Is the Netherlands (still) a tax haven? It acted as one over decades. Recently, the government, however, implemented new regulation that is supposed to curb the profit shifting via the Netherlands. The most important piece in this respect is the 2021-‘royalty tax’ levied on royalty payments to tax havens. Will this tax be effective? How costly is it? Will it reduce investment and employment? Research suggests that the royalty tax (if enforced properly) will eliminate the most harmful income-shifting practice. At the same time, it does not reduce investment and real activity if sufficient leeway to use internal debt remains.
Over decades, the Netherlands developed a reputation for being a tax haven. It became infamous as a part of the ‘Double Irish Dutch Sandwich’, Google’s construct to shift profits via Ireland and the Netherlands to Bermuda. Effectively, the Netherlands is a conduit country that helps to funnel profits from high-tax countries to tax havens. Particularly the Dutch Special Purpose Entities attract income, often as interest and royalty payments, and pass it on, effectively untaxed, to tax havens.
How profit shifting works
The first main strategy that multinational firms use for such profit shifting is debt shifting. Instead of investing non-deductible equity directly in high-tax affiliates, multinationals put the equity in an internal bank in a tax haven. The internal bank passes on the capital as loans to related affiliates. Such a structure creates tax deductions in high-tax countries and causes little tax payments on received interest income in the tax haven. The second, and quantitatively much more important, strategy is to misprice intra-firm trade to shift profits from high- to low-tax affiliates. Such transfer pricing works particularly well for firm-specific intangibles like Google’s search algorithm. As their true value is difficult to determine for tax authorities, multinationals can overcharge royalty payments for the use of these intangibles in high-tax countries. That way, profits from high-tax countries eventually are booked in tax havens where the ultimate owners of the intangibles reside – and hardly pay taxes.
The Netherlands’ response to international pressure
Due to international pressure and the harm of the Dutch tax-haven status, substantial regulatory changes came into place under Secretary of Finance Menno Snel. Most importantly, since 2021 a withholding tax, equal to the Dutch corporate tax rate, is levied on interest and royalty payments to black-listed countries, mainly tax havens with a tax rate of less than 9%. This ‘royalty tax’ intends to curb any shifting via the Netherlands.
So, is the Netherlands still a conduit country? Is the new regulation desirable? And will it be effective?
‘If enforced properly, the new royalty tax should largely abolish the tax-haven status of the Netherlands’
The implications of the ‘royalty tax’
Together with Steffen Juranek and Andrea Schneider, I theoretically explored these questions in a model that hosts multinationals that use both debt shifting and overcharging royalty payments to shift profits to a tax haven. The multinationals choose both their investment and their profit shifting to maximize their global after-tax profits. Their profit shifting is determined by balancing tax savings and costs related to coping with profit-shifting regulation.
Our results suggest that the policy is desirable and that all countries (except for the real tax havens) will benefit. A first important insight is that debt shifting has some beneficial effects. It directly reduces the tax burden on marginal investment and fosters employment. In contrast, transfer pricing in intangibles is damaging because it does allow for shifting economic profits, while it does not boost firm investment (on the intensive margin). Hence, countries only loose from such transfer pricing. Therefore, it is optimal to eliminate it completely via a royalty tax that removes all tax advantages. Finally, the royalty tax also falls on the arm’s-length payment, and by that, it still taxes investment. The resulting economic distortion, however, can be compensated for by allowing for some (more) debt shifting.
Smart choice – ending the tax-haven status (?)
In sum, the new Dutch royalty tax should prevent shifting profits from and via the Netherlands to tax havens, if it gets enforced properly. At the same time, as long as the debt-shifting regulation does not become too strict, the tax does not need to have negative effects on real investment and employment in all non-haven countries, including in the Netherlands.
Time will show whether these predictions are correct. Previously, only the finance and consultancy industry in Amsterdam benefitted from the existing situation, while hardly any income or tax revenue was generated in the Netherlands. A promising sign is that Google has now stopped its ‘sandwich’ with effect of 2021.
Bio:
Dirk Schindleris Professor of International Taxation at Erasmus School of Economics. His main fields of research are taxation under uncertainty and international corporate taxation, in particular profit shifting in multinationals. He tries to embed institutional details of regulation and combine insides from economics and accounting in his research.
FAQs
The Netherlands is a tax haven for multinationals. Although this construction will be phased out and stopped completely in 2024, partly due to pressure from other European countries. The Netherlands is not a classic tax haven, but rather a transit of tax money to other countries.
Are the Netherlands a tax haven? ›
The Netherlands has been known internationally, since at least the 1970s, as a tax haven. A political debate about this issue started in 1977, when economist and social-democratic MP Flip de Kam published a book about corporations transferring large sums to Caribbean countries without paying Dutch corporate tax.
