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Andre G M Nagelmaker
Pan-Invest BV, The Hague & Serra Partners, Amsterdam
a.nagelmaker@pan-investgroup.com

 

Introduction

The role of the corporate service provider (in several countries also referred to as ‘trust offices’) has evolved considerably. In this article the inside-out perspective on the corporate services sector will be given, describing its origin, role, and position in the international tax arena. As this author has operated in this sector for the last 32 years in the Netherlands and Luxembourg, the focus will be placed on these locations.

History of the corporate services sector

While the concept of a trust and trustee dates back to the time of the Crusades, the corporate services sector or trust offices as considered here are of a much more recent origin. It is thought that the modern concept of the corporate services sector began with the advent of the Second World War, when multinational corporations from the Netherlands sought to relocate their head offices and for that purpose set up head office (ie, holding companies) in Curaçao, which was expected to remain unoccupied territory, thereby safeguarding global corporate assets from seizure. In order to reduce the cost of operations of this artificial head office, all activities and roles were outsourced to a professional services provider, linked to the relevant notary’s office.^[1]

After the Second World War and supported by the Marshall Plan, in the wake of globalisation of the economy, many US-based corporations investing in Europe made use of the Netherlands as their stepping stone into Europe. They created regional head offices and finance companies following the concept as developed in Curaçao. The Netherlands was selected for reasons of its treaty network, participation exemption, ruling practice, the rule of law, lack of monetary constraints and its excellent multilingual professional infrastructure. Accountants, law firms, notaries, banks, were asked to take care of the relevant holding and finance companies, setting up trust companies or integrating these activities. In the 1990s, when the concept of conflict of interest emerged, these activities were sold or carved out. In the 2000s, private equity became aware of the highly predictable and resilient cashflows of these trust companies investing heavily and consolidating both locally and internationally in what was till then a very fragmented industry.^[2]

The Netherlands-based trust companies lead this process in Europe until the 2000s. Luxembourg has since taken over this position, and is now the leading jurisdiction.

Role in international tax

To begin with, the role of the corporate services company or trust office was not recognised at all and the focus remained on formal aspects, such as the legal residence of the holding/finance company, confirmed by a certificate of residency by the relevant tax authorities. Gradually, when capital flows and dividend, interest and royalty flow from source countries to the (single) recipient country increased, tax authorities became increasingly aware and started asking questions of the corporate services company, taking first the route of legal fraud, and when such proved to be futile, harrying the taxpayer by asking endless questions and holding up the reduction of withholding taxes. Depending on the assertiveness of the relevant tax authority, the focus was placed on the corporate service supplier at that time. There are accounts of the German Tax Authorities maintaining a list of corporate service suppliers, and their addresses and directors, refusing either tax treaty benefits to companies residing at these addresses or to make a payment to these addresses.

In the last decades, the concept of legal fraud has gradually been replaced by the concept of substance, initially focusing on formal or legalistic aspects, such as the residency of directors, location of accounting, bank accounts, board meetings and assets; and subsequently evolving into Subpart F, Controlled Foreign Corporation regulations, thin capitalisation, and transfer pricing demands. After 2008, and in the wake of the Organisation for Economic Co-operation and Development (OECD) Action Plan on Base Erosion and Profit Shifting (BEPS), the focus has turned to the purpose and actual activities performed and the ‘real’ economic presence of the recipient company. The Multilateral Convention to Implement Tax Treaty Related Measures to Prevent Base Erosion and Profit Shifting (MLI) and the principle purpose test (PPT) are now very much feared, as this gives carte blanche for source countries to actually refuse tax treaty or other tax benefits.

In this process the role of corporate service provider has changed from that of a passive unquestioning but highly responsive facilitator to an inquisitive proactive partner. There is a growing tendency with clients of the corporate service provider to set up their own operations, mixing these with other activities such as sales, procurement, marketing, and local production. The corporate services provider may thereby detach its staff to the client, placing staff on the payroll and rendering support in areas such as corporate governance, finance, and compliance. The corporate services provider thus becomes irrelevant for international tax purposes and more a safeguard for good governance and solid compliance. Due to the increased cost of operations of tax-saving arrangements, a rationalisation of corporate entities has followed in multinational corporations (MNCs) as well as smaller private or single purpose investors. Social scrutiny, and fear of damage to reputation further strengthens this development.^[3] The downside of the reduced role of the corporate service provider is that all oversight on the integrity of business is lost, which has already attracted negative publicity.^[4]

Role in anti-money laundering and tax evasion

The role of the corporate services provider initially was that of facilitator and enabler (cost-wise) of avoiding double taxation of capital gains, dividend, interest, and royalty flows in a corporate or private international investment structure. While a legalistic approach was prevalent, the corporate services provider focused on legally documenting a transaction and reflecting this in the accounts of a company. The advent of a more moral and socially driven approach has seen the role of the corporate services provider evolve to one of gatekeeper, preventing money laundering of proceeds of tax evasion, and criminal and socially unacceptable activities. This change has not come about easily or quickly. As facilitator of transactions and the avoidance of double taxation, the corporate service provider was an adopted member of the corporate family of the client. The mentality of the average person working in the industry had to change considerably to adapt to a role of internal compliance officer and critical supporter of transactions. The slow pace of evolution has invoked considerable criticism from supervising bodies, media, and politicians. Initially anti-money laundering activities focused on preventing criminally sourced wealth being integrated through investment structures in the normal economy. Later, as tax avoidance became socially unacceptable and tax evasion was criminalised, attention turned more and more to the avoidance of tax avoidance and securing a sustainable and socially acceptable client operation. The emergence of the Paradise and Panama Papers have shown that both service providers and their clients have not developed simultaneously in all locations.

