Objectivus Expert Services – Dividend Arbitrage Explainer – Part II

Part 2: Litigation and Regulatory Enforcement

Having explained in Part I the diDerence between Cum-Ex and WHT Reclaim trading strategies, we now turn to the evolution of legal opinions and the gradual adaptation of tax laws across most EU states to eliminate these trading opportunities. However as with many EU initiatives the coordination between member states has been dislocated and the policy reactions diDerent from state to state.

2012 – The Beginning of the End for Div Arb?

The legal response to Cum-Ex trading and WHT reclaim schemes has been extensive, involving criminal prosecutions, civil recovery actions, and regulatory enforcement. Germany has been at the forefront of legal proceedings related to Cum-Ex transactions, having initiated some of the earliest investigations and prosecutions.

The first major shift in enforcement came in 2012, when Germany amended its tax laws to prevent multiple refund claims on the same withholding tax payment. However, this did not immediately halt investigations into past transactions. Instead, it triggered a wave of retrospective enforcement actions, leading to criminal proceedings against financial professionals, tax advisors, and investment firms that had participated in Cum-Ex trading. Whilst Germany was the first country to eDectively close the Cum-Ex arbitrage window, some other EU countries did eventually follow suit, although an EU-wide Directive only comes into force in 2030 (which we explain in Part III).

The most significant legal development occurred in 2019, when a German court convicted two British traders for their involvement in Cum-Ex transactions dating back to the period 2006=2011. This was the first case in which individuals were found criminally liable for Cum-Ex trades. The ruling established a precedent that such transactions could be prosecuted as tax fraud rather than regulatory loopholes.

Then in 2021, the German Federal Court of Justice further clarified this position, ruling that Cum- Ex trading constituted criminal tax fraud. This decision provided the legal basis for subsequent prosecutions, reinforcing the argument that Cum-Ex was not a mere technical exploitation of tax rules, but a deliberate scheme designed to extract funds from tax authorities.

SKAT, WHT Claims

Litigation related to WHT reclaim schemes has followed a diDerent trajectory. The Danish tax authority, Skatteforvaltningen, better known as SKAT, has been at the centre of enforcement actions, filing claims exceeding €1.7 billion in relation to alleged fraudulent WHT refund claims. Much of this litigation is taking place in the United Kingdom, given that many of the financial institutions involved in the alleged schemes operated through London-based entities. SKAT’s approach to recouping Danish tax losses have involved proceedings in Denmark, England, USA, Canada, Dubai, Malaysia and elsewhere, highlighting the global nature of the WHT schemes that were in place.

Several years after the events, Cum-Ex trading and WHT Reclaim schemes are now largely deemed illegal and prosecutions have either been made or remain in progress across the EU and elsewhere, not only for traders but additionally the providers of legal and tax advice. The political motivation to pursue Cum-Ex and WHT Reclaim actors is obvious; to recoup billions in allegedly false WHT refunds as well as to cover for the national embarrassment of poor procedures and inconsistent tax legislation, a subject we expand upon in Part III.

Whilst oDicial figures are hard to obtain (possibly to avoid red faces at national treasuries), these are the estimates of taxpayer losses due to these allegedly illegitimate tax refund claims. The countries involved include:

• Germany: Identified as the hardest-hit country, with approximately €35.0 billion withdrawn from its treasury due to cum-ex schemes.
• Denmark: Engaged in extensive investigations into WHT scheme, with estimated losses of around €1.7 billion.
• France: Estimated to have lost at least €17 billion due to these fraudulent activities.
• Italy: Faced with estimated losses of €4.5 billion from such schemes.
• Belgium: Experienced significant financial impacts, with losses estimated at €201million.
• Austria: Actively investigating cum-ex transactions to address potential tax fraud.
• Finland: Among the countries where evidence of cum-ex tax fraud has been found.

  Both Cum-Ex and WHT reclaim cases have tested legal doctrines concerning tax law interpretation, financial market regulation, and liability for structured, pre-planned transactions. Over time, the evolution of the legality of these trading strategies has focused on accusations that:

1. The trading was structured with the sole purpose of generating tax reclaims rather than any genuine commercial interest for the parties involved, so-called ‘sham trading’.
2. Alleged circular trading patterns ensured there was no transfer of share ownership between participants.
3. Traders used derivatives to mitigate market directional risk while maintaining the appearance of risk exposure.
4. In the case of WHT reclaims, no shares were ever held and no dividends were ever received from the issuing company.

While some legal arguments have focused on whether transactions constituted regulatory arbitrage or outright fraud, courts have increasingly ruled in favour of tax authorities, establishing liability for financial institutions and individuals involved

Ongoing litigation is expected to continue shaping the legal framework surrounding tax-driven trading strategies. The cases have also influenced regulatory policy, prompting reforms aimed at preventing similar schemes in the future.

In Part III of this series of posts, we conclude by putting the regulators and tax authorities under the microscope and consider how eDective their surveillance and oversight were in limiting the financial impact of these trading strategies.