Why tax is so high in Netherlands? ›
The tax revenue funds public spending in the Netherlands, including healthcare, education, and social security benefits. In 2024, the Dutch government is projected to raise around €402.9 billion in taxes. Most of this will come from income tax, social security contributions, and Value Added Tax (VAT).
Is there a tax treaty between US and Netherlands? ›
The US Netherlands tax treaty, originally signed in 1993, serves as an agreement between the two countries for determining the taxation of income where both nations may have the legal right to tax according to their respective laws.
What is the tax loophole in the Netherlands? ›
The structure relies on the tax loophole that most EU countries will allow royalty payments be made to other EU countries without incurring withholding taxes. However, the Dutch tax code allows royalty payments to be made to several offshore tax havens (like Bermuda), without incurring Dutch withholding tax.
Where is the biggest tax haven in the world? ›
According to modern studies, the § Top 10 tax havens include corporate-focused havens like the Netherlands, Singapore, Ireland, and the U.K., while Luxembourg, Hong Kong, the Cayman Islands, Bermuda, the British Virgin Islands, and Switzerland feature as both major traditional tax havens and major corporate tax havens.
How the Netherlands built one of the world's worst tax havens? ›
Rather, it's because the Netherlands lets those companies park the money they make elsewhere in Dutch subsidiaries or shell companies, or move those profits through “letterbox” entities in the Netherlands, from which it can be sent on to other tax havens.
What is the 30 rule in Amsterdam? ›
The 30% reimbursem*nt ruling (also known as the 30% facility) is a tax advantage for highly skilled migrants moving to the Netherlands for a specific employment role. When the necessary conditions are met, the employer can grant a tax-free allowance equivalent to 30% of the gross salary subject to Dutch payroll tax.
What is the 183 rule in the Netherlands? ›
183-day rule applies – taxed in country of residence
An example of this is that your Dutch employer assigned you to work in France, which makes you stay there for more than half of the year. In this case, the 183-days rule applies, and the country of employment is not entitled to levy tax on the wages.
Does Netherlands have free healthcare? ›
The Netherlands has universal healthcare, but the government requires all adults living or working in the Netherlands to have basic insurance. The basic plan will cost € 100-120 out of pocket. If you're employed, your employer will pay a small percentage towards medical coverage as well.
The Dutch tax lower incomes far less steeply than in the USA. For example, at a household income of $40,000 the U.S. effective tax rate is 9.18%, while the Dutch rate is a mere . 05%.
How can I avoid double taxation in the Netherlands? ›
You may have to file two tax returns but you will not pay tax twice on the same income. The Netherlands makes agreements with other countries to determine which country can tax what income. The agreements are laid down in a tax treaty so that you do not pay double taxation.
Does the Netherlands accept American immigrants? ›
Immigration. As a third-country national who does not possess EU, EEA, or Swiss nationality, you will need a residence permit to stay in the Netherlands for more than 90 days. There are different types of visas, residence permits, and work permits depending on your employer and your specific case.
What is the 30 tax rule in the Netherlands? ›
The 30% tax ruling is a tax advantage for highly skilled migrants in the Netherlands. An employer can pay up to 30% of the salary of an expat employee with the 30% ruling free of tax. An enormous tax saving for both employee and employer. Try our tax calculator to find out how much you can save with the 30% ruling.
Do immigrants pay taxes in Netherlands? ›
As soon as you move to the Netherlands you become a resident taxpayer. That means: You pay income tax in the Netherlands.
Who pays property tax in the Netherlands? ›
Most property owners and tenants of a garage, storage space, or business premises pay property taxes (Onroerendezaakbelastingen, or OZB). This is a fixed percentage of the official listed value (WOZ value) of the property.
Is Netherlands a high tax country? ›
The OECD average tax wedge in 2022 was 34.6% (2021, 34.6%). In 2022, the Netherlands had the 22nd highest tax wedge among the 38 OECD member countries, occupying the same position in 2021.
Which European country is a tax haven? ›
England, Germany, and Ireland are among the top tax havens on the continent. Switzerland's financial secrecy has made it one of the world's top places to store cash. Foreign companies can get favorable treatment as Danish holding companies while Luxembourg doesn't charge capital gains taxes on certain stocks.
Is Netherlands a low tax country? ›
During that period, the highest tax-to-GDP ratio in the Netherlands was 40.0% in 2020, with the lowest being 34.8% in 2003. The Netherlands ranked 12th¹ out of 38 OECD countries in terms of the tax-to-GDP ratio in 2022. In 2022, the Netherlands had a tax-to-GDP ratio of 38.0% compared with the OECD average of 34.0%.
Do Dutch people pay taxes? ›
In the Netherlands, worldwide income is divided into three different types of taxable income, and each income type is taxed separately under its own schedule, referred to as a 'box'. Each box has its own tax rate(s). An individual's taxable income is based on the aggregate income in these three boxes.