One can conclude, however, that the role of the corporate service provider has evolved from enabler to preventer of aggressive forms of tax avoidance and tax evasion overall.

Role in the chain of international tax planning

The chain of international tax planning consists of tax and legal advisers, notaries, banks, accountants, audit firms, corporate services providers and, of course, their clients. As stated above the corporate service provider was initially an integrated part of the service offering of the other parties in the chain. Its role was thereby that of executor of the schemes and transactions concocted by those higher up in the chain, no questions asked, leading to claims in these firms that if you failed as a (tax) lawyer, auditor, or banker you could always become a trust officer. Whether this contention holds any truth is questionable, but as has been seen, initial attitudes may have supported this prejudice.

With the emergence of the concept of conflict of interest and the consequent separation or carve out of trust companies,^[5] the corporate service provider acquired a more independent role, though still depending very much on the goodwill of the tax and law firms, who were in turn often referred to as ‘feeders’ rather than business partners. And as tax and law firms took a very legalistic perspective, the corporate service provider did the same.

When the international expansion and consolidation of corporate service providers occurred, corporate service providers changed their attitude. They more actively engaged with clients and directly sourced their business from these and new clients. In order to sustain revenue growth, these bigger firms have now expanded more into tax and regulatory compliance, becoming direct competitors of the firms that once started these activities.

With increasing social unease surrounding the role of the corporate services provider, especially in the Netherlands, tax and law firms have distanced themselves more from the corporate services providers, with several firms actually dissuading clients from making use of a corporate services provider promoting the set-up of their own operations. MNCs from the European Union, Japan and the United States with a strong business-to-consumer profile have followed this advice as public scrutiny in the form of bans on their products would hamper their growth.

In the social and political arena in the Netherlands the tax lawyers’ association has also dissociated itself from corporate services providers (though without avail, as their role in international tax avoidance has increasingly become the subject of public scrutiny in the Netherlands). A similar distancing has not occurred elsewhere, or less so, for example in Luxembourg, Ireland, Hong Kong or Singapore. The supervisory bodies in these countries still, however, impose increasing demands on the substance of operations of clients and the gatekeeper role of the service provider.

The corporate service provider has evolved strongly in the role of gatekeeper, to such an extent that it often takes the lead in areas such as client due diligence and transaction monitoring. As supervision on the partners in the chain remains very disintegrated and occasionally absent, clients have little or no advantage, however, and are forced to subject themselves to repetitive and sometimes opaque client due diligence and transaction monitoring processes, which poses the question whether the economic and social benefit of gatekeeping activities is outweighed by the administrative strain it puts on citizens and corporates. An integration of supervision and relevant legislation supported by technology (AI-based systems) for all partners in the chain could reduce this strain considerably and support sustainable economic growth in these challenging times. The responsibility for achieving this chain integration and reduction of administrative burden lies with lawmakers and international institutions that are increasing demands on anti-money laundering and prevention of tax avoidance, but do not provide an effective and efficient supervision framework.

Conclusion

The role of the corporate service provider in international tax planning can be expected to further evolve into that of a safeguarder for good corporate governance and compliance with tax and regulatory demands and socially acceptable business practices. This is likely to vary country by country, depending on the local political environment and the role occupied by each country within the international political arena. As the case of the Netherlands has shown, once it is admitted within the political arena to having played a pivotal role in international tax avoidance, this will always be used against you. The political pressure that this creates is translated back to Dutch banks and corporate services providers, reducing the role of the Netherlands in international capital flows and foreign direct investments, and thereby the clout it holds in the international political arena. The Luxembourg authorities, in contrast, set an example by timely changing course and focusing on funds and international capital flows, offering excellent jobs for residents of Germany, France, and Belgium. While the corporate services industry there is booming, it is contracting in the Netherlands.

The developments described here will force the corporate services sector to further evolve. Albeit the evolution may differ from country to country, it is anticipated that the relevance of the corporate services sector in international tax planning will reduce while its role in securing international trustworthy sustainable governance and capital flows will increase. To do so the industry will have to invest heavily in data and document technology, know-your-customer (KYC) and customer-due-diligence (CDD) systems and become the international administrative integrator reducing the burden and complexity of international administrative demands imposed on corporations, funds, financial institutions and high-net-worth individuals. It will still enable transactions in international tax planning, but the focus will shift further from unconditional speed to tech-enabled sustainability, reliability, and administrative efficiency.

 

Notes

 

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