Finance

The Netherlands mailbox paradise: growth of firms must continue to be curbed

That is what a commission of inquiry led by civil servant Bernard ter Haar said in a report. According to the committee, measures have been taken, but they have not yet resulted in enough improvement. More needs to be done at international level as well.

In 2019, the Netherlands had 12,400 letterbox companies, also known as conduit companies. Together they had about 4,500 billion euros on the balance sheet. Annually, an average of about 170 billion euros in interest, royalty and dividend payments flows through these firms to tax havens.

Little for the economy

Compared to their size, however, the firms contribute only to a limited extent to the Dutch economy. They only provide three to four thousand jobs. In 2019, they paid an estimated 650 million euros in corporate tax, 0.2 percent of total tax revenues.

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.

In this way, foreign profits are channeled via the Netherlands to Bermuda, to ultimately end up with a low-taxed position at an American firm. And a large part of the foreign investment is channeled through without the Dutch economy really benefiting from it.

Criminal Money

According to the committee, Dutch letterbox companies are also used in “long chains of empty entities to disguise criminal money and ultimately launder it.”

The Netherlands has traditionally been an attractive location for letterbox companies, partly due to tax rules and 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.

Tax haven

“For a long time, the government deliberately did not obstruct the development of this transfer practice,” says the committee. And that has to change, according to the European Commission. The Netherlands scores many points when it comes to facilitating tax avoidance, which means that other countries are missing out on a lot of income.

The government has recently taken action to ensure that the Netherlands becomes less attractive to letterbox companies. For example, a withholding tax on interest and royalties has been introduced that must be further expanded. Businesses may also be exempt from certain tax treaty benefits.

Action taken

The effect of these rules is not yet clearly visible, says the committee. A cautious downward trend is visible, but more can be done. In short, the price tag associated with setting up a letterbox company must continue to rise.

According to Ter Haar, international rules are essential to prevent the problem from spreading to other countries. For example, the European Commission is looking at a minimum tax on the profits of large multinationals. The Netherlands must fight for harmonized rules internationally.

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