Struggle against deception in the 'cum cum' sector: unveiling the secrets behind Bercy's withdrawal from the parliament
In the world of finance, the strategy known as "Cum Cum" has been a topic of concern for tax administrations since 2018. This strategy, associated with complex cross-border transactions and exploitation of dividend withholding tax loopholes, has been causing a stir in the tax administration due to revelations by an international media consortium.
The strategy involves foreign financial institutions temporarily lending their shares to domestic banks or entities just before a dividend payout. The domestic entity then claims a tax refund on the dividend withholding tax, even though the tax was either not paid or was refunded multiple times. This scheme exploits a legal loophole where securities lending fees associated with these transactions are often tax-exempt, enabling the fraud.
Multinational corporations also employ intercompany dividends and intricate networks of shell companies to shift profits and avoid paying dividend taxes legitimately owed in jurisdictions like France. By artificially flowing capital and dividends through subsidiaries in low-tax countries, they reduce their taxable base in higher-tax countries.
However, measures are being taken to combat this tax evasion. In France and Europe, increased scrutiny, legal action, and closing of legal loopholes are being implemented. For instance, securities lending fees are now subject to taxation, and cooperation and information sharing among European tax authorities have been enhanced. Stronger anti-avoidance rules and compliance requirements are also being adopted.
The climax of this event occurred on Thursday, July 24, 2022, when a device to combat dividend tax evasion was finalized. This device leaves no room for maneuver in dividend tax evasion, effectively ending this practice that costs the French government 1.5 to 3 billion euros in tax revenue annually.
In France, a foreign owner of shares listed on the French stock exchange is required to pay a withholding tax of 12.8% for individuals and 25% for companies. However, financial institutions have been circumventing this tax by selling shares for a short period before dividend payment, allowing them to avoid tax. Most of the time, these shares are managed by banks, and they are then returned to their original owners after the tax-exempt period.
The foreign bank becomes the temporary owner of the shares, making them exempt from dividend tax. This practice has been a source of delight for their clients who avoid paying dividend tax, but it has caused a stir in the tax administration. Tense exchanges between Parliament and the government have been a part of this event.
Enforcement and regulatory reforms are ongoing to address these challenges effectively. The battle against dividend tax evasion on the French stock exchange is a complex one, involving both closing legal loopholes exploited by securities lending-based frauds and tackling multinational structures that misallocate dividends to low-tax jurisdictions.
The complex strategy of securities lending, used by foreign financial institutions and domestic banks, is exploiting a loophole in the banking-and-insurance industry by temporarily avoiding dividend withholding tax payments. Similarly, multinational corporations are using intercompany dividends and intricate networks of shell companies to shift profits and liabilities in the business sector, causing substantial financial losses to tax administrations such as those in France. Moreover, enforcement and regulatory reforms are required to streamline the taxation of securities lending fees, combat dividend tax evasion, and close legal loopholes in the industry and the finance sector.
