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Report of the Conduit Companies Committee

On November 22, 2021, the 103-page report ‘Op weg naar acceptabele doorstroom’ (The road to acceptable conduit activities) of the Conduit Companies Committee (hereinafter: the Committee) was published. The report contains 15 recommendations, divided into six tax and nine non-tax policy options. At the same time, the Deputy Minister of Finance sent the government’s response to this report to the Lower House of Parliament. In brief, it appears from this that the government believes that the soon to be expected EU measures for letterbox companies should be followed as far as the possible withholding of benefits for conduit companies is concerned. And that the next government should consider tightening in the fields of information exchange, transparency and supervision. Conduit companies should prepare for these developments.

In this memorandum, we therefore discuss in more detail the findings and recommendations of the Committee as they appear from the report and the government’s response.

Concise summary

The Committee notes that many measures have already been taken at the national level to prevent the flow of funds, mainly in the field of taxation. Many measures have also been taken to combat money laundering and terrorist financing. However, it is not yet clear how effective the tax measures are in preventing the channeling of funds, partly because the effects are not yet visible in the (lagging) figures.

The Committee goes on to say that, in its view, agreements at the international level are indispensable in order to combat tax avoidance through conduit companies. Developments in this area have been accelerating for a few years now. This all leads to a combined uncertainty about (i) the effectiveness of national measures already taken and (ii) the outcome of international negotiations in this field. The Committee combines these two elements and takes the position that it is wise to closely monitor the effects of the (tax) measures already taken and the outcome of the international tax negotiations. The Committee also recommends that the Netherlands adopt a constructive and, where possible, initiating attitude towards current international initiatives.

However, the Committee sees opportunities for measures in the area of greater transparency, strengthened supervision and reporting requirements. The Committee divides its recommendations into tax and non-tax policy options. The tax recommendations concern the withholding of tax benefits or securities, improving the exchange of information and tightening the Dutch stance in treaty and multilateral negotiations on tax matters. The Committee recognizes a number of risks under EU law. The Committee therefore sees all the more reason to take an energetic, coordinating and initiating approach to the European initiative against conduit companies. With the latter, the Committee refers to the European Commission’s proposal for a directive to combat tax avoidance through the use of shell entities (i.e. conduit companies), which is expected this year.

The non-tax recommendations concern, among other things, withholding the legal benefits that investment protection agreements (investeringsbeschermingsovereenkomsten; hereinafter: IBOs) offer to conduit companies, increasing the transparency of legal entities by, for example, tightening the obligations with regard to the identification of the Ultimate Beneficial Owner(s) (hereinafter: UBO(s)), the UBO register, and the accounting and reporting rules (‘403 statement’), as well as combating financial crime through stricter supervision, better international cooperation and additional research.

Tax

Role of taxation

The Committee explains that the position of the Netherlands as a conduit country has historically grown as a result of tax policy aimed at facilitating the cross-border activities of Dutch companies and attracting foreign investment. The most relevant elements of the Dutch tax system that have made the Netherlands attractive for conduit companies, at least until recently, are the participation exemption, the extensive treaty network, the absence of withholding tax on interest and royalties and the ruling practice. In combination with its well-organized financial advice and service sector, the Netherlands became a frequently used intermediary for these elements in order to avoid withholding taxes elsewhere.

It appears from a comparative law study that the Dutch system has not been unique in the abovementioned respects for some time; other countries, for example, (now) also have an extensive treaty network and a participation exemption.

Moreover, in recent years, the Netherlands has taken and announced several measures that make certain types of flows less attractive. For example, a conditional withholding tax on interest and royalties was introduced in 2021, the ruling practice was tightened on July 1, 2019 and the Netherlands is striving to ensure that all tax treaties include a Principal Purpose Test (hereinafter: PPT; an anti-abuse provision). The effects of many of these measures are not yet visible in the statistics, but should be in the coming years.

The Committee concludes that ‘policy stacking’ has occurred to a certain extent, while the effects of the measures taken are still unclear to a great extent, partly because the relevant figures only become available after a number of years. Furthermore, the Committee notes that internationally there is also much to be done in terms of combating tax avoidance through the use of conduit companies. Therefore, the Committee takes the position that it is wise to closely monitor the effects of the (tax) measures already taken and the outcome of the international tax negotiations. The Committee also recommends that the Netherlands adopt a constructive and, where possible, initiating attitude towards current international initiatives.

That is not to say that there is no room for improvement. However, some of the recommendations carry risks under EU law. The Committee therefore sees all the more reason to settle these matters in the soon to be expected European initiative against conduit companies.

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Read the full report here.

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