Cross-Border Investing with Tax Arbitrage: The Case of German Dividend Tax Credits
AbstractGerman dividends typically carry a tax credit which makes the dividend worth 42.86% more to a taxable German shareholder than to a tax-exempt or foreign shareholder. This results in a penalty for foreign investors who buy and hold German dividend-paying stocks. I document that, as a result of the credit, the ex-day drop exceeds the dividend by more than one-half of the tax credit, and show that futures and option prices embed more than one-half of the tax credit. The existence of the credit creates opportunities for cross-border tax arbitrage--in which foreign holders of German stock transfer the dividend to German shareholders--and implies that it is tax efficient for foreign investors to hold derivatives rather than investing directly in German stocks. The empirical findings are consistent with costly tax arbitrage activity by German investors, who face tax risk due to antiarbitrage rules. Since dividend tax credits exist in many other countries, the findings are potentially of broad interest. Article published by Oxford University Press on behalf of the Society for Financial Studies in its journal, The Review of Financial Studies.
Download InfoTo our knowledge, this item is not available for download. To find whether it is available, there are three options:
1. Check below under "Related research" whether another version of this item is available online.
2. Check on the provider's web page whether it is in fact available.
3. Perform a search for a similarly titled item that would be available.
Bibliographic InfoArticle provided by Society for Financial Studies in its journal Review of Financial Studies.
Volume (Year): 14 (2001)
Issue (Month): 3 ()
Contact details of provider:
Postal: Oxford University Press, Journals Department, 2001 Evans Road, Cary, NC 27513 USA.
Web page: http://www.rfs.oupjournals.org/
More information through EDIRC
You can help add them by filling out this form.
CitEc Project, subscribe to its RSS feed for this item.
- Gaul, Jürgen & Theissen, Erik, 2008.
"A partially linear approach to modelling the dynamics of spot and futures prices,"
CFS Working Paper Series
2008/12, Center for Financial Studies (CFS).
- Gaul, Jürgen & Theissen, Erik, 2012. "A partially linear approach to modelling the dynamics of spot and futures prices," CFR Working Papers 13-01, University of Cologne, Centre for Financial Research (CFR).
- Tseng, Yun-lan & Hu, Shing-yang, 2013. "Tax reform and the identity of marginal traders around ex-dividend days," Pacific-Basin Finance Journal, Elsevier, vol. 25(C), pages 181-199.
- Mishra, Anil V & Ratti, Ronald A, 2013.
"Taxation of Domestic Dividend Income and Foreign Investment Holdings,"
50601, University Library of Munich, Germany.
- Mishra, Anil V. & Ratti, Ronald A., 2014. "Taxation of domestic dividend income and foreign investment holdings," International Review of Economics & Finance, Elsevier, vol. 31(C), pages 218-231.
- Dai, Qinglei & Rydqvist, Kristian, 2007. "Investigation of the Costly-Arbitrage Model of Price Formation Around the Ex-Dividend Day," CEPR Discussion Papers 6074, C.E.P.R. Discussion Papers.
- Sven-Olov Daunfeldt, 2007.
"Tax-Induced Trading and the Identity of the Marginal Investor: Evidence from Sweden,"
The European Journal of Finance,
Taylor & Francis Journals, vol. 13(7), pages 657-667.
- Daunfeldt, Sven-Olov, 2005. "Tax-Induced Trading and the Identity of the Marginal Investor: Evidence from Sweden," HUI Working Papers 3, HUI Research.
- Hartzmark, Samuel M. & Solomon, David H., 2013. "The dividend month premium," Journal of Financial Economics, Elsevier, vol. 109(3), pages 640-660.
- Dwenger, Nadja & Steiner, Viktor, 2009.
"Financial leverage and corporate taxation: Evidence from German corporate tax return data,"
arqus Discussion Papers in Quantitative Tax Research
61, arqus - Arbeitskreis Quantitative Steuerlehre.
- Nadja Dwenger & Viktor Steiner, 2014. "Financial leverage and corporate taxation: evidence from German corporate tax return data," International Tax and Public Finance, Springer, vol. 21(1), pages 1-28, February.
- Nadja Dwenger & Viktor Steiner, 2009. "Financial Leverage and Corporate Taxation: Evidence from German Corporate Tax Return Data," Discussion Papers of DIW Berlin 855, DIW Berlin, German Institute for Economic Research.
- Susan E. K. Christoffersen & Christopher C. Geczy & David K. Musto & Adam V. Reed, 2004. "Do Shareholders' Preferences Affect their Funds' Management? Evidence from the Cross Section of Shareholders and Funds," CIRANO Working Papers 2004s-22, CIRANO.
- Christoffersen, Susan E.K. & Geczy, Christopher C. & Musto, David K. & Reed, Adam V., 2005. "Crossborder dividend taxation and the preferences of taxable and nontaxable investors: Evidence from Canada," Journal of Financial Economics, Elsevier, vol. 78(1), pages 121-144, October.
- Huizinga, Harry & Voget, Johannes & Wagner, Wolf, 2012. "Who bears the burden of international taxation? Evidence from cross-border M&As," Journal of International Economics, Elsevier, vol. 88(1), pages 186-197.
For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: (Oxford University Press) or (Christopher F. Baum).
If references are entirely missing, you can add them using this form.