This chapter discusses, including mathematical descriptions, trading strategies based on tax arbitrage, including municipal bond tax arbitrage, which amounts to borrowing money and buying tax-exempt municipal bonds, which is attractive to companies in jurisdictions where tax rules allow them to buy tax-exempt municipal bonds and deduct interest expenses from their taxable income, cross-border tax arbitrage exploiting the difference in the tax treatment of the foreign and domestic stockholders in countries with “dividend imputation” corporate tax systems, which effectively penalizes foreign investors holding stock through ex-dividend creating an incentive for such investors to sell stock cum-dividend and buy it back ex-dividend, or utilize other strategies using American put options, or stock loans or swap agreements involving domestic investors.
KeywordsTax arbitrage Municipal bond tax arbitrage Tax-exempt municipal bonds Interest expenses Taxable income Tax shield Cross-border tax arbitrage Dividend imputation Ex-dividend Cum-dividend American put option Stock loan Swap agreement Foreign investor Domestic investor Double-taxation system Tax credit Interest rate
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