Over the last few decades, the financial interconnectedness between countries has strongly increased. This applies in particular to the Netherlands, where many multinationals are established and pension funds hold extensive foreign portfolio investments. The strong international ties have made the Dutch current account balance comparatively sensitive to dividend payments to portfolio investors. Profits not distributed to them are not included in the current-account balance but are regarded as income in the countries where the profits are retained.
Under the balance of payment rules of the IMF, a foreign shareholder of a Dutch company qualifies as a 'portfolio investor' if the holding is below 10% (larger holdings are booked under 'direct investments'). Only distributed profit paid to a foreign portfolio investor counts as the investor's income, while the non-distributed part is attributed to the Netherlands because it is assumed to be unavailable to the investor. As a result of this statistical accounting rule, the Dutch current account balance comes out higher than it would if all profits had counted as income of foreign investors. The opposite occurs as foreign companies retain part of their profit instead of distributing it to their Dutch equity investors.
The same effects are found in other countries, too, but the Dutch current account balance is extra sensitive to the rate at which profits are distributed. On the one hand, foreign residents invest relatively heavily in Dutch listed companies, because many large multinationals have their headquarters in the Netherlands. In 2011, foreign investors held Dutch equities worth 55% of the Dutch gross domestic product (GDP). In Germany and the USA, the corresponding figures were 20% and 15%, respectively. On the other hand, the Netherlands stands out among euro countries in having large pension funds that invest a major part of their assets abroad. Partly as a result of this, Dutch residents' foreign equity investments in 2011 ran to some 75% of GDP. In Germany, this was only 20% and in the USA 30%.
Effects of profit retention
For the Netherlands, the effects of profit retention have therefore been substantial in recent years. In 2011, for instance, the profits that Dutch-based companies did not distribute to foreign investors amounted to almost 4% of GDP. Thus they contributed substantially to the Dutch corporate savings surplus. By contrast, the savings balance for households as calculated by Statistics Netherlands (CBS), which includes the income of pension funds, was some 4% of GDP lower that year, owing to retained profits on foreign equity investments. In the years before 2011, the household savings balance would also have come out significantly positive if profits had been distributed in full, instead of hovering around zero (to judge by the available information which was somewhat limited in this case because of difficulties in ascertaining the total profits of all relevant foreign entities).