The European Securities and Markets Authority (ESMA) has released a report outlining its preliminary findings on multiple withholding tax (WHT) reclaim schemes.
This inquiry was conducted following a request from the European parliament. ESMA gathered evidence from national competent authorities (NCAs) on the supervisory practices regarding the schemes across the EU.
Certain EU member states allow a WHT reclaim on the dividends of listed companies; however, this can be abused by aiming to obtain multiple repayments of a single WHT.
The body analysed the incidence of the schemes and whether they result in a violation of market abuse (MSR) or short selling regulation (SSR). To identify the schemes, ESMA analysed EU cash trading and securities lending volumes which showed increased trading activity on dividend dates.
Overall, the report found the execution of the schemes do not imply breaches of MAR and SSR, but the is concern on compliance of sharing trading reporting obligations.
Other findings were that dividend arbitrage trading can be carried out through a wide range of sophisticated and complex trading methods to falsify a genuine claim, and the schemes include high volumes of trading of outstanding shares on large capitalisation EU index stocks.
The schemes were aimed at mainly obtaining multiple repayments on a singe WHT pain upon distribution of dividends. ESMA acknowledged that some tax laws allowed for the issuance of tax certificates which do not contain a refence to underlying distribution of dividends, making it harder to uncover multiple fraudulent requests.
Regarding MiFID II framework, ESMA does not believe the schemes imply violations.
ESMA chair Steven Maijoor said, “ESMA has looked into multiple withholding tax reclaim schemes from a securities markets perspective. While these schemes do not necessarily imply breaches of the market abuse or short selling regimes, they may affect the integrity of securities markets and individual firms.
“ESMA has identified best practices that could be used by NCAs to detect and investigate multiple withholding tax reclaim schemes. In addition, we have launched a formal inquiry to further collect evidence on NCAs’ supervisory experiences.”
The body would like NCAs to set up calibrated alerts in surveillance systems to identify cases where percentage of traded shares of an issuer reaches a significant level or to perform selective analysis on dividend distribution dates.
In addition to this, NCAs should use central securities registers data on settlement, transactions and short selling data, liaise with central securities registers and tax authorities and conduct further firm-specific investigations.
ESMA’s next steps will be to report the results to the European Parliament.
