Tax Avoidance through The Netherlands

For the Dutch version, click here

At the beginning of this year, the NOS ran a large headline: “Tax evasion by Google netted the Netherlands more than 25 million euros” [1]. Although at first glance this seems to be a good windfall for the Dutch treasury, it gradually becomes clear that these are only the small crumbs that the Netherlands gets out of the many billions of euros that Google is funneling through our country. 

​​Google is not the only globally known company to use clever tricks to avoid tax (note: different from criminal tax evasion). Starbucks, U2 and The Rolling Stones, too, have given up their business addresses in the Netherlands in order to channel their earnings to countries where there is hardly any profit tax.

​​Shell Corporations

The profits of multinationals are thus not deposited and reported in the Netherlands, but rather channelled through. The Netherlands does not have an exceptionally low profit tax rate: about 25 percent for everything above the limit of €245,000 in 2021. This, of course, is where you end up as a multinational very quickly. 

What was so favorable about the tax laws in our country until 2021 is that no withholding tax was levied on royalties. These are costs that a company can charge for the use of intangible assets, such as brand names, recipes, patents, etc.  This meant that a company registered in the Netherlands that received royalties from a foreign company did not have to pay tax on them. There was also an arrangement that ensured that Dutch companies that paid royalties to foreign companies, did not have to pay tax on this either. [2]

The consequence of all these favorable tax rules leaves pretty little to the imagination. It is therefore apparently easy to set up a tax-evasive construction. Take the fictitious company, Bami B.V., based in Tilburg. Bami produces deep-fried snacks and sells them in the Netherlands. In principle, the company should pay 25% of its profit as corporation tax at the end of each year. 

Now the owner of Bami has also set up a shell company in Bermuda, Nasi LLC. This stand-alone company houses the recipes for the fry snacks. Then Bami pays a fixed amount of royalties to Nasi, for using the recipes. As previously mentioned, royalties to and from the Netherlands were untaxed until 2021. This, combined with the absence of any corporate or profit tax in Bermuda, makes for an ideal construction to pay as little tax as possible. 

The Netherlands probably has some 14,000 shell corporations. Many of these are located in office buildings on Amsterdam’s Zuidas, where they are managed by accountants and tax consultants. Often these are just empty offices with a houseplant and a coffee machine, to give the idea that the building is actually in use. In practice, there are at most a handful of meetings held by the management of the parent companies. Again, this only happens because it is mandatory, and these directors and executives must be able to prove that meetings were held in the Netherlands, often with the receipt of lunch as proof. [3] 

“This is how shell companies are cleverly used, they are created purely to send out a hefty bill for royalties a few times a year”

Moderna Switzerland GmbH

One of the most recent examples of tax avoidance has recently surfaced: Moderna. The company that produced one of the most widely used Covid vaccines created a new subsidiary in Switzerland: Moderna Switzerland GmbH. This subsidiary would have handled payments for all of Moderna’s European vaccine orders. In Switzerland, the average corporate tax rate is about 15%.

Also, the patents for the Moderna vaccine are stashed in a subsidiary registered in the US state of Delaware. This is an important link in their tax structure, especially among Americans, because in Delaware no tax is levied on income from intangible assets, such as patents. This is how ‘shell’ companies are cleverly used, and created purely to send out a hefty bill for royalties a few times a year so that the profits from these can then be deposited as favorably as possible. [4]

Solutions

Tax evasion by companies is of course no great secret. Meanwhile, the governments of all the countries that are missing out on billions in income have also woken up, and plans are being worked on to clamp down on shoddy tax structures.

For example, withholding tax on royalties has been introduced in the Netherlands since 2021 for countries that pay these fees to entities in so-called “tax havens. These havens refer to countries where profit and corporate taxes are 9% or less. Some examples are Bermuda, the Cayman Islands, and Samoa. [5]

Another initiative to prevent tax avoidance is one of the agreements of the G7, which since this year have agreed that companies, regardless of their location, must pay at least 15% tax on their profits [6]. This may help level the playing field to some extent, by curbing the imposition of low taxes.  

Of course, there will never be a universal solution against tax avoidance. Accountants and tax specialists work to find loopholes to ensure that a company can put as much money as possible in favorable locations. And paying a lot of tax just doesn’t fit into that picture.