, Volume 20, Issue 6, pp 910-937

Tax treaty shopping: structural determinants of Foreign Direct Investment routed through the Netherlands

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Abstract

Many multinationals divert Foreign Direct Investment (FDI) through conduit countries that have a favorable tax treaty network, to avoid host country withholding taxes. This is referred to as tax treaty shopping. The Netherlands is the world’s largest conduit country; in 2009, multinationals held approximately €1,600 billion of FDI via the Netherlands. This paper uses microdata from Dutch Special Purpose Entities to analyze geographical patterns and structural determinants of FDI diversion. Regression analysis confirms that tax treaties are a key determinant of FDI routed through the Netherlands. The effect of tax treaties on FDI diversion partly arises from the reduction of dividend withholding tax rates, which provides strong evidence for tax treaty shopping.

Research for this paper was done when the author was working for SOMO.
Views expressed in this paper are solely those of the author.