Income from foreign direct investment (FDI) in the Netherlands flowing to low-tax countries has fallen sharply over the past two years. This is probably due to newly introduced national and international legislation, according to a DNB analysis.
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The Netherlands is the second-largest recipient of FDI in the world, behind the United States. However, a significant part of these investments – and the related income – also leaves the Netherlands immediately, without adding any value. This phenomenon of large inward and outward FDI involves what is known as conduit activities.
Low-tax countries such as the Cayman Islands, the Bahamas and Bermuda have been major destinations of these activities via the Netherlands in recent years. Between 2015 and 2019, an average of €35 billion in foreign direct investment income (over 14% of the total income) was channelled annually to low-tax countries. The last two years have seen a change in trend, however. In 2020 and 2021, this amount dropped to €6 billion per year, or 3% of total income.
At De Nederlandsche Bank, we independently compile statistics on the Dutch financial sector and economy. This article is based on these statistics. More information on our statistics and all dashboards can be found on our Statistics homepage.
While income flows to low-tax countries are drying up, relatively more FDI income goes to countries like the United States, the United Kingdom and Member States of the Economic and Monetary Union (EMU). It can be assumed that this is due to more substantial investment activities.
Since outflows to other conduit countries such as Switzerland, Ireland and Luxembourg are not increasing, it seems unlikely that profits will end up in low-tax countries via other conduit countries.
The fact that less foreign direct investment income flows through the Netherlands to low-tax countries is probably related to newly introduced national and international laws and regulations. For example, the Irish tax authorities have banned what has become known as the double Irish with a Dutch sandwich structure in 2020, which was particularly popular among US technology companies. Using this method, multinational companies tried to minimise their tax burden by placing profits in low-tax countries through Ireland and the Netherlands.
In addition, the Withholding Tax Act (Wet bronbelasting) came into force in the Netherlands on 1 January 2021. This tax applies to interest or royalty payments made by an entity resident in the Netherlands to an associated entity in a low-tax country. It is particularly the incomes that are subject to this withholding tax that have fallen the hardest. For example, in 2021, interest and royalty payments to low-tax countries were as much as 96% lower than in 2019.
Although the flow of income to low-tax countries has decreased significantly, the Netherlands remains a major conduit country overall. DNB figures show that inward foreign direct investment in 2021 was €4,700 billion, €200 billion up from 2020, or approximately 10% of the global total.
Not all conduit activities undertaken in the Netherlands that involve FDI income are tax-driven. Other aspects, such as the Netherlands’ solid legal infrastructure, investment protection, the flexibility of its business law and the presence of many financial, fiscal and legal service providers also make it an attractive place to do business.
Foreign direct investment is investment by a resident of one economy in another (foreign) economy with the objective of acquiring a lasting interest in the company in which it invests. A lasting interest implies (i) a long-term relationship between the investor and the investee company and (ii) a degree of control by the investor over the policies pursued. In practical terms, this means that the investor must hold at least 10% of the company's voting rights.
FDI income consists mainly of profits in the form of dividends and retained earnings belonging to foreign owners, both inward and outward. Another important type of income between group companies that is used in practice for tax purposes is fees charged for the use of intellectual property, also known as royalties.
Table 12.8: Direct investment transactions (Quarter)
Table 12.16: Direct investment positions broken down according to country
Table 12.21: Geographical distribution of inward en outward FDI income
DNB Analyse - Mapping Conduit Flows Through The Netherlands
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