Withholding-Tax Non-Compliance: The Case of Cum-Ex Stock-Market Transactions
39 Pages Posted: 29 Apr 2017 Last revised: 23 Feb 2019
Date Written: February 22, 2019
This paper explores withholding tax non-compliance in the context of dividend taxation. It focuses on a specific type of stock-market transactions around ex-dividend dates, so-called “cum-ex” trades, which have caused considerable revenue losses due to illegitimate tax refunds in Germany and other countries. We use a stylized model of the stock-market equilibrium to analyze the incentives of traders on the German stock market and find that cum-ex trades differ from tax arbitrage exploiting imperfections in the administration of the withholding tax: Cum-ex trades are only profitable for both buyer and seller in the presence of collusive tax fraud. Our analysis of market data for publicly traded German stocks from 2009 to 2015 confirms the theoretical predictions. We find an increase in transaction numbers shortly before ex-dividend dates due to cum-ex trading. In line with the collusion hypothesis, effects on stock-market prices are not found.
Keywords: Tax compliance; Tax evasion; Withholding taxes; Collusion; Tax fraud; Tax refunding; Cum-ex trades; Ex-dividend dates; Dividend taxes; Capital gains taxes
JEL Classification: H26, G12
Suggested Citation: Suggested Citation