The Netherlands AS A CONDUIT OFFSHORE FINANCIAL CENTER

Javier Garcia-Bernardo

The University of Amsterdam

May 23nd, 2017

Javier Garcia-Bernardo, Jan Fichtner, Frank Takes, Eelke Heemskerk

Paper:  arxiv.org/abs/1703.03016

THE NETHERLANDS IS IN THE CENTER OF FOREIGN INVESTMENT

Origin of foreign direct investment in Brazil (Brazilian firms controlled by foreign companies)

Weichenrieder, A. J., & Mintz, J. (2006). What Determines the Use of Holding Companies and Ownership Chains?

IT EMERGED IN THE LAST 30 YEARS

Reasons

• Logistic:
  • Located in the heart of Europe.
  • Outstanding infrastructure.
  • Highly educated and multilingual workforce.
• Developed trust and management services.
  • Easy to start Special Purpose Entities (SFIs in NL)
• Beneficial tax regime:
  • No withholding taxes for interest and royalties.
  • No real withholding tax for dividends.
    • Participation exemption.
    • Large number of tax treaties.
  • Advance Tax Rulings (ATR) and Advance Pricing Agreements (APA)
• Investor protection
  • Large number of bilateral investment treaties
  • Advanced tax ruling system (increase certainty)

(PwC / EY / DELOITTE / KPMG)

• Examples of SFI are:
  • Holding companies of (mainly) foreign companies;
  • Finance companies that typically extend loans to foreign group companies and are themselves financed mainly from abroad;
  • Royalty companies, film and music rights companies that receive royalties mainly from abroad;
  • Reinvoicing companies that are mainly invoiced by foreign entities and invoice other foreign entities.

FINANCIAL VEHICLES USED: Special Purpose Entities

(Special Financial Institutions)

Source: De Nederlandsche Bank

Assets of SFIs

Source: De Nederlandsche Bank

Number of SFIs

Source: De Nederlandsche Bank

Source: Orbis

• Ownership structures reflect tax strategies:
  • Dividends: Parent-subsidiary relationship usually required.
  • Royalties/Interests need at some point ownership relationships.                
• The size of the Netherlands indicate a structural role in tax planning:
  • Companies such as  IKEA, Fiat, Ferrari or Qiagen have moved the headquarters to the Netherlands.
  • More common: Use Dutch SFIs. Virtually every EU multinational do it.
  • Families control their fortune through foundations in the Netherlands.

WHY WE CARE ABOUT SFIs

Around €150 billion are lost by tax avoidance -- equivalent to the total annual expenditure of the EU*.

WHY WE CARE ABOUT SFIs

* Fernandez, R., McGauran, K., & Frederik, J. (2013). Avoiding Tax in Times of Austerity. Energias de Portugal (EDP) and the Role of the Netherlands in Tax Avoidance in Europe.

Tax of Holding: 27.8%

Tax of IKEA: 22.5%

our research

We look at which countries are used disproportionally in transnational ownership chains.

finding 1: sink-OFFshore financial centers

Blue:  (Former) Colony/Territory of the United Kingdom

Paradisacal beach in Luxembourg 

As of June this year, BVI hosted 430,000 companies: 15 for each of their 28,000 inhabitants. The

finding 1: sink-OFFshore financial centers

finding 2: conduit-OFFshore financial centers

sink

conduit

other country

finding 2: conduit-OFFshore financial centers

sink

conduit

some country

Round-tripping

what do the numbers actually mean?

what do the numbers actually mean?

23% of all the value flowing to a sink-OFC flows through a Dutch SFI

Chains to:

• Luxembourg: 40% go through the Netherlands
• Cyprus: 30% go through the Netherlands
• Malta: 71% go through the Netherlands
• Curaçao: 90% go through the Netherlands
• Lichtenstein: 30% go through the Netherlands

Node:
- Color: Importance as sink (Blue < Yellow < Red)
- Size: Importance as conduit

Arrow:
- Color: Importance relative to GDP
- Size: Importance

conclusions

• Global situation:
  • Sink-OFCs are connected to the United Kingdom (except Luxembourg).
  • Conduit-OFCs (NL,GB,IE,CH,SG) are on our doorstep:
    • They are specialized geographically and sectorally.
    • Can be a point of intervention.
• Dutch situation:
  • Dutch SFIs are in the middle of 23% of all corporate structures (and growing).
  • SFIs have assets of over 4 trillion (up from 1.5 trillion in 2007).
  • SFIs are used to transfer dividends, as well as royalties and interests, especially to Luxembourg.