French lenders are challenging tax authorities’ view on some dividend arbitrage strategies, after a raid across banks in Paris this week.
(Bloomberg) — French lenders are challenging tax authorities’ view on some dividend arbitrage strategies, after a raid across banks in Paris this week.
The French banking lobby Federation Bancaire Francaise (FBF) lodged a lawsuit at the nation’s highest administrative court, to request tax authorities to clarify which dividend arbitrage strategies require the payment of taxes, according to a person familiar with the procedure. Lenders argue that French fiscal authorities didn’t provide a clear guidance in an advance tax ruling – a written interpretation of the law – published last month.
An official for the court, the Conseil d’Etat, wasn’t immediately able to acknowledge the receipt of the FBF claim.
Paris prosecutors on Tuesday raided the offices of BNP Paribas SA, its unit Exane, Societe Generale SA, Natixis SA and HSBC Holdings plc as part of a probe into tax fraud and money laundering related to dividend arbitrage strategies known as Cum-Cum. Prosecutors from Germany, where the avoidance of tax payments on dividends has been a scandal for the best part of a decade, also took part in the raid. In addition to the criminal case, banks targeted by French prosecutors face total collective back taxes and fines of more than €1 billion ($1.1 billion).
Cum-Cum refers to a dividend arbitrage strategy where shareholders transferred stock for a short period to investors based abroad to avoid a dividend tax. Investors held the shares during the period when dividends were paid out and either weren’t taxed or taxes were refunded. They then sold the securities back to the original owner and the amount saved was split between the parties.
A similar scheme, known as Cum-Ex, allowed short-sellers and the actual holder of shares to all claim tax credits on a dividend paid only once.
A trader in a German Cum-Ex trial in 2019 told the court that Cum-Ex was five to six times more profitable than Cum-Cum. However, Cum-Cum was far more widespread, especially in interbanking trading, as the legal risks were deemed to be much lower.
–With assistance from Gaspard Sebag.
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