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Where the Stars Hide Their Money.
Where the Stars Hide Their Money
U2, the Rolling Stones, movie stars, sports figures and a host of corporations have turned to an unlikely accountant, the Netherlands, to help them avoid paying taxes on multimillion dollar profits in their home countries.
Bands like the Rolling Stones and U2 were publicly outed last summer for using tax shelters in the Netherlands to protect the millions they earn on royalties from getting taxed in their respective home countries.
They are part of a growing number of celebrities who've turned to the low-tax, politically stable Netherlands to protect royalties they earn legally from licensing intellectual property — from J.Lo's derriere to U2's hit song "One."
And the Dutch have beckoned by overhauling their tax structure this past year to make it easier and more lucrative for individuals and corporations to set up shell companies that allow income from royalties, interest and dividends to flow in and out of the country tax-free.
"What a group like U2 or the Rolling Stones has done is create a holding company that owns the rights to their songs and their name," Richard LeVine, an international tax expert who counsels corporate and individual clients on asset protection for the Connecticut-based Withers, Bergman LLP, tells ABC News.
"So every time their song is played on the radio, or they sell an album, royalties are paid to their Dutch company, which allows them to collect millions of dollars in royalties tax-free and lowers the profits they're paying taxes on in their home countries," LeVine says.
Mailbox companies, or corporate shells, allow companies to channel royalties, dividends and interest payments through the Netherlands. More than 20,000 exist right now, according to a report by the Netherlands-based SOMO, the Center for Research on Multinationals.
The Dutch Federal Bank estimates that in 2002, 3.6 billion euros flowed through such companies.
The Rolling Stones has taken advantage of the Netherlands tax structures for the past 20 years, with the help of Dutch accountant Johannes Favie, who runs Promogroup, a financial consulting firm. Promogroup has helped the Rolling Stones pay just over $7 million in taxes on earnings of $450 million over the past two decades. In 2005, the rockers paid a tax rate of 1.6 percent on earnings of $172 million.
The band had to disclose its finances in 2006 when Promogroup helped the band members draw up their wills. Through the leniency of Dutch tax laws, they will be able to transfer assets to their heirs tax-free.
U2's move came on the heels of a change in Irish tax law, which originated as a way to help struggling artists by not taxing their royalties. It also allowed world-famous Irish artists like Van Morrison, U2, the Cranberries and Sinead O'Connor to earn millions in untaxed royalties. As of Jan. 1, 2007, a cap was set on earnings, and artists who earn more than 250,000 euros (or about $319,000) have to pay taxes on up to half their creative income.
With the help of the Promogroup, the band created U2 Ltd., which now holds the rights to its song catalogue. U2 Ltd.'s earning are not known. However, the band is said to be worth around $900 million, according to the annual "Rich List" published by London's Sunday Times.
Frances Weizig, a co-author of the SOMO report, says the Netherlands represents all the best a tax shelter can offer. "This is a stable country with its own economy and tax system apart from the role foreign direct investment plays. The foreign ministry will tell you that these tax structures add to the economy, but it's not our whole economy," says Weizig.
"What's going on, in a nutshell, is that the Netherlands is a respectable tax haven," says Mark Nestmann, whose firm, Nestmann Group Ltd., is based in Phoenix, Ariz., and focuses on wealth preservation.
"It established a wide network of tax treaties, and it has political and economic clout. Companies can invest there and avoid the scrutiny they'd get if they were on a blacklisted country like the Cayman Islands," Nestmann says.
More than 1,800 corporations are headquartered in the Netherlands, according to John Orr, a spokesperson for the Netherlands Foreign Investment Agency, including iconic American brands like Coke, Starbucks, Exxon, Nike and Subway.
And a new tax boon by the Dutch government will keep the money flowing in. The "working profit initiative," which took effect Jan. 1, 2007, has reformed the country's corporate tax structure, lowering taxes even further.
Michael Ooms, the North American director for the Netherlands Foreign Investment Agency, tells ABC News that the initiative will further enhance the Netherlands' position as a premier European Union business location. Currently, the Netherlands competes with several other low-tax states in the EU — including Ireland, Luxembourg and Switzerland — for foreign investment.
Two new clauses in the initiative, one which taxes patents at 10 percent and another which taxes a company's balance of receipts and payments at a mere 5 percent, will cement the image of the Netherlands as a tax haven, warns Weizig.
"[The group interest box] clause allows corporations to set up subsidiaries in one country, and as the subsidiary pays money back to its headquarters in the Netherlands, only 5 percent of the income is taxed. A lot of questions are being asked about this," says Weizig. The clause is still pending approval by the EU.
But the benefits of dodging taxes in the Netherlands only extends so far.
Yankees Need Not Apply
"This is a fabulous tax saving device for stars that do not have residency in the United States and for multinationals with a large amount of business outside the United States … You won't see Bruce Springsteen or Tiger Woods doing this," says LeVine.
But U2's members are Irish. And the Rolling Stones are British.
Many countries have signed double taxation treaties with the Netherlands that allow companies to earn royalty income in the Netherlands without fearing taxes at home.
Stars still have to pay income tax in their resident country, but there's a loophole to minimize those taxes.
U2 earned $389 million on its last world tour, according to Billboard Magazine, making it the second-most lucrative tour of all time. The band members were beat out by the Rolling Stones, who earned a hefty $425 million by the end of 2006 for its most recent tour.
LeVine guesses that the bands used a portion of their profits to pay their holding companies in the Netherlands for the right to sing their own songs. It's an old corporate trick to lower taxable profits while shoring up the money elsewhere.
"What do sports figures make money on, their endorsements or their salary?" LeVine asks. "They license their own name and then pay themselves from what they earn in endorsements to use it. Coca Cola pays its holding company for the right to sell a bottle of Coke with the Coca-Cola label. And it's the same thing with musicians." When contacted for this article, Fran Curtis, a spokeswoman for the Rolling Stones tells ABC News, "The band does not discuss its finances in public, and I won't comment on them."
A spokeswoman for U2 also said that the band would not comment. However, U2's lead guitarist, David Evans reportedly told a Dublin radio station in October, "Of course we're trying to be tax efficient. Who doesn't want to be tax efficient?"
It's a system that's caught on, and can only expect to grow with the new Dutch tax system.
"What U2 is doing will be the cusp of what we see in the future," cautions Nestmann. "We're transforming our society and our world from where you have property and steel factories into where the real value is the idea of things. So how do we tax this and do it fairly and do it in a way that doesn't impede trade? It's going to be something that we'll be thinking about for a long time."
LeVine says his company, which has offices in Paris and London, and counsels multinationals on asset protection and tax liability, is looking at ways to jump onto the Netherlands bandwagon. "It looks like the market on superstars is taken, but there must be someone else who needs this kind of help."