SEMINAR SERIES
Management Seminar
Yao-Min Chiang（Distinguished Professor, Department of Finance, National Taiwan University）
- Date&Time:
- 2025.6.23 (Mon) 13:00-14:30
- Venue:
- Large Seminar Room 2 on 3F, Research Bldg. No.2, Yoshida Campus, Kyoto University
- Language:
- English
- Contact:
- Asli M. COLPAN
(Title)
"Dividend Tax Avoidance Using ETFs and Stocks"
Abstract:
Barber, Lee, Liu, and Odean (2008) highlights the profitability of foreign institutional investors in Taiwan but does not specify their strategies. This study introduces a specific strategy—dividend tax avoidance through ETF-stock swaps. Taiwan's stock market is heavily influenced by foreign institutional investors, who accounted for 31.3% of the total trading volume on the Taiwan Stock Exchange in 2023. Their trading activities impact stock prices, exchange rates, and market movements. Foreign investors in Taiwan face a dividend withholding tax, creating incentives for tax avoidance. This study examines how foreign investors exploit regulatory gaps by swapping stocks for ETFs before ex-dividend dates to avoid dividend taxes. We analyze trading patterns, showing that ETFs accumulate constituent stocks before the stock ex-dividend date and subsequently reduce holdings before the ETF ex-dividend date. The patterns are particularly evident in large ETFs such as TAIEX ETF and Taiwan Semiconductor Manufacturing Company (TSMC). Taiwanese regulators have implemented measures to curb tax avoidance, including aligning ETF and stock dividend payout dates and restricting fund companies from promoting tax-related advantages. However, evidence suggests that foreign investors continue to engage in this practice, leveraging ETF liquidity and regulatory loopholes. This study makes several contributions. First, it identifies a previously undocumented tax avoidance strategy employed by foreign institutional investors in Taiwan. Second, it proposes an empirical methodology to detect tax-motivated ETF-stock swaps using regression analysis of foreign institutional holdings. Third, it addresses the OECD’s (2023) concerns about the challenges of identifying dividend stripping and provides insights for regulators. The findings have broader implications for tax authorities, financial market stability, and the ongoing global effort to curb tax-driven trading distortions.