base of the fraud is that as a result of this scheme the state has charged once 250.000 EUR to the first Investor for the dividend tax. However, two certificates for tax refund have been issued for total value of 500.000 EUR. Once the Investor 1 and Investor 2 use the certificates and request a refund for this amount, the tax agency pays 250.000 EUR more than it should.

As you can see dividends cum/ex trading scheme is hard to detect due to the fact that this fraud is divided among 3 different people at least and many other members are involved.  



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