Income from foreign direct investment in the Netherlands flowing to low-tax jurisdictions has declined structurally since 2020, new figures from DNB show. Income flows with other countries remained more stable over the same period.
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The Netherlands is one of the world's largest recipients of foreign direct investment. However, a significant part of these investments – and the related income (see Box) – also leaves the Netherlands immediately. This phenomenon of capital flowing through the Netherlands involves what are known as conduit activities. The route of this flow is sensitive to the design of international tax laws and regulations.
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.
For a long time, it was financially attractive for multinationals to transfer their profits, in the form of dividends, interest income or royalties (such as trademark rights), through the Netherlands to countries with lower tax rates. Countries such as the Cayman Islands, Bermuda and the Bahamas are examples of such low-tax jurisdictions (LTJs).
Various measures to prevent tax avoidance have been taken in recent years, such as the introduction of a global minimum tax of 15% on the profits of multinationals and the introduction and extension of source taxes on cash flows to LTJs.
Outward income flows to LTJs showed a steady upward trend until 2019, to an average of over €37 billion in the period 2017-2019. By 2020, they had dropped sharply to around €5 billion. Since then, outward income flows have fluctuated between €5 billion and €10 billion annually; in 2023 they amounted to €7 billion.
Total outward income flows related to direct investment remained at a similar level as in 2022, at €324 billion. In 2019, before the income flows to LTJs started to decline, this amounted to €283 billion.
The vast majority of foreign direct investment income now consists of profits and interest. Since 2015, royalty flows have fallen sharply, from around 25% of total incomes to around 15% in 2023. A significant share of royalties flow through the Netherlands as part of conduit activities.
The lower outward and inward income flows to and from LTJs coincide with restructurings undertaken by the international business community to adjust to changes in tax laws and regulations.
Direct investment positions with LTJs are clearly lower than in the past, especially as regards direct investment by foreign entities in Dutch subsidiaries. The total value of these positions decreased by more than half, from €449 billion in 2016 to €165 billion by the end of 2023.
As a result, the share of LTJs also decreased significantly as a percentage of total direct investment positions in the Netherlands. This was compounded by the fact that direct investment from other jurisdictions in the Netherlands increased by €160 billion over the same period.
By the end of 2023, total direct investment from abroad in Dutch companies amounted to around €4,800 billion, and from the Netherlands in foreign companies to over €5,600 billion.
Foreign direct investment is investment by a company in one economy in another (foreign) economy (i.e. between the Netherlands and other countries) with the objective of acquiring a lasting interest in the investee company. 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 investee company's voting rights. Foreign investments consist of participating interests and loans between parent, subsidiary and sister companies.
Foreign direct investment income consists mainly of profits in the form of dividends and retained earnings belonging to foreign owners, both inward and outward. Fees charged for the use of intellectual property, also known as royalties, are another important type of income between group companies that is used in practice for tax purposes.
Financial conduit companies were responsible for more than half of Dutch inward (€182 billion) and outward (€171 billion) foreign direct investment income in 2023. These financial holding companies and special purpose entities are mostly set up for the flow of dividends and interest.
In addition, foreign direct investment income also flows through Dutch companies engaged in non-financial activities. A significant share of the royalties paid (€59 billion) and received (€41 billion) by these companies flow through the Netherlands as part of conduit activities. Multinationals also use these non-financial companies for intra-group financial flows (other than royalties) that are separate from Dutch business activities. The size of the latter category of conduit activities is difficult to ascertain exactly because it is recorded jointly with other business activities.
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