Netherlands: report on letter box companies and financial activities publishedJune 18, 2013
On 11 June 2013, the SEO Economic Research Institute published a report for the Holland Financial Centre, Uit de schaduw van het bankwezen.
The report deals with the taxation of special financial institutions (letter box companies) and financing activities that are not carried out by a bank (shadow banking).
The most important aspects of the report are summarized below.
Special financial institutions
The term special financial institution is defined in the report as a company that is established in the Netherlands for fiscal reason and does not always have substantial commercial or operational presence (substance).
It mainly concerns companies owned by non-residents who receive substantial cash flows from foreign countries, which are subsequently paid to another foreign country.
The report identified that in 2010, there were approximately 12,000 special financial institutions.
The main conclusions with respect to those institutions are as follows:
- In 2010, the total incoming dividend, interest and royalty flows were approximately €153 billion and the outgoing flows approximately €125 billion
- The 10 largest special financial institutions cover approximately 50% of those flows
- Based on the Dutch norm for excessive low taxation (i.e., a rate below 10%), approximately 5% of these flows are low taxed. If a tax rate between 10% and 15% is used, that percentage increases to approximately 40% of those flows.
- The cash flows from developing countries are approximately 2.5% of those flows
- The special financial institutions contribute approximately €3 to €3.4 billion to the Dutch economy in the form of taxes, employment costs and purchased services. The 10 largest special financial companies paid approximately €1,208 million of corporate income tax in 2011, €32 million on pension and other social contributions and €1,064 million of dividend withholding tax
- The special financial institutions (in)directly create between 8,000 to 13,000 FTE of jobs
Shadow banking activities are defined in the report as “credit intermediation that involves entities and activities outside the regular banking system and raises:
- Systematic risk concerns, in particular by maturity/liquidity transactions, leverage and flawed credit risk transfer
- Regulatory arbitrage concerns”
With respect to shadow banking, the main conclusions are as follows:
- The balance total of those activities is approximately €1,500 billion
- In the case of special financial institutions, the activities are only carried out by those that are related to a financial group
- Only the financial companies bear a high risk, which is approximately 9% of the shadow banking group. The average and high-risk groups cover slightly less than 25% of the shadow banking system. This risk is determined by means of the amount and term of loans granted, the percentage of debt financing and the relation with banks and/or other financial institutions
- The vast majority of the activities are under indirect or distance control, often by the Central Bank
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