On March 28, five major banks (BNP Paribas, Société Générale, Natixis, HSBC and Exane, a subsidiary of BNP Paribas) were raided as part of preliminary investigations, opened in 2021, for suspicion of tax evasion and money laundering. of tax evasion. Ordered by the National Financial Prosecutor’s Office (PNF), these investigations target dividend arbitrage practices widely exploited by banks: the “CumCum” and the “CumEx”.
Dividend arbitrage is a popular tax avoidance technique that benefits foreign shareholders. Banks temporarily (just before the dividend payment period) transfer ownership of shares from one customer to another customer residing in a low-tax jurisdiction. The tax savings achieved through this transaction are then shared between the bank and the customer.
In France, the tax authorities withhold up to 30% tax on dividends paid by French companies to foreign shareholders, depending on the shareholder’s tax residence. Dividend arbitrage therefore makes it possible to reduce, or even completely avoid, French tax deductions on dividends. Taken to the extreme, it even allows certain foreign shareholders to ask the French tax authorities for tax refunds that have not necessarily been withheld from their dividends.
CumCum: A legal but potentially abusive practice
The CumCum makes it possible to escape all or part of the tax levied by the French State on the dividends paid to foreign shareholders of a French company thanks to two types of financial arrangements. The first, internal, consists of transferring the shares to a French resident, most often a bank, which collects the dividends before paying them back to the foreign investor. Indeed, banks as a company benefit from more advantageous taxation than individuals.
The second, external, consists of transferring the shares of the foreign investor to another foreign investor, who might also be a bank, residing in a country with which France has signed a favorable tax treaty. These two types of arrangements, in which banks play a key role, allow the investor to make tax savings and only have to pay a commission in exchange for the service rendered.
While tax optimization via CumCum does not violate the law, the misuse that is made of it raises ethical questions. In this regard, provisions were made in France, in 2019, qualifying as abuse of rights, CumCum transactions having a “mainly” and not only “exclusively” fiscal purpose.
France has also ratified a multilateral convention, developed under the aegis of the Organization for Economic Co-operation and Development (OECD), making it possible to refuse the advantages of tax treaties when one of the main purposes of the financial arrangement is to obtain an undue tax advantage. Carrying out a CumCum transaction for an essentially tax purpose therefore constitutes, at least since 2019, an “abuse of rights” liable to sanctions.
From potentially abusive to definitely fraudulent: CumEx
The CumEx allows several foreign shareholders to request tax refunds from the French State (tax which has either never been withheld or withheld only once). The CumEx is possible due to the high number of exchanges of shares between different people, shortly before the payment of the dividends, making it difficult, if not almost impossible, for the tax authorities to identify the “real” owner of the shares. Concretely, the arbitrage of dividends via the CumEx therefore constitutes an illegal practice whose main objective is to dupe the tax administration.
In 2018, a survey, known as the CumEx File and led by an international consortium of journalists (including The world and the German daily The time), had exposed the CumCum and CumEx transactions to the light of day. According to this survey, the loss of revenue over 15 years for several European countries (including France and Germany) would amount to 150 billion euros. The damage for the French State amounted to 33.4 billion euros. Given the complexity and multiplicity of financial arrangements, using in particular rapid short sales, the CumEx remains difficult to prove.
How to distinguish the legal from the abusive?
If the practice of arbitrage of dividends with a view to tax optimization is legal, it can be considered as particularly borderline from an ethical point of view. The banks defend their use of CumCum transactions, which are widely used in financial circles, by pleading for their strict compliance with the tax rules in force. According to Étienne Barel, Deputy Chief Executive Officer of the French Banking Federation, share lending also meets a real economic need for corporate financing or financial market fluidity.
According to him, imposing too strict rules on French banks on this type of operation would amount to weakening them once morest their foreign competitors, thus damaging the competitiveness of the Paris marketplace. We can imagine that the arbitrage of dividends, done in an ethical spirit, can indeed benefit the French economy by allowing quick and easy access to resources and maintaining a certain competitiveness, but this does not seem to be its main motivation.
In this context, the question remains how to distinguish the legal from the abusive? Especially when it comes to a financial arrangement mobilized throughout the year and more particularly in the periods preceding the payment of dividends? Does the government really have the means of control necessary to distinguish sales for tax purposes and others? And then if this mechanism remains recognized as legal, is it moral? Our research shows that respecting the rules does not prevent the pursuit of opportunistic objectives or the hiding of realities under the guise of technical compliance.
How to prevent or sanction the CumEx?
With regard to CumEx, the ethical question arises less since the practice in question is clearly fraudulent and reflects an outright tax fraud. Here, the issue is rather in the aspects of control. The practice of CumEx is possible because the speed of technological tools, the complexity, the number of transactions and tax jurisdictions mean that the tax administration is not able to identify the real owner of the shares. How then to prevent or sanction the CumEx? Our research shows that the digitization of trading activities and their increasing complexity have made not only their control complicated but also their moral condemnations.
The limited aspect of controls also leads one to reflect on the consequences of CumEx practices on professional ethics. In debit of their illegality, the latter can indeed be collected in banks or firms specialized in tax optimization as commonly accepted. In this context, we can also wonder regarding the political will and the means necessary to limit their preponderance. The research establishes that some technological developments might help reduce the incidence of financial fraud, but others – such as the anonymity offered by some blockchain applications – will reduce the cost and are likely to increase profitability and innovation. of fraud.
