The looming scandal involving cum-cum transactions

Readers will no doubt be familiar with the cum-ex tax fraud scandal that has been making waves across Europe (see, for example, our recent article The cum-ex scandal explained: the enforcement net widens). There is another related, but different, potential scandal on the horizon, involving another type of trading strategy commonly known as ‘cum-cum’ (Latin for ‘with-with’). The sums involved have been said to dwarf even those at stake in relation to cum-ex. To date ‘cum-cum’ transactions have received much less attention, but may also soon embroil financial institutions, corporates, lawyers and other professionals in civil and/or criminal proceedings.

What is cum-cum?

So, what is cum-cum and how is it different from cum-ex? While there are different types of arrangements across different jurisdictions, at their heart, cum-cum and cum-ex arrangements share the same basic goal: to achieve a beneficial outcome in relation to the treatment of withholding tax on dividends paid by companies in various European jurisdictions, by means of the structured transfer of shares around dividend payment dates.

However, while cum-ex fraud sought to achieve a benefit by means of multiple reclaims of the same withholding tax, often involving complex transactions carried out in such a way so as to obscure beneficial ownership of the shares, cum-cum is arguably a simpler concept.

A typical cum-cum transaction would involve the transfer of shares from an existing shareholder to a recipient who is resident in a country where the rate of dividend withholding tax is lower (and may even be a resident of the same jurisdiction as the company paying the dividend). Such a transfer would take place before the dividend record date (the date for determining who is on the share register and, therefore, entitled to a dividend). A dividend would then be paid with no, or a reduced rate of, withholding tax. The shares would subsequently be re-transferred to the original shareholder after the dividend record date. The intention was to achieve a reduction or avoidance of withholding tax, with the financial benefit shared between the counterparties to the trade.

What are the authorities doing in response?

It is fair to say that to date action in relation to cum-cum arrangements has been noticeably slower than in relation to cum-ex. For instance, we have not yet seen any of the high-profile criminal prosecutions that have taken place in Germany in recent years. However, that picture may be changing and there are signs that activity is underway.

For example, in March 2023, in what was described as their biggest ever raid, French financial prosecutors searched the offices of a number of large banks seeking further information and documentation in relation to cum-cum trading strategies.

It is difficult to put an overall number on the potential financial impact of cum-cum trades as matters presently stand. It has been reported that the recovery sought by the French authorities in relation to the above investigation is around €2.5bn. A report based on research from the University of Mannheim, conducted in partnership with the research network CORRECTIV, estimated that potential tax revenue losses relating to cum-cum transactions in 10 countries amounted to a staggering €141bn between 2000 and 2021 (and that was said to be on the basis of conservative estimates). There is clearly a lot at stake here.

From a UK perspective, the UK does not levy withholding tax on dividends and so cum-cum transactions would not have caused any loss to the UK exchequer per se. However, that is also the case for cum-ex; and again, given London’s status as a financial centre, many UK-based institutions and professionals are likely to have been involved in these arrangements in one way or another. The recent Supreme Court decision in the case brought by the Danish tax authority (SKAT) in relation to the cum-ex scandal may also embolden foreign authorities to take action in the UK.

It remains to be seen, however, in which direction the looming scandal will proceed. On the basis of the numbers above, authorities will clearly be interested in taking action. However, in certain quarters, it has been said that cum-cum sits in more of a legally grey area than cum-ex and has not been viewed as criminal, or even fraudulent, to the same extent. Authorities may not share that view and so it may not stop them from launching prosecutions; but even if they do not, regulatory action and civil proceedings seem inevitable. Anyone involved will very much be watching and waiting.

Stewart Hey is a partner, Hugh Gunson is a partner and Rachel Warren is a legal director at Charles Russell Speechlys
charlesrussellspeechlys.com