Houses are reflected on the Herengracht, one of the city of Amsterdam's three main canals. 2013 will mark the 400th anniversary since construction began on Amsterdam’s world renowned Canal Ring that was added to the UNESCO World Heritage list
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A modest 10-floor office block on the eastern edge of Amsterdam houses the headquarters of Energyco, Agro Trade International, Banzai Venture Investments and about 2000 other companies.

Fully 1942 of those companies list their address as Postbox 990, which one might think would be stuffed with letters. But just one company is responsible for all of them – Intertrust, a trust firm that creates and manages subsidiaries for multinationals, even if some of them have little or no real business activities in the Netherlands. Intertrust did not respond to requests for interview.

The Netherlands has 23,000 such “letterbox companies”, managed by 176 licensed trust firms. These companies attract huge flows of money, making €8tn worth of transactions in 2011 – 13 times the country’s gross domestic product.

It is not just financial letterbox companies that realise the tax benefits of the Netherlands. The Rolling Stones and U2 both have companies in the same 17th-century Amsterdam canal house, which they list as the owners of their intellectual property, taking advantage of the lack of Dutch withholding taxes on royalties.

In the face of criticism for the mix of tax treaties, exemptions and loopholes that favour multinationals, Dutch authorities have tried to restrict letterbox companies such as those at Postbox 990. But these efforts have been limited by a desire to preserve the tax advantages that attract potential employers.

Critics charge that the tax breaks distort financial flows: the Netherlands is the biggest global location of gross profits reported by US companies’ foreign subsidiaries, even though it does not figure in the top 10 of their reported employment.

The country “charges too little tax on companies that do nothing here but pump their money through,” said Diederik Samsom, leader of the centre-left Labour party, which shares the governing coalition with the centre-right Liberals.

“The average tax rate for regular citizens is 39.5 per cent,” said Jesse Klaver of the GreenLeft party last month. “When you see that Google for example can pay just 1.9 per cent in tax by sending money through the Netherlands, that is indefensible.”

Even the Liberals’ Frans Weekers, deputy finance minister, has acknowledged doubts over “companies that headquarter themselves in the Netherlands for purely financial reasons,” and pledged to go along with efforts by the OECD and the EU to fight the erosion of countries’ tax bases.

But Dutch politicians agree there is a distinction to be made between letterbox companies and substantive company headquarters.

In the past two decades, companies such as Starbucks, Cisco, Google, Ikea, Tommy Hilfiger, and the Russian telecom group Wimpelcom have set up small subsidiaries in the Netherlands, in large part for tax reasons. But they have grown into European or global headquarters with hundreds of employees.

While Starbucks based its European headquarters in the Netherlands to take advantage of favourable Dutch tax rules, a decision British MPs alleged was a device to reduce its British subsidiary’s profits, it also has a substantive business in the Netherlands, including the company’s coffee roasting plant. All told, more than 400 US companies have their European headquarters in the Netherlands.

A report by KPMG claims the loss of a single large company such as Anglo Dutch oil company Shell could cost the country 0.4 per cent of its GDP. Such figures are disputed by sceptics, but they have prompted fears that a crackdown could burden the struggling Dutch economy, which shrank 1 per cent last year.

“International tax law is a moving target. It always has been, ever since international tax practice started in the 1920s,” said Robin Fransman of the Holland Financial Centre, an industry group that advised the government on its strategy for attracting corporate headquarters. “We have to be careful about new legislation, or we are going to lose business” – to other tax-friendly countries.

The Dutch government has taken steps to tame its tax avoidance industry. Since 2009, companies have had to meet some minimal requirements for a material business presence in the Netherlands if they want to take advantage of Dutch tax treaties with other countries. Legislators hoped that would block letterbox companies from being used by multinationals as tax shelters, and indeed the number of letterbox companies has been stable for three years, though the total has not shrunk.

“Ten years ago we used to have clients in those buildings with 2000 companies in them, but we don’t advise on those any more,” said Marc Sanders, a lawyer at tax advisers Taxand in Amsterdam. “Foreign governments are really going after the letterbox companies. You have to have a substantial business presence now or it won’t work.”

“Baloney,” countered Albert Hollander, the former head of advocacy group Tax Justice Netherlands. He said the substance requirements were far too skimpy. “In my view this is not a substance test, it’s a letterbox-company manual,” pointing out exactly what multinationals needed to do to avoid being rejected.

What political will there is to change the Dutch system is focused on the trust firms. But in parliamentary debates last month, members of the governing centrist Labour and Liberal parties warned against making changes to tax laws that could scare away companies with genuine headquarter operations in the Netherlands.

The MPs did, however, take decisive action on the Netherlands’ “tax paradise” issue. An MP from the far-right party for Freedom of Geert Wilders proposed a resolution demanding that the government stop using the words “tax paradise” in connection with the Netherlands. The resolution passed overwhelmingly.

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