Analysis
13 January 2022

CumEx files, from tax optimization to tax fraud?

A look back at the revelations of the "CumEx files" and key take aways on these practices of tax optimization by dividend arbitrage that may soon be qualified as tax fraud.

 

Among the 50 most influential people of the year 2021, Bloomberg readers could discover a remarkable figure: Anne Brorhilker, Attorney General of Cologne. Her battle: fighting against the so-called “CumCum” and “CumEx” practices, dividend arbitrage strategies that allegedly enabled more than a hundred billion euros to be stolen from various European tax authorities.

These strategies aim to elude or evade taxes on dividends by means of quick transfers of company shares, or even to obtain refunds on taxes that were never paid.

Today, investigations are progressing across Europe, and some believe that these widespread practices may lead to numerous tax reassessments and criminal prosecutions.

 

I.  “CumEx Files” Scandal

Dividend distributions are subject to taxes in most countries, in France a flat tax of 30%. Nevertheless, to attract foreign capital, many states, including France, allow for more favorable taxation of dividends distributed abroad. Depending on the country and the tax treaties in effect, a foreign shareholder may be taxed at only 15, 10 or even 0% on dividends received, as is the case in Qatar, for example[1].

Consequently, strategies have been put in place to reduce the tax impact on the perception of dividends.

Among these tactics, “CumCum” practices are the simplest and most widespread ones and refer to the transfer of securities “with” (cum in Latin) dividends. The strategies consist in briefly transferring the ownership of securities to a person residing in a country benefiting from an advantageous tax regime on dividends, while waiting for the payment of dividends. Once the payment is made, the securities and dividends are returned to the “beneficial” owner. The beneficial owner then receives tax-free dividends in return for a commission paid to the intermediary. The owner of the securities has thus avoided paying taxes on dividends.

Alongside these “CumCum” strategies, the “CumEx” practices have also emerged. Invented by the German tax lawyer Hanno Berger, now residing in Switzerland and subject to a pending extradition request by the German authorities, these practices consist in passing securities from one person to another very quickly, so that several people appear to be the owners of these securities. Each of these individuals then claims a tax credit on the profits attached to the dividends or a refund on the dividend withholding tax. This, even though they did not or will not pay that tax[2].

These “CumCum” and “CumEx” practices were brought to light by the investigative work of a group of international media (the so-called “CumEx Files”) and raised a scandal in several European countries.

 

II.  Potential criminal repression of dividend arbitrage practices in France

It appears that the use of of such “CumEx” practices in France has been limited because of existing French tax rules, and in particular due to the abolition of the tax asset method (méthode des avoirs). However, several large banks were reportedly, as early as 2017, suspected by the French tax authorities of having used “CumCum” strategies[3]. These practices are said to have cost France 33 billion euros over more than a decade[4].

In a context of tightening European control over these practices, many believe that “CumCum” strategies, like “CumEx” practices, could lead to criminal proceedings in France in a near future.

The facts are often well established, albeit complex. It is therefore on the legal qualification of the facts that the proceedings will focus, and in particular as to whether such practices constitute tax fraud. The natural and legal persons having benefited from such practices could be prosecuted as principal perpetrators, while the banks and financial advisors and institutions having provided aid or assistance to such practices could be prosecuted as accomplices.

In any case, the criticism of “CumCum” practices is part of a more global movement of increasing penalization of tax law. With the end of the monopoly of the French tax administration on initiating tax enforcement proceedings, tax fraud prosecutions have increased significantly, and have thus doubled between 2018 and 2019[5]. Hence, a penalization of these practices seems to be a realistic possibility in the future.

Related content

Press review
24 May 2024
Press review – Week of 20 May 2024
This week, the press review covers the fine imposed on bank company N26, the trial of EDF and its former...
Press review
17 May 2024
Press review – Week of 13 May 2024
This week, the press review covers the death of Renaud Van Ruymbeke, the conviction of former Mayor of Toulon for...
Event
16 May 2024
Anticorruption initiatives in Latin America: Lessons from the last decade (webinar)
To contribute to the Latin America and Caribbean Weeks event, organised by the French Ministry of Europe and Foreign Affairs...
Publication
14 May 2024
LIR 6th Edition : Focus on ADP INGENIERIE and SEVES Group/SEDIVER CJIPs
Navacelle contributes to The Legal Industry Reviews' sixth edition, focusing on the last two CJIPs (kind of French DPAs) concluded....
Analysis
6 May 2024
Overview of the future European Anti-Money Laundering Authority
The new Authority for Anti-Money Laundering and Countering the Financing of Terrorism will be based in Frankfurt and shall start...
Press review
3 May 2024
Press review – Week of 29 April 2024
This week's press review focuses on the indictments of Arnaud Lagardère for misuse of company assets and abuse of power,...
Press review
26 April 2024
Press review – Week of 22 April 2024
This week, the press review covers the European Parliament’s adoption of the Corporate Sustainability Due Diligence Directive, the definitive conviction...
Press review
19 April 2024
Press review – Week of 15 April 2024
This week, the press review covers the publication of TRACFIN’s 2023 report on professionals’ suspicious transaction reports, the decision of...
Press review
12 April 2024
Press review – Week of 8 April 2024
This week, the press review covers the Panama Papers trial which opened on Monday, 8 April, the decision rendered against...
Press review
5 April 2024
Press review – Week of 1 April 2024
This week, the press review covers the conviction by the American justice system of the crypto assets platform FTX‘s former...
Press review
29 March 2024
Press review – Week of 25 March 2024
This week, the press review covers the opening of proceedings against Google, Apple and Meta by the European Commission for...
Press review
22 March 2024
Press review – Week of 18 March 2024
This week, the press review covers the report of the French Court of Auditors on the financial situation of the...