Is the Netherlands a tax haven? Not at all, said the new CDA State Secretary for Tax Affairs Marnix van Rij firmly three weeks ago, after his introductory meeting with Prime Minister Mark Rutte. ‘No, the Netherlands is not a tax haven, I want to emphasize that here.’ That while there are countless reports that describe and denounce the role of the Netherlands as a fiscal haven and center for money shuffling by multinationals.
‘For tax specialists, a tax haven is palm trees, sun, zero taxation and no information exchange. That is not the Netherlands,’ says professor Jan Vleggeert, head of the tax law department at Leiden University. ‘But if you look at it with different eyes, we are a tax haven for it grotten companies. They can avoid tax via the Netherlands.’
Because of its role as a hub for rich companies – at the expense of other countries, which miss out on tax revenue – the Netherlands has come under increasing fire in recent years. International reputation is at stake. How did the small and apparently neat country on the North Sea come to this?
Home base
To answer that question, we have to look at what the Netherlands is, says Vleggeert: a small, open economy, strongly focused on international trade and traditionally – until recently – the home base of multinationals such as Shell, Unilever and the Steenkolen Handels Vereniging , the SHV. To stimulate the economy, especially after the Second World War when the country has to be rebuilt, hard work is being done on a system of agreements and rules to remove international trade barriers as much as possible.
For example, there will be (tax) treaties with a series of countries. Before the Second World War, it had already been arranged that a parent company and subsidiaries did not have to pay double taxation: the participation exemption, especially important for multinationals, but also an excellent opportunity to shift cash flows.
In the late sixties, early seventies discovers that more is possible: if you can facilitate international trade, you can also do so with money flows. ‘Tax experts will see the possibilities and gradually expand further and further’, says Vleggeert, who did research three years ago into the role of the Netherlands as a tax haven. ‘In order to bring them to the Netherlands, large companies could make agreements here about their tax position, so-called rulings, which no one had any insight into.’
The entire financial industry that has sprung up around it from advisors, lawyers and tax specialists – say the Amsterdam Zuidas – has actually been ‘a side effect’ of the flexible national rules and the many favorable international treaties that we have, says the professor.
In the 1970s and 1980s, social grumbling can be heard. For example, the ‘prostitution of our tax system’ with the Antilles route is denounced in the House. But in the liberal 1990s, the world economy grew larger and more international, and the Dutch financial industry flourished along with it. Including letterbox companies: empty shells without staff or real activities, set up only to avoid taxes.
Research by the Commission on conduit companies last year, at the request of MP Pieter Omtzigt, among others, shows that the Netherlands still has 12,400 such letterbox companies in 2019, through which 170 billion euros pass annually. The tax revenue (650 million euros) and the number of jobs (4,000) are negligible, the international reputational damage less and less.
Transit country
Often when the Netherlands is called to account for being a tax haven, the response is defensive: everything is allowed according to the rules and if we don’t do it, someone else will. Studies show that the Netherlands is far ahead in various areas of tax avoidance. ‘The Netherlands is simply the largest conduit country, just assume that’, says Henk Willem Smits, (co-)author of the book The tax haven.
The turning point in the discussion is the credit crisis of 2008. In the aftermath, banks and companies are rescued and citizens pay the price of the cuts. ‘In 2012, 2013 it really started to chafe. Why didn’t companies have to pay taxes and citizens were the losers?’, says Smits. ‘The CDA, among others, then made the switch: something had to be done.’
In the years that followed, international pressure increased further. Spring 2016 the Panama Papers will be released, a large collection of leaked confidential documents from ‘business services provider’ Mossack Fonseca. They cause an international scandal about tax avoidance by a series of prominent individuals and companies. The OECD has introduced an international minimum corporate income tax rate of 15 percent. And last month the European Commission presented – without directly mentioning the Netherlands – a plan to track down and tackle letterbox companies. And in the Netherlands itself, after the arrival of State Secretary Hans Vijlbrief at the beginning of 2020, real work is being done for the first time on tackling tax avoidance via the Netherlands, although according to the Commission on conduit companies, much more needs to be done.
‘We’ll have to wait and see what approach letterboxes take. That still needs to be implemented. But such a minimum rate will soon make it more difficult for large companies to avoid tax,’ says professor Jan Vleggeert. Author Smits: ‘Now you see something happening. The American supermarket giant Walmart, among others, has recently largely emptied its mailbox here.’
