Withholding-Tax Non-Compliance: The Case of Cum-Ex Stock-Market Transactions
39 Pages Posted: 29 Apr 2017 Last revised: 30 Oct 2018
Date Written: October 28, 2018
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: Suggested Citation