The cum-ex tax scheme was a dividend tax fraud that let multiple investors claim refunds on withholding tax that had only been paid once, draining an estimated €55 billion from European treasuries over roughly two decades. It worked by exploiting a settlement gap around dividend payment dates, and it eventually produced criminal convictions carrying prison sentences of up to 12 years, along with sweeping tax-law reforms across Germany and the wider European Union.
How the Trade Worked
The scheme turned on dividend withholding tax. When a German company paid a dividend, it withheld 25 percent as tax and remitted that to the government. The investor received a certificate proving the tax had been paid, which could be used to claim a refund or offset other tax owed. One dividend, one certificate, one refund. Cum-ex broke that relationship.
Short selling was the engine. Just before a company’s dividend record date, a trader would sell shares they didn’t yet own, borrowing them through an intermediary. The buyer thought they were purchasing real shares and expected the dividend plus the tax certificate. The original lender still held a valid claim to the same dividend on the shares they actually owned. Because the borrowed shares hadn’t yet settled, the tax system briefly saw two owners of the same stock.
Both parties ended up with paperwork showing withholding tax had been deducted. Both filed for refunds. The government had collected the tax once and now owed it back twice. Each cycle manufactured a phantom tax credit that could be turned into real cash. High-frequency trading platforms let participants repeat the cycle thousands of times around a single dividend payment.
The entire structure depended on the two-business-day settlement cycle (T+2) that governed most stock transactions. During those two days, the tax system couldn’t cleanly determine who owned the shares at the moment the dividend was paid.
The Cum-Cum Variation
A related strategy called cum-cum, sometimes labeled dividend washing, exploited the same withholding tax system from a different angle. Foreign investors typically faced higher withholding rates on German dividends than domestic ones. A foreign shareholder would temporarily transfer shares to a domestic party just before the dividend date, let the domestic party collect the dividend at the lower rate, and take the shares back afterward. The two split the tax savings.
Germany closed this variant in 2016 by requiring investors to hold the shares for at least 45 days within a 90-day window around the dividend date and to bear at least 70 percent of the price risk during that period. Investors who failed those tests could only credit a fraction of the withholding tax.
Who Made the Scheme Possible
No single institution could run a cum-ex trade alone. Each cycle required several types of players.
Hedge funds and specialized investment firms initiated the trades, borrowing shares before the dividend date. They had the capital and the algorithms to time executions precisely. Brokers matched buyers and sellers at the volumes needed to make individual small refund claims add up.
Custodian banks played a particularly damaging role. They hold securities for clients and administer dividend payments, including issuing the tax certificates that prove withholding tax was paid. In a cum-ex trade, the buyer’s custodian bank issued a certificate even though the seller’s side had never remitted the tax. The certificate looked identical to a legitimate one, and tax offices processed the refund automatically.
Intermediary banks supplied credit lines that let traders move volumes of shares far larger than their own cash, multiplying the number of phantom certificates. Law firms and accounting firms produced formal opinions arguing the trades complied with existing rules. That professional cover gave the banks and funds confidence to run the strategy at industrial scale.
When Courts Called It a Crime
For years, participants argued they were exploiting a technical gap in the law rather than committing fraud. If the code allowed multiple refunds on the same shares, they said, the code was the problem.
That defense collapsed in 2021, when Germany’s Federal Court of Justice upheld the convictions of two former London-based investment bankers in the first cum-ex case to reach the country’s highest criminal court. The judges found that participants had deliberately subverted the tax system to obtain refunds for taxes never paid, and that the trade’s complexity did not shield it from being classified as fraud.
Under Germany’s Fiscal Code, intentional tax evasion carries a prison sentence of up to five years. Serious cases involving large sums or organized schemes raise the maximum to ten years, and courts can order full seizure of the proceeds.
Key Convictions and Sentences
The most high-profile German conviction was that of Hanno Berger, a tax lawyer widely described as one of the scheme’s architects. In December 2022, after an eight-month trial, Berger was sentenced to eight years in prison on three counts of tax evasion committed between 2007 and 2011. He had earlier fled to Switzerland before being extradited.
