Dutch Unlikely to Budge on Calls for Tougher Letterbox Rules

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By Linda A. Thompson

Oct. 25 — The Dutch government is unlikely to take measures against the thousands of resident letterbox companies that shift profits through the Netherlands before next year’s parliamentary elections, despite lawmakers’ calls for tougher restrictions.

More stringent rules would make it harder for shell letterbox companies to qualify as Dutch tax residents, limiting their access to double taxation agreements and other tax benefits offered under Dutch law.

This style of tax planning has come under scrutiny from the European Commission, which is targeting the arrangements through legislative moves to prevent companies from using letter-box subsidiaries in countries solely to qualify for a softer tax regime and cut their bill.

However, ahead of parliamentary elections in March 2017, Dutch lawmakers have shown little appetite to make current requirements stricter, tax justice officials and academics in favor of the changes told Bloomberg BNA.

The comments come amidst a motion adopted Oct. 11 by the Dutch House of Representatives, calling on the government to propose restrictions in relation to the substance requirements that companies based in the Netherlands currently have to meet under the country’s corporate taxation laws.

The current rules were already tightened in 2013 following the commission’s moves to clamp down on the controversial arrangements.

However the two Dutch lawmakers who submitted the current motion say that “many thousands of letterbox companies” remain in the Netherlands and that they are “damaging the economy of the Netherlands and other countries more than so they are benefiting it.”

The likelihood that such a legislative proposal will be presented and ratified anytime soon is small.

A spokesman for the State Secretary of Finance said he wouldn’t comment on the motion before it was discussed in the House of Representatives.

More Transparency

Esme Berkhout, tax policy adviser with Oxfam Novib, the Dutch affiliate of the international organization, said the substance criteria might be tightened by only allowing natural persons to be directors. Under the current rules, trust agencies can also act as directors.

She noted, however, that the government should look beyond just the substance requirements for letterbox companies. She said more “transparency about ultimate beneficiaries” is needed and called on the Dutch government “to support public country-by-country reporting efforts and strong rules preventing profit shifting to tax havens.”

As long as companies are not required to offer more transparency about their tax structures, “they will continue using letterbox companies and each time seek out the limits of the substance requirements being imposed, ensure that they meet them and subsequently continue avoiding taxes through the Netherlands,” she said.

Berkhout said that the Dutch government should be doing more to combat such tax avoidance.

“We still are seeing a minister and state secretary who believe that the Netherlands should compete with other countries at the tax level without much further thought about the ultimate consequences of this,” she said.

4,000 Billion

According to a 2013 study by Amsterdam-based research firm SEO Economisch Onderzoek, the inward and outward financial flows through letterbox companies totaled 4,000 billion euros ($4,349 billion) in 2011. This study defined letterbox companies as business entities “located in the Netherlands for tax reasons but with no commercial or operational presence there”, including for instance special purpose entities and offeree companies.

A Dec. 2015 study by the EC found that of all 28 EU member states, the Netherlands had the highest number of structures and indicators enabling aggressive tax planning, though it did not look at the issue of letterbox companies specifically.

2017 Elections

Rik Grashoff, a lawmaker for the Dutch Greens (GroenLinks) who submitted the motion together with Ed Groot, a lawmaker for the Labour Party, said that their aim was to put the ball in the government’s corner.

Previous attempts by lawmakers to develop more stringent substance requirements were always shut down one way or other by State Secretary Eric Wiebes, he told Bloomberg BNA in a phone-interview October 20.

“That’s why in this motion we told the competent state secretary: ‘Now, you present a couple of proposals.”

Grashoff conceded that the Dutch parliament was unlikely to pass new legislation tightening the substance rules before the March 2016 elections because of the time needed to implement legislative changes.

“That’s why it is even more important that we have ideas on the table that can play a role in the next cabinet negotiations,” he said, adding that any subsequent steps would also depend on the parties elected.

Little Offices

The substance requirements currently contained under Dutch corporate tax law require, among other things, resident companies to dispose of qualified or highly-skilled personnel and to have a business location in the Netherlands.

Grashoff said these lax substance criteria had resulted in the establishment of “many little offices” in the Amsterdam business district.

“You sometimes have very many of these companies located at one address, with only a secretary behind the reception desk to tell you that no-one is there,” he said. “It sounds a bit ridiculous, but that’s really how it is.”

He added that more stringent substance requirements would ideally require resident companies to perform “real” economic activities such as the production of goods, products or services in the Netherlands. The production of such goods or services should additionally be proportionally related to the total profits realized in the Netherlands by that company, he said.

Legal Fiction

Eric Kemmeren, a professor in international taxation and tax law at Tilburg University, said the access of resident letterbox companies to the Dutch corporate tax regime and international tax treaties could be limited by introducing changes to the legal provisions for business place, contained in the 1969 Dutch Corporate Income Tax Act under section 2, paragraph 4.

This article provides that companies established under Dutch company law are understood to be resident of the Netherlands for the purposes of corporate income tax, Kemmeren said in a phone-interview with Bloomberg BNA Oct. 24.

“This means that a letterbox company, so a private company with limited liability automatically has access to Dutch tax treaties,” he said, unless such agreements include other limitations, such as the limitation on benefits provision in the tax treaty between the Netherlands and the U.S.

Functional Relation

Kemmeren said more stringent substance requirements could be achieved by scrapping Article 2.4 and adding two simple criteria for non-natural persons to the Dutch Corporate Income Tax Act as well the international tax treaties the Netherlands has concluded with other countries:

  •  that resident companies perform or have performed a substantial income-producing activity in the Netherlands; and
  •  that the corresponding income is attributed to that activity on the basis of a functional analysis.

The latter would prevent a fry shop, for instance, from being used to re-route millions of loans through the Netherlands, he explained.

“When such a functional relation exists between the company activity and the income, for instance when the concerned assets, a loan for instance, are used to perform the economic activity, well then that asset should be managed and its operation directed and controlled in the Netherlands.”

National Rules

If adopted, such criteria would quickly spell the end of letterbox companies since business entities that failed to meet them would not be able to qualify as tax residents and thus would not be able to enjoy the benefits of the tax treaties the Netherlands has signed, Kemmeren said.

“Instead, they would fall back on the national legislation of the concerned country,” he said.

Kemmeren added that it was difficult to predict whether more stringent substance requirements would be adopted anytime soon, but he noted that “many persons in the financial sector” have a stake in maintaining the rules as they are.

The motion is expected to be addressed in the November plenary session focused on the 2017 Tax Plan, but a precise date hasn’t been announced.

To contact the reporter on this story: Linda A. Thompson in Brussels at psukhraj@bna.com

To contact the editor responsible for this story: Penny Sukhraj at psukhraj@bna.com

For More Information

The motion submitted to the Dutch House, in Dutch, is at http://src.bna.com/jCP.

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