TAX RELAXED

Some of the world’s biggest brands (and bands) have learned how to benefit from Dutch tax rules as a way to protect their earnings.

WORDS BY IAN WYLIE
ILLUSTRATION BY TELEGRAMME

TRADITIONAL TAX HAVENS, SUCH AS the Cayman Islands, are still the first choice with finance directors wishing to buy offthe-shelf companies and deal with light-touch regulators. But the Netherlands is fast becoming a highly attractive and more respectable alternative.

Back in 1972, while the Rolling Stones were celebrating the success of their Exile on Main Street album with a debauched tour of North America, their manager, Bavarian aristocrat Rupert Loewenstein, was sipping coffee in Amsterdam. He was setting up a company, Promogroup, into which all the group’s royalties from record sales, airplay and song publishing would from then on be paid. Loewenstein had discovered that Holland was unusually lenient on the taxation of royalties. And it still is. Just a couple of years ago, Promogroup, run by reclusive Dutch accountant Johannes Favie, attracted U2’s huge song catalogue for similar purposes.

In essence, Dutch tax rules allow artists like the Rolling Stones or U2 to create a holding company that owns the rights to their songs and their name. So each time their song is played on the radio, or they sell an album, royalties are paid to their Dutch company, which allows them to collect millions of dollars in royalties tax-free and lowers the profits recorded and taxed in their home countries.

The Dutch government, keen to promote Amsterdam as a global financial centre, appears content for individuals and corporations to use tax shelters within its jurisdiction. Multinationals from Coca-Cola, Nike and Sun Microsystems to Ikea and Gucci have all set up Dutch holding companies similar to the ones used by the Rolling Stones and U2 in order to reduce their tax charges on interest, royalties on patents, dividends and capital gains from foreign subsidiaries. “Companies have to do the best for their shareholders,” says Liesbeth Staps, executive director of the Netherlands Foreign Investment Agency’s London office.

But in London, there are fears that what has so far been a drip-drip-drip of companies across the North Sea could soon turn into a flood.

Drinks giant Diageo has transferred ownership of brands, including Johnnie Walker, J&B and Gilbey’s gin, to a Netherlands subsidiary. Royal Dutch Shell opted for a parent company with Dutch headquarters and tax residency when it overhauled its dual-listed structure.

Brit Insurance, the company with an apparently British name (it actually stands for Benfield & Rea Investment Trust), is the latest organisation announcing a move to the Netherlands because of what it says is “continuing uncertainty” about tax policy.

The British government is proposing a new, so-called “controlled companies” scheme that will give its tax authorities new powers to investigate companies’ accounts to ensure that they are not using their overseas wings specifically to cut their tax bills. Some firms believe that the UK government will use this controlled companies system to rake in more taxes from these companies.

British companies considering moving their tax residence out of the UK more than doubled to 14% last year, according to a recent poll by KPMG, the professional services group. Yet Brit Insurance claims tax is not the only reason why it wants to move its domicile to the Netherlands. “With its many positive attributes, including membership of the EU, strong financial services sector, stable fiscal strategy and excellent communications we anticipate the Netherlands will provide a good springboard for future growth,” says spokeswoman Eleanor Lewis. “Given that it is the financial centre of the Netherlands and has excellent international transport connections, Amsterdam is our most likely destination, although no final decision has yet been made.”

Amsterdam certainly has its attractions. In the 2009 Mercer global Quality of Living survey, Amsterdam is, at 13th position, 25 places ahead of London.

“The Netherlands is a strategic and accessible location with an international environment and a well-developed financial services industry,” points out Frederik Habers, a tax lawyer in the London office of Nauta Dutilh, a Benelux law firm. “Other services that are relevant to headquarters, such as legal and accounting services are internationally recognised as top notch. Regulators are generally efficient and accessible.”

“The Netherlands is strategically located, in the centre of Europe, with excellent connections to all major cities. Combine that with excellent language skills, a well educated workforce, a strong financial sector and support industry, a cosmopolitan atmosphere and a competitive tax climate, and you’ve got all the makings of an international hub,” argues Robin Fransman, deputy director of the Holland Financial Centre, a government backed alliance of Dutch financial services organisations. “The Netherlands has never been a story about tax advantages alone. Companies want to be located in a place that is reliable and trustworthy – where they can hire all the right people with the right skills.”

Fransman says attracting foreign companies will benefit the Netherlands. “Globalisation leads to concentration of all kinds of activities. The Netherlands has thus far been a beneficiary of that trend, especially Amsterdam. The concentration of HQs in Amsterdam brings jobs, at a high educational level and accompanying high incomes and spin off effects. That brings people, life, culture and everything you’d expect from an international metropolis to Amsterdam,” explains Fransman.

Yet according to SOMO, an Amsterdam-based centre for research on multinationals, 20,000 of the companies registered in the Netherlands are no more than “mailbox companies” that create little or no employment. SOMO says tax avoidance schemes do harm to the reputation of both the Netherlands and the companies. “Even if a company stays within the law, and exploits loopholes or international arbitration opportunities to lower its tax duties, that is not a very ethical thing to do,” argues Francis Weyzig, a researcher at SOMO. “Remember that a company benefits from infrastructure, education, legal security, and many other things provided by the government. A company should therefore pay its fair share of tax to contribute to the financing of public goods and services, and it should pay that tax in the countries where its operations are located.

“The Netherlands should ask itself whether it wants to continue to facilitate fiscal structures that are completely detached from real business operations. Some of these structures are conduits to channel financial flows to and from tax havens like the Cayman Islands and Jersey and may involve aggressive tax avoidance, harming other countries. The Netherlands should take measures against these aggressive structures, and take responsibility for their undesirable effects abroad.”

In response, Holland Financial Centre says the Netherlands is home to some 20 global and 50 European “true” headquarters of Fortune 500 companies. “The Netherlands is home to mailbox companies through our trust industry, the biggest trust industry in the world,” concedes Fransman. “But they do not come to the Netherlands for tax reasons alone. In taxes, the Netherlands is very competitive but not exceptionally ‘light’. For that, you’d be better off in the Caymans, Monte Carlo or the Channel Islands.

“Companies come to the Netherlands because of the reliability of the legal and political system, the quality of its regulators and – last but not least – because of its overall trustworthiness.”

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