Is the Netherlands still a tax haven?

An article in the section Research in a Nutshell

Is the Netherlands (still) a tax haven? It acted as one over decades. Recently, the government, however, implemented new regulation that is supposed to curb the profit shifting via the Netherlands. The most important piece in this respect is the 2021-‘royalty tax’ levied on royalty payments to tax havens. Will this tax be effective? How costly is it? Will it reduce investment and employment? Research suggests that the royalty tax (if enforced properly) will eliminate the most harmful income-shifting practice. At the same time, it does not reduce investment and real activity if sufficient leeway to use internal debt remains.

Over decades, the Netherlands developed a reputation for being a tax haven. It became infamous as a part of the ‘Double Irish Dutch Sandwich’, Google’s construct to shift profits via Ireland and the Netherlands to Bermuda. Effectively, the Netherlands is a conduit country that helps to funnel profits from high-tax countries to tax havens. Particularly the Dutch Special Purpose Entities attract income, often as interest and royalty payments, and pass it on, effectively untaxed, to tax havens.

How profit shifting works

The first main strategy that multinational firms use for such profit shifting is debt shifting. Instead of investing non-deductible equity directly in high-tax affiliates, multinationals put the equity in an internal bank in a tax haven. The internal bank passes on the capital as loans to related affiliates. Such a structure creates tax deductions in high-tax countries and causes little tax payments on received interest income in the tax haven. The second, and quantitatively much more important, strategy is to misprice intra-firm trade to shift profits from high- to low-tax affiliates. Such transfer pricing works particularly well for firm-specific intangibles like Google’s search algorithm. As their true value is difficult to determine for tax authorities, multinationals can overcharge royalty payments for the use of these intangibles in high-tax countries. That way, profits from high-tax countries eventually are booked in tax havens where the ultimate owners of the intangibles reside – and hardly pay taxes.

The Netherlands’ response to international pressure

Due to international pressure and the harm of the Dutch tax-haven status, substantial regulatory changes came into place under Secretary of Finance Menno Snel. Most importantly, since 2021 a withholding tax, equal to the Dutch corporate tax rate, is levied on interest and royalty payments to black-listed countries, mainly tax havens with a tax rate of less than 9%. This ‘royalty tax’ intends to curb any shifting via the Netherlands. 

So, is the Netherlands still a conduit country? Is the new regulation desirable? And will it be effective?

‘If enforced properly, the new royalty tax should largely abolish the tax-haven status of the Netherlands’

The implications of the ‘royalty tax’

Together with Steffen Juranek and Andrea Schneider, I theoretically explored these questions in a model that hosts multinationals that use both debt shifting and overcharging royalty payments to shift profits to a tax haven. The multinationals choose both their investment and their profit shifting to maximize their global after-tax profits. Their profit shifting is determined by balancing tax savings and costs related to coping with profit-shifting regulation. 

Our results suggest that the policy is desirable and that all countries (except for the real tax havens) will benefit. A first important insight is that debt shifting has some beneficial effects. It directly reduces the tax burden on marginal investment and fosters employment. In contrast, transfer pricing in intangibles is damaging because it does allow for shifting economic profits, while it does not boost firm investment (on the intensive margin). Hence, countries only loose from such transfer pricing. Therefore, it is optimal to eliminate it completely via a royalty tax that removes all tax advantages. Finally, the royalty tax also falls on the arm’s-length payment, and by that, it still taxes investment. The resulting economic distortion, however, can be compensated for by allowing for some (more) debt shifting.

Smart choice – ending the tax-haven status (?)

In sum, the new Dutch royalty tax should prevent shifting profits from and via the Netherlands to tax havens, if it gets enforced properly. At the same time, as long as the debt-shifting regulation does not become too strict, the tax does not need to have negative effects on real investment and employment in all non-haven countries, including in the Netherlands. 

Time will show whether these predictions are correct. Previously, only the finance and consultancy industry in Amsterdam benefitted from the existing situation, while hardly any income or tax revenue was generated in the Netherlands. A promising sign is that Google has now stopped its ‘sandwich’ with effect of 2021.


Dirk Schindler is Professor of International Taxation at Erasmus School of Economics. His main fields of research are taxation under uncertainty and international corporate taxation, in particular profit shifting in multinationals. He tries to embed institutional details of regulation and combine insides from economics and accounting in his research.

More information


Steffen Juranek, Dirk Schindler, and Andrea Schneider, Royalty Taxation under Profit Shifting and Competition for FDI, NHH Discussion Paper FOR-11/2020.

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