Finance

European Commission wants to tackle Dutch letterbox companies

With more than 12,000 conduit companies, the Netherlands is a real letterbox paradise. From Pfizer, to Bono and all kinds of mafia bosses, anyone who has a little money and wants to pay as little tax as possible has one, says chairman of the European Parliament’s Tax Committee Paul Tang.

In that capacity, he will be scrutinizing the committee’s new bill in the near future and wanting to convince opposing member states of the need for a law. All member states and parliament still have to agree, but now that the proposal has been made, the discussion is more about the details than about whether there will be a law.

Big cleaning

“It is time for a major clean-up. The Netherlands is attracting criminal activities and is hurting neighboring countries financially, on a large scale,” he says. While we can miss the letterbox companies like a toothache, according to Tang.

According to interest group Tax Justice Network, EU countries lose about 10 billion euros annually in tax revenues due to Dutch firms and policy.

A commission of inquiry led by civil servant Bernard ter Haar recently concluded that the companies contribute only to a limited extent to the Dutch economy. Annually, an average of about 170 billion euros in interest, royalty and dividend payments flows to tax havens. In addition, criminal money is laundered in this way.

letterbox company

Letterbox companies are set up by companies to take advantage of the (tax) rules in a country. For example, less tax has to be paid or (parts of) companies can pass complicated rules. Usually there is no actual economic activity in the country of the letterbox company.

Report to tax authorities

If all goes well in the negotiations between the Commission, the Member States and the European Parliament, the law should come into force on 1 January 2024. This includes, among other things, that companies must report to European tax authorities if there are questions about activities. Following up on inspection requests will be made mandatory on pain of fines of at least 5 percent of turnover, the Commission’s proposal states.

“That quickly runs into the millions,” said Tang. Tax authorities are currently already exchanging information internationally via a database, which is intended to be expanded.

Don’t take advantage anymore

The law must ensure that letterbox companies can no longer just profit from applicable tax rules or treaties. For example, under European law no tax may now be levied on money flows between EU countries, but that has to change for letterbox companies.

The Netherlands has traditionally been an attractive location for letterbox companies, thanks to the many tax treaties concluded with other countries. These prevent, for example, that a company has to pay tax in several countries on the same economic activity.

But that too must change. With the new law, this advantage no longer applies to letterbox companies, because the country where the money flow originates may also collect tax.

Definition uncertain

Ultimately, the benefits should disappear. But the precise definition of a letterbox company is still sensitive, Tang knows. The law focuses on ‘risky companies’. These are companies that have a lot of income from indirect money flows such as royalties or dividends and often operate internationally with a minimum of manpower. But there is still a lot of discussion about this.

Letterbox paradise The Netherlands has in any case promised to play a leading role in making the EU more effective and to cooperate internationally against tax avoidance, according to the coalition agreement.

The Ter Haar Committee also recommends sound international policy. Until now, the Netherlands has taken some measures, but the effects are not yet really visible.

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