The Netherlands as a Tax Haven: Fact or Fiction?
It has not been a long time – fourteen years to be precise – since the Netherlands featured prominently on a list of tax havens compiled by the Obama administration, among places such as Bermuda, the Cayman Islands and Ireland. This was part of a U.S-led crackdown on tax havens enabling multinationals to pay taxes in low-tax jurisdictions instead of countries where most of their activities take place. A swift diplomatic intervention by the Dutch embassy in Washington D.C. was needed to remove the Netherlands from the list of countries with a tax haven status.[i] Unfortunately, the reputational damage was already done.
There is no exact definition of a tax haven. However, the OECD (Organisation for Economic Co-operation and Development) lists the following factors to identify a tax haven: no or low taxes, a lack of effective exchange of information, a lack of transparency and no requirement for substantial business activities.[ii] The consequences of tax avoidance are, of course, dire. If multinationals pay less tax, there is less money going to schools, hospitals, public utilities and other services that keep society afloat. This article explores the criticism regarding Dutch corporate tax policies and assesses whether it is still justified or if the country’s reputation as an important location for tax avoidance is a distant memory.
The Netherlands indeed offered multinationals a favourable tax regime. This was partly because of the absence of a withholding tax on interest and royalty payments. Another characteristic of the Dutch tax system are the advanced tax rulings (ATR’s), which allow multinationals to cut a deal with the tax authorities on the fiscal implications of their transactions in the Netherlands.[iii] In addition to this, the country has been an industry leader in the field of tax-optimization through so-called mailbox-companies. These companies are legal entities with no substantial activities in the host country and are mainly set up in a jurisdiction to obtain a favourable legal framework.[iv]
In recent years, tax avoidance by multinationals, as well as tax evasion by wealthy individuals, has caught the attention of both the public and the regulators. The publication of the Panama Papers in 2016 and the Paradise Papers in 2017 have laid bare an extensive network of secretive offshore companies designed to use legal loopholes to hide money in low-tax jurisdictions and to obscure the identity of their owners.
It also showed the vulnerability of the international financial system to money laundering, corruption and the avoidance of international sanctions. In its wake, multiple people involved – including several high-ranking officials – have lost their jobs and sometimes even their freedom, while countries managed to recoup more than $1.36 billion in unpaid taxes and fines.[v] Moreover, these revelations and the public outrage that followed them have led to increased scrutiny towards tax avoidance and its enablers.
The role of the Netherlands in the proceedings has once again confirmed the status of the country as a major player in enabling tax avoidance. According to Dutch law, corporate service providers have a duty to register the identity of their clients and monitor their cash flow activities in order to ensure compliance with the policies of the Dutch central bank.[vi] In reality, these companies have proven to be keen on assisting multinationals in creating complex and opaque structures in offshore tax havens to protect assets from creditors and hide the identity of beneficiaries.[vii]
Supervision has been slow, to say the least. Cases are complex and analysing a myriad of financial transactions is a task that overwhelmed the tax authorities. What made efficient monitoring even more difficult is the fact that the actors in the financial system – corporate service providers, banks, notary firms and lawyers – all worked from their own checklists and their own criteria. The Dutch parliament has also taken notice of these developments and the role of the Netherlands in the proceedings. In as early as 2013, parliament passed a vote supporting a firm approach with regards to multinationals using Dutch fiscal constructions with the aim of tax avoidance.[viii]
However, tangible results are hard to come by. According to Jan Vleggeert, professor of Tax Law at Leiden University, the introduction of a withholding tax on interest and royalty payments to low-tax jurisdictions is a step in the right direction. The aim of this tax is to counter aggressive tax structures that are created solely with the purpose of avoiding taxes and that do not accurately reflect economic reality. However, these measures are counterbalanced by a powerful lobby of the Dutch financial sector, citing job losses in finance and a decline of foreign investment in the Netherlands as consequences of more rigid fiscal policies.[ix]
Another approach in the debate on tax havens is the notion that simply making rules is not enough. Anna Gunn, partner at Gunn Tax Communication, thinks that a different mindset is needed to combat aggressive tax planning strategies and their negative consequences. A new generation of tax professionals could have a major impact on the tax policies of multinationals and on the way the debate on tax planning is shaped. This is exemplified by the implementation of an ‘Ethics Board’ at leading Dutch tax consultancy firms and the introduction of ethics as a subject within tax law programs at universities.[x]
Nonetheless, these measures have not silenced critics. The inability to learn lessons from the past has led to a vote by the European Parliament to include the Netherlands on their official tax haven blacklist, another dent in the country’s reputation on tax matters and further testimony that the Netherlands is etched in collective European memory.[xi]
In addition to this, the steps taken by the Dutch authorities to combat tax avoidance have received criticism for being half-hearted and inadequate to effectively respond to these problems.[xii] Gunn’s plea for a change in attitudes may be the key to creating fairer, more inclusive societies. Yet, it may be a long, hard journey to not only change the agendas of governments, multinationals and professionals in the finance industry, but to alter the perception of the Netherlands as a tax haven catering to clients seeking to bend the rules in their favour as well.
[ii] OECD, Harmful Tax Competition: An Emerging Global Issue, 1998, p. 23.
[iii] Kamerstukken II, 2020/21, 25087, nr. 272, p. 1.
[iv] De Swart, European Company Law 2015, 12/1.
[vi] Art. 15a Handelsregisterwet 2007.
[vii] Meinzer 2019, p. 105.
[viii] Kamerstukken II, 2012/13, 31066, nr. 160, p. 1.
[ix] Vleggeert & Vording, NJ 2018, 93/3.
[x] Gunn, NTFR 2022/3472.
Pieter Vergouw: Hi, I’m Pieter. I have a bachelor degree in Business Administration and I am a qualified English and Economics teacher. I’m currently pursuing a master’s degree in Law at the University of Amsterdam and my interests include adult education, integrity in sports, tax policy and international law.
Taylor Brunnschweiler is a second year studying European Languages and cultures at the university of Groningen. Other than languages, she enjoys cosmetology, illustration and graphic design in general.