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 say that emphatically here.’ That while there are countless reports that describe and criticize the role of the Netherlands as a fiscal refuge and center for money shifting by multinationals.
‘For tax specialists, a tax haven is palms, 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 from a different perspective, we are a tax haven for it grotten companies. They can avoid tax through the Netherlands.’
Because of its role as a hub for rich companies – at the expense of other countries, which miss out on tax revenues – the Netherlands has come under increasing fire in recent years. International reputation is at stake. How did it come to this with the small and apparently neat country on the North Sea?
Home base
To answer that question, we need to look at what the Netherlands is, says Vleggeert: a small, open economy, strongly focused on international trade and traditionally – until recently at least – the home base of multinationals such as Shell, Unilever and the Steenkolen Handels Vereniging. , the SHV. In order 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 number of countries. Before the Second World War, it was already arranged that a parent company and subsidiaries did not have to pay double tax: the participation exemption, especially important for multinationals, but also an excellent opportunity to shift money flows.
In the late sixties, early seventies, discovered that more is possible: if you can facilitate international trade, you can also do that with money flows. ‘Tax specialists will see the possibilities and gradually expand them further,’ says Vleggeert, who researched the role of the Netherlands as a tax haven three years ago. ‘In order to bring them to the Netherlands, large companies could make agreements here about their tax position, so-called rulings, which nobody had any insight into.’
The entire financial industry that has arisen around it of advisers, lawyers and tax specialists – say the Amsterdam Zuidas – has therefore actually been ‘a side effect’ of the flexible national rules and the many favorable international treaties that we have, says the professor.
In the seventies and eighties there was a lot of social grumbling. In the House, for example, the ‘prostitution of our tax system’ with the Antilles route is criticized. But in the liberal 1990s, the global economy is getting bigger and more international, and the Dutch financial industry is also thriving. Including letterbox companies: empty shells without personnel or real activities, set up only to avoid tax.
Research by the Conduit Companies Committee last year, at the request of Member of Parliament Pieter Omtzigt, among others, shows that in 2019 the Netherlands will still have 12,400 such letterbox companies, through which 170 billion euros go through each year. The tax revenues (650 million euros) and the number of jobs (four thousand) are negligible, the international reputation damage is less and less.
Transit country
Often when the Netherlands is approached about the fact that it is 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 have shown that the Netherlands is far ahead in various areas of tax avoidance. ‘The Netherlands is simply the largest transit 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 of this, banks and companies are being rescued and citizens are paying the price of the austerity measures. “In 2012, 2013 it really started to rub off. Why didn’t companies have to pay taxes and why were citizens the losers?’, says Smits. ‘The CDA, among others, made the switch then: something had to be done.’
In the years that follow, international pressure is further intensified. In the spring of 2016, the Panama Papers will be released, a large collection of leaked confidential documents from ‘business services provider’ Mossack Fonseca. They are causing an international scandal about tax avoidance by a range of prominent individuals and companies. The OECD is introducing an international minimum rate of 15 percent corporate income tax. And last month the European Commission – without directly mentioning the Netherlands – presented a plan to track down and tackle letterbox companies. And in the Netherlands itself, after the appointment of State Secretary Hans Vijlbrief in early 2020, real work is being done on tackling tax avoidance via the Netherlands for the first time, although according to the Committee conduit companies much more needs to be done.
‘We’ll have to wait and see for that approach to letterboxes. All of that has yet 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: ‘You see something happening now. The American supermarket giant Walmart, among others, recently emptied a large part of its mailbox here.’
Is the end of the Dutch tax haven in sight? Perhaps, but a possible practical problem is that Marnix van Rij, who does not think the Netherlands is a tax haven anyway, will have to focus all his attention on a completely different file in the coming period: the repair of the savings tax. It was declared illegal by the Supreme Court last week. “That is the biggest priority for me,” the state secretary said this week.
WHAT IS A ‘DOUBLE SANDWICH’ OR A ‘MONEY BOX AT SEA’?
The Netherlands is under growing pressure to tackle tax avoidance. What are the constructions, from which companies, and what is already being done about it?
Ikea and the fictitious deductions
It is easier to assemble an Ikea Billy bookcase with your eyes closed than to understand the tax 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, known as rulings. One of those agreements concerned the transfer of the rights of the Ikea trademark to a Dutch company. This happened at the end of 2011. For the purchase of the trademark rights, the Dutch company had to pay no less than 9 billion euros.
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 other 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 Nederland also started to write off the purchased trademark right, which also resulted in a tax deduction. But because this trademark right was partly obtained with an informal capital contribution, it was a so-called fictitious deduction. The rules for this informal capital were tightened up by the Dutch government in 2019. In addition, the interest payment that companies are allowed to deduct from taxable profit has now been considerably limited, so that a maximum of 1 million euros in interest expenses can still 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. For years, the Netherlands did not levy withholding tax and thus became a transit port for royalties, ending up in a country that did not levy any tax at all, such as Bermuda or the British Virgin Islands.
In 2021, the Netherlands has turned its back on this option and introduced a withholding tax. With this, the government wrote, the Netherlands hopes to make itself ‘less attractive’ as a transition country.
Until 2020, the major user of this tax construction was tech company Google. It pumped revenues through Ireland, the Netherlands and finally Bermuda, through a construction known as the “double Irish, Dutch sandwich.” Because Google’s trademark rights were housed in Bermuda. Royalties are fees for the use of intellectual property, such as copyrights or patents. How high those compensations should be was the start of a round of negotiations with the Dutch tax authorities. After which a ruling was eventually rolled out.
For example, Google had to pay Ireland a hefty fee of the billions in revenue that came in to Bermuda for the use of the intellectual property of the search company. In order to avoid having to pay withholding tax on these royalty payments in Ireland, a Dutch company was placed in between, so that the royalties disappeared tax-free to Bermuda. After all, the Netherlands did not levy withholding tax. In eight years, around 128 billion euros disappeared to the tax haven of Bermuda.
Nike and the piggy bank at sea
For years, American companies were lured to the Netherlands for tax purposes with the so-called limited partnership (CV). The government itself advertised this fiscal trick. The structure was also referred to as a ‘piggy bank at sea’. One of the most famous users of this is sportswear manufacturer Nike.
In 2020, this tax trick, a ‘hybrid mismatch’ in tax jargon, was destroyed under pressure from the European Union. The sports brand Nike had arranged the tax structure in such a way that the turnover of the company outside the United States almost entirely ended up with the Dutch companies. From these BVs, interest, royalties and profit distribution were channeled almost tax-free to Nike’s Dutch CV: the CV/BV construction.
And therein lay the crux. Under 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 with it either. For example, no taxes were levied anywhere and the profits of American companies ended up in a kind of fiscal no man’s land, the piggy bank at sea.
The profit remained there, to be paid out to the shareholders at a fiscally favorable moment, or – of course also in a tax-friendly manner – to be used for loans or investments.