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The conduit sector

Read aloud

The Netherlands is a major player in the financing of multinational corporations. For legal and tax reasons, multinational corporations often channel large sums of money through Dutch financial holding companies. These holding companies have little or no real economic activities in the Netherlands. This dashboard provides an overview of this conduit sector.

What does ‘conduit’ mean?

When a foreign parent company establishes a Dutch subsidiary, that subsidiary receives funds from the parent company in the form of equity and loans. Conduit is a situation in which the subsidiary does not use those funds for business activities in the Netherlands, but transfers them abroad to finance other business operations there. Once the funds have passed through the Dutch subsidiary, its balance sheet shows participating interests (such as shares) and loans, on both the assets and liabilities sides. It pays and receives dividends and interest on these positions (income flows).  

By far the largest proportion of such flows involve Dutch subsidiaries that are used solely for financing purposes and employ very few staff. In DNB’s statistics, these types of subsidiaries are referred to as ‘financial holding companies owned by multinationals’. Together, they make up the Dutch conduit sector. 

In the Dutch policy debate on conduit financing, various other terms are also used to refer to these 'financial holding companies owned by multinationals’, such as such as ‘captive financial institutions’, ‘special financial institutions’, ‘pass-through entities’ and ‘letterbox companies’. More information about the definitions of these concepts can be found here. 

Size of the Dutch conduit sector

The total financial size of the Dutch conduit sector (the sum of all assets) is approximately four times the size of the Netherlands’ gross domestic product (GDP), but it has declined since 2016 relative to GDP since 2017. This decline is linked to policy measures that have made the Netherlands a less attractive conduit country, due to which financial flows have shifted to other countries. Multinational corporations have wound up financial holding companies in the Netherlands and established fewer new ones.

Mostly related to foreign countries

The balance sheet of the conduit sector consists mainly of assets (claims) and liabilities on and to other countries. Given its enormous scale, the conduit sector has a significant influence on developments in the current and financial accounts of the balance of payments, particularly in terms of inward and outward direct investment.

The graph above shows that around 90% of the assets held by Dutch financial holding companies owned by multinationals. In fact, almost all of the liabilities are owed to foreign countries. 

Limited debt to Dutch financial institutions

While the conduit sector is part of the financial sector, it is almost entirely separate. Given that it has limited debt to other Dutch financial institutions, the sector falls outside the narrow definition of non-bank financial intermediation used to measure potential financial risks outside the banking sector.

Types of financial holding companies owned by multinationals

Two types of financial institutions can be distinguished in the conduit sector:

  • Special Purpose Entity (SPEs)
    Around half of the conduit sector consists of financial holding companies known internationally as special purpose entities (SPEs). An SPE’s balance sheet consists almost exclusively of foreign assets and liabilities.

  • Other financial holding companies owned by multinationals
    Other financial holding companies owned by multinationals make up the remainder of the conduit sector. Like SPEs, they employ very few staff, but they do not meet the SPE definition because they have financial ties with the Netherlands –  they hold a participating interest in a Dutch company, or are a listed parent company based in the Netherlands. In this type of holding company, too, foreign positions are much larger than domestic ones, which means there is a significant flow of funds.

To gain an understanding of the conduit sector, the figures for the entire sector must be considered, meaning both SPEs and other financial holding companies owned by multinationals.

To complement the picture further, financial and trade flows outside the conduit sector must also be taken into account. For example, the flow of royalties and licence fees are channelled through the international trade in services of non-financial subsidiaries owned by multinationals.

Conduit positions by country

Over the past few decades, conduit positions worth hundreds of billions of euro were created with countries with which the Netherlands has close economic ties, such as the United States, the United Kingdom and Germany. 

In addition, there are significant positions with other conduit jurisdictions, such as Luxembourg, Ireland, Singapore and Switzerland. Like the Netherlands, these countries are often used by multinational corporations as conduit countries. For tax and legal reasons, a flow of funds sometimes passes through several countries before reaching the non-financial subsidiary where the final investment is made.

The chart above shows the assets and liabilities of the conduit sector abroad.

Income flows by region

These massive cross-border positions generate tens of billions of euro in incoming and outgoing income flows with foreign regions every year, in the form of interest, dividends and retained earnings. A small proportion of these income flows comes from Dutch participating interests and loans. Almost all the income generated by the conduit sector in the Netherlands and foreign countries goes abroad. 

* The category ‘rest of the world (undefined)’ relates to interest and dividends on issued securities. Based on the sources used, it is only known which share of these income flows accrues to non residents, while the exact breakdown by country is unknown.

The largest flows of income are to and from the statistical category ‘rest of the world’, which includes the United Kingdom and the United States. Income flows to other conduit jurisdictions are also substantial, particularly inflows. Low-tax jurisdictions, which have an effective tax rate of less than 15%, such as the Cayman Islands and Bermuda, account for a relatively small proportion of the total flow of funds. 

Transactions cause changes in conduit financing

Changes in international regulations can make it more attractive for multinational corporations to move participating interests and loans to other countries. The transactions presented in Table 15.8 provide insight into these restructuring measures. Negative transactions indicate reductions of existing conduit positions in the Netherlands, while positive transactions signal the creation of new positions.

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