On August 31st, 2022, the Financial Times reported that JPMorgan’s Frankfurt’s office was raided by German prosecutors as part of a probe  into the multibillion dollar cum/ex scandal. After Barclays, Bank of America, and MorganStanley, JPMorgan is the fourth bank to be raided by the German authorities this year. Germany is not the only country to have been affected by the cum ex scheme. The scheme has also hit other countries like Belgium, Denmark, Switzerland and the Netherlands. Cum-ex transactions first came to light in 2011, when a whistleblower notified the German authorities. The so called “cum-ex files” was a broad investigation into cum-ex transactions by a journalism collective. Allegedly, a large network of banks, stock brokers and lawyers has been involved in defrauding several European tax administration billions of euros. Investigations into cum-ex transactions, and prosecution of parties suspected of being involved are ongoing in multiple European countries. In response to cum-ex transactions, many European tax administrations have become more diligent in processing withholding tax reclaims.

In short, a cum ex transaction involves three parties that move a share position around just before the dividend payment date. After the transaction, the shares end up with the same party whose position remains the same. A dividend tax refund is claimed not once but twice. As a result, the tax authorities end up levying dividend tax once but refunding it twice, leaving it out of pocket an amount equivalent to the dividend tax. Cum ex is often referred to as a tax evasion scheme but it is actually more than that. It is tax fraud and it is important for investors to be able to recognize cum ex transactions to avoid becoming part of one. For more detail on how a cum ex transaction works, please click here.

Cum ex transactions are sometimes confused with cum-cum transactions. In cum-cum transactions, securities (usually shares in publicly listed companies) are lent to a party with a better withholding tax reclaim position than the owner of the securities, right before a dividend distribution. The dividend is collected, the withholding tax is reduced or fully reclaimed, and the shares are returned by the borrower to the lender. The lender gets a substation payment or manufactured dividend and the gain, in the form of lower or no withholding tax, is shared between the lender and the borrower in a certain proportion. While cum-cum transactions are also (often, if not always) tax driven, there is a notable difference with cum-ex transactions. In cum-cum transactions, tax that would otherwise have been due is avoided (or evaded, which of the two it is, is debatable). This is often referred to as “dividend stripping”, or “dividend washing”. With cum-ex transactions, not only is the tax that would otherwise have been due not levied, but the tax authorities are actually paying out the amount they would otherwise have levied.