17th April 2023
Hugues Chevalier, Economist
The European banking sector, which is just recovering from the Credit Suisse crisis, could be plunged back into turmoil with the “CumCum” scandal. This practice aims to circumvent the dividend tax due by shareholders of listed companies. In practice, a “share lending” contract is established between a custodian bank and its foreign clients before the dividend is paid to temporarily transfer the legal ownership of the share to the bank, which in most cases is virtually tax-free. The share is then returned to its owner after the dividend is paid. The tax gain is then shared between the bank and its client. This practice has been going on for decades in a ‘legal grey area’ and has avoided paying billions in taxes in several European countries. Following the “CumEx Files” investigation in 2018 by several international media, the German, French and Dutch tax and judicial authorities launched complaints against the largest European banking groups for laundering and tax fraud. Some banks have even allegedly participated themselves in these arrangements to avoid tax on dividends. In Germany, the Bonn court condemned, in a ruling in 2020, these practices whose “purpose is solely fiscal”. And in the wake of this, the Cologne public prosecutor’s office opened more than a hundred investigations. In France, the investigations opened in 2021 led last week to searches in the five largest banks five largest banks, including BNP Paribas and Société Générale, suspected of aggravated tax fraud and money laundering. In the Netherlands, as a result of the “CumCum” practice, ANB Amro has already set aside almost EUR 100 million for possible litigation. This is nothing compared to the billions allegedly embezzled from the tax authorities in France and Germany.