Tax-motivated trading in the Scandinavian countries : an empirical study on cum-cum transactions and potential tax loss in Norway, Sweden and Denmark

Abstract

In recent years, foreign investors have taken advantage of loopholes in European taxation systems in order to avoid paying taxes on dividends and to steal from the public treasury for their own benefit. This has happened through extensive stock lending/trading around exdividend dates in many European countries for the last decade and our theory is that it is still happening. In this thesis we are primarily looking at tax-motivated trading such as cumcum/ cum-ex trading in Scandinavia. The tax-motivated trading schemes involves extensive stock lending and transfer of shares before the ex-dividend date from investors with a high marginal tax rate, to investors with a lower marginal tax rate. The saved tax is usually split among the participants in the scheme. This scheme is not necessarily strictly illegal, however, if investors can lend out their stocks with the purpose of avoiding taxes, it could be a sign that the taxation laws are not working as supposed. In this thesis we investigate how the short ratio behaves for the largest publicly traded stocks in Norway, Sweden and Denmark. We are interested in changes around the ex-dividend date and how the short ratio has changed in the said countries after Denmark changed their regulation in 2016. Next, we look to see if dividend yield can explain the differences in the short ratio. Finally, we give an estimate on the tax loss in 2018 for the largest stocks in Sweden and Norway. We find that short ratio increases significantly in a seven-day window around the ex-dividend date in said countries. Additionally, we find that short-selling in Denmark is significantly reduced in the period after the regulation was introduced. Whether this is due to the regulation itself or other factors is hard to determine, but the effect is isolated to Denmark. We find that short-selling is higher for stocks in the highest dividend yield group, but we cannot say that the increased short ratio is directly linked to the increase in dividend yield for all dividend yield groups. Whether the increased short-selling is due to tax-motivated trading or other factors, such as dividend capture trading, is hard to conclude on but we argue that a substantial part of the short-selling is likely tax-motivated. Finally, we argue that Norway and Sweden could be prone to revenue tax losses up to NOK 675 million and SEK 754 million, respectively for the year 2018.