February 21, 2011 / 7:02 PM / in 8 years

Analysis: NYSE-Deutsche Dutch move highlights tax incentives

WASHINGTON/NEW YORK (Reuters) - Deutsche Boerse and NYSE Euronext’s move to set up a Dutch holding company, despite few links to the Netherlands, highlight Holland’s attractive tax laws in the starkly variable international tax system.

A Netherlands-based holding company will take over both companies as part of Deutsche Boerse (DB1Gn.DE)’s $10.2 billion takeover of NYSE Euronext NYX.N, announced last week.

If the deal is cleared, the new exchange joins Ikea, LyondellBasell(LYB.N) and other firms that chose to locate in Holland, where foreign firms are largely not taxed on profits made abroad.

The move comes as U.S. policymakers mull a revamp of the corporate tax code, amid business complaints that the system ties their hands in competing against foreign-based rivals.

Republican lawmakers have argued the complicated tax system in the United States drives business and jobs overseas.

The exchanges would not comment on whether favorable tax treatment was a driving factor in the decision, though tax policies likely played a role, tax attorneys said.

“Taxes are clearly a part of a decision,” to locate a holding company in the Netherlands, said Sang Kim, a partner at DLA Piper who was not commenting on the specific deal. “Invariably capital moves across borders.”

Netherlands’ corporate tax rate is about 26 percent, far below the U.S. statutory rate of 35 percent, among the highest in the developed world. It is close to Germany’s 30 percent rate and in line with an average of industrialized nations.

It is Holland’s laws excluding foreign profits from tax and its extensive network of tax treaties with their peers, which let companies avoid double taxation, that give it an edge.

Netherlands ranked third after Mexico and Canada in tax burden for business in a 2010 KPMG study that looked at 10 countries across the world, taking into account income, sales, property and other taxes. The U.S. ranked sixth.

A key difference between the United States and most of the rest of the world is that the U.S. taxes all income wherever it is earned. Most other countries tax income earned only within their borders, a system known as territorial.

On Thursday, a top U.S. Treasury department official said moving to a territorial system will be part of the corporate tax overhaul debate, which may take years.

CENTER OF COMMERCE

It is unclear whether a revamping of the U.S. system would alter incentives in the current system.

Holland joins Hong Kong and other small countries that establish themselves as business-friendly places to locate.

“They have set themselves up as a center for commerce, because they could not get that level of economic development with their own population and resources,” said Daniel Berman, a Boston University professor and former Treasury department tax official.

In itself, the lost revenue from NYSE re-locating to the Netherlands may seem a drop in the multi-trillion dollar U.S. economy. NYSE paid $119 million in income taxes for the nine months ended Sept 30, 2010, according to their latest regulatory filing.

Still, in 2010, 122 new international companies were established in the Amsterdam metropolitan area, 31 percent of them from the U.S., according to Amsterdam inbusiness, the city’s foreign investment agency.

The city now has more than 2,000 foreign companies, the agency said on its Web site.

Under the terms of the NYSE-Deutsche Boerse deal, a holding company based in the Netherlands, will take over both companies.

Because the Dutch company is buying the two, all earnings from the group outside the United States avoid the U.S. tax system, Berman said.

Under Dutch law, profits flowing in are largely exempted from the corporate income tax, and dividends flowing out are often free of taxation.

An acquisition is the perfect time for a company to re-locate their headquarters, said Shan Nair, a consultant to companies looking to re-locate offshore.

“There is already going to be a change in tax structure, so it is an excellent opportunity for them,” Nair said.

Many economists and U.S. officials agree the steep rate relative to industrialized countries and complexity of the tax code is not good for business.

One key lawmaker pointed to the deal to blast the U.S. corporate tax system.

“If this transaction happens, it raises the very legitimate question of whether America’s anti-competitive regulatory and tax systems have played a role in having the New York Stock Exchange headquartered overseas,” Senator Orrin Hatch, the top Republican on the Senate’s tax writing committee, said.

Editing by Andrew Hay

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