It's only tax planning, but I like it

published 28 February 2007

It's hardly rock n' roll, but the world's biggest stars have got good business heads and are taking advantage of Dutch tax havens to boost their earnings. Simon Wilson reports

Is Holland well known as a tax haven?

Not until recently, and not for all types of business. For hedge funds, private-equity firms and trading companies looking to mimimise the tax due on profits, traditional Caribbean tax havens, such as the Cayman Islands, are still very much in favour with their off-the-shelf companies and light-touch regulators. But for earnings derived from intellectual property, particularly in the entertainment industry, the Netherlands is fast becoming a highly attractive and more respectable alternative because it does not charge corporation tax on earnings from royalties. Tax-exempt income includes earnings from traditional sources, such as songs and films, but also protected are earnings from all kinds of merchandising, licensing and exploitation of image rights. Since these kinds of rights increasingly make up a major part of the income for celebrities such as rock stars and athletes, the Netherlands is now the tax shelter of choice for some of these big earners.

Which big hitters head for the Netherlands?

The Rolling Stones, the world's biggest live music act. Though the band may not have been cutting-edge musically since the 1970s, they are famously sharp when it comes to business, thanks to the cool head of London School of Economics-educated Mick Jagger and the shrewd planning of the band's trusted financial manager, Prince Rupert Loewenstein. For example, the Rolling Stones decided some 20 years ago to prioritise touring over recording a move that now looks uncannily prescient. While the price of CDs has crashed, that of tickets to big-name live events has soared, along with the spending power of rock music's ageing fan-base. In 1989, the group charged $30 a ticket for their US stadium gigs compared with up to $400 today. And for last summer's UK shows they got away with a £340 price tag for special "onstage experience" seats built into the set. It all adds up to estimated touring income of $1.35bn in 18 years.

How did they hit on Holland?

Back in 1972, Loewenstein set up a company in Amsterdam, Promogroup, which receives all the band's royalty income from records, radio and TV airplay and song publishing. Documents released by the Dutch corporate register last summer show that the plan to cut the tax bill has worked a treat. From 1986 to 2006, the Rolling Stones channelled some £240m via their Amsterdam company, and paid tax on their earnings of less than £4m an effective tax rate of just 1.5%. Today, Promogroup is run by a reclusive Dutch accountant, Johannes Favie. Last summer, Favie set up two private foundations to transfer assets tax-free to the heirs of Mick Jagger, guitarist Keith Richards and drummer Charlie Watts. It seems that new boy Ronnie Wood is still technically an employee after 30 years, although because he now gets the same cut as the others from touring, he is hardly stuck for cash.

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Who else has Holland attracted?

Dublin-based rock group U2, the Rolling Stones's nearest rivals for the world's top-grossing act last year. Since the 1960s, Ireland has given artists and writers a famously easy ride when it comes to tax. Until 1 January, it exempted resident artists, including musicians, from tax on the sale of their work. Now there's a still-generous nil-rate band up to e250,000. But crucially for the band's five multimillionaire members (in an unusual arrangement, long-time manager Paul McGuinness shares the spoils with the four musicians), the sale of licensing and merchandising rights is not included. Given the shrinking tax-break on earnings from song rights, last June McGuinness shifted ownership of U2's huge song catalogue from his own Dublin-based company to Promogroup, the firm originally set up by the Rolling Stones. For U2, whose frontman, Bono, is a high-profile campaigner on global poverty, the publicity resulting from this tax-avoidance strategy has been less than welcome, but the group argues it's merely being tax-efficient, just like any other business.

Who else can benefit?

Any wealthy artist or sports star can potentially gain from Holland's tax regime, using Promogroup or a similar outfit in Amsterdam's Financial Mile, such as TMF, EQ Management Services or Fortis Intertrust anyone, that is, save Americans. Sadly for US citizens, America taxes royalty payments at its standard corporation tax rate of 35% when monies are remitted to the US from Holland. But not only wealthy individuals stand to gain.

The Dutch government, keen to promote Amsterdam as a global financial centre, has done much to foster the use of tax shelters in its country, and big multi-nationals such as Coca-Cola, Nike, Sun Microsystems, Ikea and Gucci, have all set up Dutch holding companies virtually identical to the ones used by the rock bands in order to channel royalty earnings from patents.

How many firms are involved altogether?

According to SOMO, a business research group based in Amsterdam, the Netherlands is home to some 20,000 "mailbox companies" the Dutch term for corporate shells used by foreigners to relieve taxes on royalties, dividends and interest payments. Other well-known businesses taking advantage include Britain's flagging record company EMI and CKX, the entertainment conglomerate that owns stakes in American Idol, the Elvis Presley estate and, now, David Beckham. Globally, some 1,165 companies use Dutch tax shelters to avoid or reduce taxes on royalties and patents. Germany is the biggest player, followed by Britain, the US, France, Hong Kong, Italy and Spain.

Simon Wilson’s first career was in book publishing, as an economics editor at Routledge, and as a publisher of non-fiction at Random House, specialising in popular business and management books. While there, he published Customers.com, a bestselling classic of the early days of e-commerce, and The Money or Your Life: Reuniting Work and Joy, an inspirational book that helped inspire its publisher towards a post-corporate, portfolio life.

Since 2001, he has been a writer for MoneyWeek, a financial copywriter, and a long-time contributing editor at The Week. Simon also works as an actor and corporate trainer; current and past clients include investment banks, the Bank of England, the UK government, several Magic Circle law firms and all of the Big Four accountancy firms. He has a degree in languages (German and Spanish) and social and political sciences from the University of Cambridge.