Withholding-Tax Non-Compliance: The Case of Cum-Ex Stock-Market Transactions

39 Pages Posted: 29 Apr 2017 Last revised: 30 Oct 2018

See all articles by Thiess Buettner

Thiess Buettner

University of Erlangen-Nuremberg-Friedrich Alexander Universität Erlangen Nürnberg

Carolin Holzmann

University of Erlangen-Nuremberg-Friedrich Alexander Universität Erlangen Nürnberg - Institute of Economics

Felix Kreidl

Friedrich-Alexander-Universität Erlangen-Nürnberg

Hendrik Scholz

Friedrich-Alexander-Universität Erlangen-Nürnberg

Date Written: October 28, 2018

Abstract

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 credits in a number of countries. We use a stylized model of the stock-market equilibrium to analyze the incentives of traders and show that cum-ex trades differ from tax arbitrage exploiting loopholes. Cum-ex trades can only be profitable for both buyer and seller in the presence of collusive non-compliance. Using the German experience with cum-ex trades as an empirical testing ground, 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, the results confirm the absence of effects on stock-market prices.

Keywords: Tax compliance; Tax evasion; Withholding taxes; Collusion; Tax fraud; Tax credits; Cum-ex transactions; Dividend taxes; Capital gains taxes; Price-drop ratio

JEL Classification: H26, G12

Suggested Citation

Buettner, Thiess and Holzmann, Carolin and Kreidl, Felix and Scholz, Hendrik, Withholding-Tax Non-Compliance: The Case of Cum-Ex Stock-Market Transactions (October 28, 2018). Available at SSRN: https://ssrn.com/abstract=2960015 or http://dx.doi.org/10.2139/ssrn.2960015

Thiess Buettner

University of Erlangen-Nuremberg-Friedrich Alexander Universität Erlangen Nürnberg ( email )

Lange Gasse 20
Nürnberg, Bavaria 90403
Germany

Carolin Holzmann

University of Erlangen-Nuremberg-Friedrich Alexander Universität Erlangen Nürnberg - Institute of Economics ( email )

Lange Gasse 20
Nuremberg, 90403
Germany

Felix Kreidl

Friedrich-Alexander-Universität Erlangen-Nürnberg ( email )

Erlangen-Nürnberg
Lange Gasse 20,
Nürnberg
Germany

Hendrik Scholz (Contact Author)

Friedrich-Alexander-Universität Erlangen-Nürnberg ( email )

Lange Gasse 20
Lange Gasse 20,
Nürnberg, 90403
Germany

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