INSIGHT: Royal Dutch Shell plc “Shell-shocked” over Tax Structure Criticism

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By Miles Dean

Before considering whether the claims have any merit it is necessary to turn back the clock to 2005 when the two operating limbs of the Shell group were brought under one central holding company. The U.K. limb being The Shell Transport and Trading Company plc (“STTC”), the Dutch arm being Royal Dutch Petroleum Company NV (“RDPC”). By way of corporate reorganization, these two companies were brought under the common ownership of a new U.K. incorporated but Dutch tax resident company, namely Royal Dutch Shell plc (“RDS”) on July 20, 2005.

In brief, the reorganization was structured as follows:

  • RDPC shareholders received 2 RDS A shares for each RDPC share they held; and
  • STTC shareholders received 0.287 RDS B shares for each STTC share they held.

Prior to the reorganization, shareholders in STTC would receive dividends without deduction of U.K. withholding tax (“WHT”), since the U.K. does not impose WHT under its domestic laws. By contrast, shareholders in RDPC would be subject to Dutch withholding tax at the rate of 15 percent as reduced by a relevant double tax convention (“DTC”).

Following the reorganization, dividends paid by RDS to nonresident shareholders are liable to Dutch withholding tax since RDS is resident for tax purposes in the Netherlands. This is an adverse effect for the former STTC shareholders who would previously have not been liable to WHT from a U.K. company.

The answer to this problem was in the form of the Dividend Access Share (“DAS”) and the Dividend Access Mechanism (“DAM”) which was approved by the Dutch Ministry of Finance in the form of rulings issued on October 26, 2004, April 25, 2005 and April 9, 2015.

As noted above, dividends paid by RDS are Dutch source and subject to 15 percent Dutch withholding tax, whereas dividends paid by STTC are not liable to U.K. withholding tax. However, since the reorganization only RDS pays dividends on the A and B class shares. To mitigate the Dutch withholding tax, STTC issued a DAS that is held on trust by trustees in the Channel Islands for the benefit of the RDS B shareholders. The DAM operates as follows:

  • upon RDS announcing a dividend of the B shares, the board of STTC simultaneously elects to declare and pay a dividend on the DAS;
  • such DAS dividend is paid to the trustee and, being U.K. source, is not subject to any withholding tax;
  • the RDS B shareholders are beneficially entitled to receive their share of the DAS dividend per the trust arrangement; and
  • the amount of the dividend paid on the DAS is netted off against what the RDS B Shareholder would have otherwise have received (i.e. they don’t get two bites of the cherry!).

Since the implementation of the DAS and DAM in 2005, it is reported that 45 billion euros of dividends have been paid via this arrangement, saving 7 billion euros in Dutch withholding tax. The question arises whether those claiming the Dutch parliament and the European Commission should launch a formal investigation have a leg to stand on.

The Commission has instigated numerous state aid investigations in the past 24 months, with high profile targets such as McDonalds, Apple, Fiat and so on firmly in the crosshairs of Margrethe Vestager.

For a measure to constitute state aid it must have the following hallmarks, as prescribed by case law of the Court of Justice of the European Union (‘‘CJEU’’) and the General Court:

  • it is provided by a member state and financed through state resources (i.e., intervention by the member state that departs from the norm);
  • an economic advantage is provided to an undertaking;
  • it is selective in favor of a particular undertaking, category of undertakings or category of goods; and
  • it distorts or threatens to distort competition and affects trade between member states—this is assumed to be the result where intervention, economic advantage and selection exist.

We will need to see the ruling obtained from the Ministry of Finance in order to say whether the arrangement amounts to state aid. However, unless the ruling provides for beneficial treatment for RDS, Commissioner Vestager will have to look elsewhere for her next headline. What is clear is that the Dutch state granted the ruling to give RDS certainty as regards its obligation to withhold tax on dividends paid to its shareholders.

Miles Dean is Managing Partner of Milestone International Tax Partners LLP, U.K.

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