Is the end of tax haven Netherlands in sight? Perhaps, but a possible practical problem is that Marnix van Rij, who does not consider the Netherlands a tax haven anyway, will have to focus all his attention on a completely different issue in the coming period: the repair of the savings tax. It was declared illegal by the Supreme Court last week. “That is the top priority for me,” said the State Secretary this week.
WHAT IS A ‘DOUBLE SANDWICH’ OR A ‘MONEY BANK AT SEA’?
The Netherlands is under growing pressure to tackle tax avoidance. What are the constructions, of which companies, and what is already being done about it?
Ikea and the fictitious deductions
It is easier to assemble a Billy bookcase from Ikea with your eyes closed than to understand the fiscal structure of the Swedish furniture store with your eyes open. In the early 1980s, founder Ingvar Kamprad moved his company to the Netherlands on paper to take advantage of the tax opportunities.
In subsequent years, agreements were made with the Dutch tax authorities, so-called rulings. One of those agreements concerned transferring the rights of the Ikea brand to a Dutch company. That happened at the end of 2011. The Dutch company had to pay no less than 9 billion euros for the purchase of the trademark rights.
The money for that hefty purchase came from the parent company in Liechtenstein, which borrowed more than 5.3 billion at an interest rate of 6 percent. That interest did not have to be paid, because an interest-only loan had been agreed. But Ikea could deduct that paper interest of hundreds of millions per year from the taxable profit in the Netherlands. Ikea Nederland received the remaining 3.6 billion euros of the purchase price for the trademark right from the parent company in Liechtenstein in the form of a kind of gift, an informal capital contribution.
In addition to the interest deduction, Ikea Netherlands also depreciated the purchased trademark rights, which also resulted in a tax deduction. But because this trademark right was partly obtained with an informal capital contribution, it concerned a so-called notional deduction. The rules for this informal capital were tightened by the Dutch government in 2019. In addition, the interest payment that companies are allowed to deduct from taxable profit has now been severely limited, so that a maximum of 1 million euros in interest costs may be deducted.
Google and the double sandwich
For decades it was the crown jewel of Dutch tax policy, the withholding tax on royalties, dividends and interest payments. Or rather, the lack of it. The Netherlands did not levy withholding taxes for many years and thus became a transit port for royalties, which ended up in a country that did not levy any taxes at all, such as Bermuda or the British Virgin Islands.
In 2021, the Netherlands has reversed this possibility and introduced a withholding tax. With this, the government wrote, the Netherlands hopes to make itself ‘less attractive’ as a transit country.
Until 2020, the major user of this tax construction was tech company Google. It pumped revenue through Ireland, the Netherlands, and eventually Bermuda, through an arrangement known as the “double Irish, Dutch sandwich.” Because Google’s trademark rights were placed on Bermuda. Royalties are payments for the use of intellectual property, such as copyrights or patents. How high those fees should be was the subject of a round of negotiations with the Dutch tax authorities. Finally a ruling was issued.
For example, Google Ireland had to pay a hefty compensation to Bermuda for the use of the intellectual property of the search company from the billions in revenue that came in. To avoid having to pay withholding tax in Ireland on these royalty payments, a Dutch company was interposed, so that the royalties disappeared untaxed to Bermuda. After all, the Netherlands did not levy any withholding tax. In eight years, around 128 billion euros disappeared to tax haven Bermuda.
Nike and the piggy bank at sea
For years, American companies were fiscally lured to the Netherlands with the so-called limited partnership (cv). The government itself advertised this tax trick. The structure was also referred to as a ‘piggy bank at sea’. One of the best-known users of this is sportswear manufacturer Nike.
In 2020, this tax trick, a ‘hybrid mismatch’ in tax jargon, was killed under pressure from the European Union. The sports brand Nike had set up the tax structure in such a way that almost all of the company’s turnover outside the United States ended up with the Dutch companies. From these BVs, interest, royalties and profit distribution were channeled almost untaxed to Nike’s Dutch CV: the CV/BV construction.
And there was the crux. According to Dutch law, the CV was not subject to tax, no, those were the partners of the CV. And they were in America. But because the money was in a Dutch CV, the American tax authorities did not interfere. For example, no taxes were levied anywhere and the profits of American companies ended up in a kind of fiscal limbo, the piggy bank at sea.
The profit remained there, to be distributed to shareholders at a favorable tax time, or – of course also in a tax-efficient manner – to be used for loans or investments.