Christian Olearius, former head of the private bank M.M. Warburg, also faced charges. Warburg received reimbursements for roughly €169 million in taxes it had never paid, and a connected investment fund received an additional €100 million in improper refunds. Olearius’s case was eventually dropped due to his declining health, though the court said this was not an acquittal.
Denmark produced the longest sentence. British hedge fund manager Sanjay Shah was convicted of orchestrating a scheme that defrauded the Danish tax authority of approximately €1.6 billion through falsified ownership claims and fabricated dividend documentation. He received 12 years, the harshest financial-crime sentence ever handed down in Denmark.
Investigations have touched roughly 1,500 suspects and 100 banks across four continents, and new cases continue to surface as prosecutors work through years of trading records.
Damage to European Treasuries
The CumEx-Files investigation, published in October 2018 by the German newsroom CORRECTIV with 18 international media partners, put the combined damage from cum-ex and cum-cum trades at roughly €55 billion across at least 11 European countries.
Germany was hit hardest. Estimates from the University of Mannheim placed losses at nearly €29 billion between 2000 and 2020, and other estimates run higher depending on the period and methodology. France reportedly lost an estimated €17 billion, Italy €4.5 billion, Denmark roughly €1.7 billion, and Belgium €201 million. Spain, the Netherlands, Finland, Norway, Austria, and Switzerland were also affected. The German government has spent years clawing back funds through retroactive assessments and settlements, forcing banks such as Warburg to repay hundreds of millions.
How the Loophole Was Closed
Germany moved first. In 2012 it changed its tax rules so that banks were responsible for both collecting the dividend withholding tax and issuing the refund certificates, shutting the specific gap that had allowed the buyer’s custodian bank to issue certificates for taxes that were never collected. The 45-day holding rule for cum-cum trades followed in 2016.
At the EU level, the European Commission’s FASTER Directive (Faster and Safer Tax Excess Relief) overhauls how member states handle cross-border withholding tax refunds. It pushes countries toward “relief at source” systems, where the correct tax rate is applied when the dividend is paid rather than reclaimed afterward. It also adds anti-abuse safeguards: refund requests can be denied if shares were acquired within five days before the ex-dividend date, if unsettled financial arrangements are linked to the shares, or if dividend payments exceed €100,000 per owner per payment date without additional verification. Certified Financial Intermediaries who process claims must verify the holder’s tax residency and treaty rate, and can be struck off the register for facilitating fraud.
Whether a Cum-Ex Scheme Could Work Under U.S. Law
The United States was not directly hit by the European scandal, and its tax code contains provisions that make the same mechanics harder to run. Section 871(m) of the Internal Revenue Code addresses foreign investors using derivatives and securities lending to avoid U.S. withholding tax on dividends. It treats “dividend equivalent” payments to foreign persons through certain derivatives as U.S.-source dividends subject to withholding, even when the foreign party never technically owned the underlying shares. The Treasury and IRS have extended the phase-in of full enforcement through the 2026 calendar year, though an anti-abuse rule remains active that can reclassify transactions designed to circumvent the regime.1Internal Revenue Service. Extension of the Phase-in Period for the Enforcement and Administration of Section 871(m)
More broadly, the U.S. codified the economic substance doctrine at 26 U.S.C. § 7701(o). A transaction produces valid tax benefits only if it meaningfully changes the taxpayer’s economic position apart from tax effects and the taxpayer has a substantial non-tax purpose for entering into it. Both prongs must be satisfied.2Office of the Law Revision Counsel. 26 USC 7701 – Definitions
The penalty for failing the test is steep. Under 26 U.S.C. § 6662, an underpayment attributable to a transaction that lacks economic substance triggers a 20 percent penalty, doubling to 40 percent if the transaction wasn’t disclosed on the return. These penalties apply on top of any taxes owed, and courts have treated the economic substance penalty as effectively automatic once the doctrine is found to apply.3Office of the Law Revision Counsel. 26 USC 6662 – Imposition of Accuracy-Related Penalty on Underpayments
A cum-ex style trade run under U.S. law would almost certainly fail both prongs. Cycles whose only purpose is manufacturing phantom tax credits produce no meaningful economic change and no substantial business rationale beyond the refund itself. Combined with Section 871(m)’s targeted treatment of dividend equivalents, these provisions make the specific mechanics of the European scheme far harder to replicate in the United States.