The effect of the 2016 tax reform act on cum-cum trading in Germany : an empirical study on trading volume of the 100 most traded stocks from 2012 to 2018
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- Master Thesis 
Various cases of sophisticated tax-motivated trading practices have recently received public attention all across Europe. These practices, some of them considered frauds, have deprived the targeted jurisdictions of tremendous tax income. In Germany the size amounts to billions of euros, and authorities have throughout the last years introduced several legislations in order to prevent these practices. In this thesis we investigate the effect of the 2016 Tax Reform Act, aimed at combatting cum-cum trading in Germany. The intention behind the reform is to reduce trading between foreign and domestic market participants around ex-dividend date, who have previously capitalized on a loophole that allowed foreign participants to avoid paying withholding tax on dividends. The Federal Central Tax Office (Bundeszentralamt für Steuern) in Germany introduced this reform only four years after prohibiting cum-ex trading, a similar, nonetheless more sophisticated tax-avoiding practice. We conduct an event study to investigate whether the legislation has achieved its intended effect by analysing the trading volume for the 100 most traded German stocks in the period January 2012 to July 2018. By analysing the trading volume in a seven-day window around the stock going ex-dividend, we find a significant decrease in the trading volume for five out of the seven days for taxable dividends, after the tax legislation was introduced. We have further analysed whether the decrease in trading volume around ex-dividend date has been greater for high yielding dividends than low or medium yielding dividends, but our results are inconclusive on the matter. Whether the tax legislation introduced in 2016 has achieved its desired effect will need further research, but we argue that the preventative reform is an improvement in reducing the cost to the German state and its taxpayers.