Dividend Withholding Tax Arbitrage Across Europe: the Revenue and Welfare Effects of Vulnerabilities in the Tax Code

We study the effect of dividend-withholding tax (DWT) arbitrage on tax revenue for Denmark and Sweden. For identification we rely on a 2016 reform in Denmark, that effectively outlawed DWT arbitrage. We employ an event-study analysis in which we compare stock lending on i.) normal trading days, to trading days around the ex-dividend date, and ii.) trading days before the reform in Denmark, to trading days after the reform in Denmark. We find that, prior to the Danish reform excess stock lending spikes around the ex-dividend rate spikes by about 4-6 percent of the public float, relative to standard trading days. After the reform, the spike in Sweden persists, but it disappears entirely in Denmark. We estimate that the overall tax revenue loss from tax arbitrage in Denmark and Sweden in the period 2010-2020 amounts to 2 bln USD.