ESMA launches formal inquiry on NCAs’ supervisory experiences
03 July 2019 Paris
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The European Securities and Markets Authority (ESMA) has published a report on its preliminary findings on multiple withholding tax (WHT) reclaim schemes and has launched a formal inquiry to gather evidence from national competent authorities (NCAs).
ESMA will gather evidence from NCAs on the supervisory practices regarding those schemes across the EU.
To identify these schemes, ESMA analysed EU cash trading and securities lending volumes that showed increased trading activity around dividend dates.
According to ESMA, some EU member states allow for a WHT on dividends of listed companies, which under specific circumstances can be reclaimed.
ESMA added that this can be abused by aiming to obtain multiple repayments of a single WHT paid upon distribution of dividends.
Key findings from the report found that the execution of these schemes do not necessarily imply a breach of the provisions of Market Abuse (MAR) or Short Selling Regulation (SSR).
Additionally, the report found that dividend arbitrage trading can be carried out through a wide range of sophisticated and complex trading methods giving the impression that a series of genuine claims has taken place.
The schemes involve high volumes of trading in the outstanding shares of large
capitalisation EU index stocks, since the schemes are more profitable when carried out
on a large scale, ESMA noted.
The report also found that the schemes appear to be aimed mainly at obtaining multiple repayments of a single WHT paid upon distribution of dividends (i.e. potentially involving a tax fraud) often using a short selling transaction.
As well as this, it was revealed that some national tax laws allow for the issuance of tax certificates that do not contain any reference to the underlying distribution of dividends, making it difficult to identify multiple fraudulent requests.
Steven Maijoor, ESMA Chair, commented: “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.”
ESMA will gather evidence from NCAs on the supervisory practices regarding those schemes across the EU.
To identify these schemes, ESMA analysed EU cash trading and securities lending volumes that showed increased trading activity around dividend dates.
According to ESMA, some EU member states allow for a WHT on dividends of listed companies, which under specific circumstances can be reclaimed.
ESMA added that this can be abused by aiming to obtain multiple repayments of a single WHT paid upon distribution of dividends.
Key findings from the report found that the execution of these schemes do not necessarily imply a breach of the provisions of Market Abuse (MAR) or Short Selling Regulation (SSR).
Additionally, the report found that dividend arbitrage trading can be carried out through a wide range of sophisticated and complex trading methods giving the impression that a series of genuine claims has taken place.
The schemes involve high volumes of trading in the outstanding shares of large
capitalisation EU index stocks, since the schemes are more profitable when carried out
on a large scale, ESMA noted.
The report also found that the schemes appear to be aimed mainly at obtaining multiple repayments of a single WHT paid upon distribution of dividends (i.e. potentially involving a tax fraud) often using a short selling transaction.
As well as this, it was revealed that some national tax laws allow for the issuance of tax certificates that do not contain any reference to the underlying distribution of dividends, making it difficult to identify multiple fraudulent requests.
Steven Maijoor, ESMA Chair, commented: “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.”
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