Shell says it remains committed to London listing as scrutiny of its dividend tax intensifies

Shareholder rights at stake as the Dutch government mulls abolition of dividend tax and a EU competition complaint is filed

Paul Tang, Member of the European Parliament for the Dutch Labour Party, has lodged a complaint with the European Commission (EC) alleging that Royal Dutch Shell’s tax dividend arrangements might be in breach of EU competition rules – a development which could have major investor implications.

Tang’s move came as the Dutch coalition government has submitted to Parliament its Budget, which includes a proposal to abolish the country’s dividend withholding tax.

Tang had in June tabled a written question in the European Parliament asking the EC whether a tax ruling granted to Shell by the Dutch tax authorities would be investigated under EU state aid rules, in a similar way as previous Commission probes looked at Apple in Ireland, Amazon in Luxembourg and Starbucks in the Netherlands.

Competition Commissioner Margrethe Vestager declined to comment on the specific ruling on July 27.

The sweetheart tax deal was unearthed by Professor Jan van de Streek at the University of Amsterdam’s Center for Tax Law in an academic paper which Dutch newspaper Trow reported before its publication in June.

At the heart of the matter is Shell’s single capital structure created in 2004 in the aftermath of a corporate scandal that overestimated oil reserves.

The new structure amalgamated the Dutch and British companies (Royal Dutch and Shell Transport and Trading) into a parent UK plc, headquartered in The Hague, with dual shares (A and B) and dual listings (London and Amsterdam).

While Class A shares would be taxed in Netherlands, British shareholders were granted Class B shares, which would pay dividends exempt from the Dutch withholding tax from a trust in Jersey.

The same arrangement was reproduced when Shell acquired British Gas in 2015. It is believed that without the sweetheart tax deals approved by the Dutch tax authorities, Shell would not have chosen The Hague as HQ.

Van de Streek told RI that the deal not only could be considered tax avoidance but plain violation of Dutch law, regardless of the tax authority’s approval.

“If my conclusion is right, Class B shares’ dividends qualify as a so-called indirect dividend. Under Dutch tax law both direct and indirect dividends are subject to tax. The ruling is a violation of the Dutch Dividend Withholding Tax Act 1965.”The complaint by Tang, seen by RI, presents as evidence Van de Streek’s paper and argues that the tax ruling distorts competition and puts Shell and its Class B shareholders in a preferential position compared to other companies and their shareholders.

The amount of the alleged aid is put at €7.5bn, the loss of Dutch tax revenue over 2005-2017, according to estimates by the Centre for Research on Multinational Corporations (SOMO in Dutch).

Van de Streek told RI: “The only reason I picked up the Shell case for researching purposes is that Shell put itself in the spotlight by lobbying for more than a decade to abolish the dividend tax in the Netherlands.”

As the tax ruling became public, Prime Minister Mark Rutte’s Budget plan to abolish dividend tax is expected to be challenged by opposition parties and civil society.

Mark van Baal, CEO of Shell’s green shareholders group Follow This, told RI that only three parties want the tax dividend abolished: Shell, Unilever (which will ask UK shareholders for approval to reallocate in the Netherlands at its next AGM) and the Dutch Prime Minister.

Van Baal said such a proposal was in no electoral program of any party but emerged in the government coalition agreement, in which Gerrit Zalm — finance minister when the tax deal was granted — took an active part. Zalm has been a non-executive director of Shell since 2013.

Van Baal told RI: “Shell had a fantastic deal with the Dutch tax authority, why risk it and risk awaking sleeping dogs? Who benefits from that? Most shareholders can deduct the dividend tax from other taxes. Shareholders who can’t do so, mostly in the UK and tax havens, can purchase B shares on the London Stock Exchange.”

Van Baal fears that the real intention of Shell, as well as Unilever, is to become a totally Dutch company no longer subject to the more shareholder-friendly British laws.

Follow This filed its climate proposals at Shell’s last three AGMs using UK law, for which 100 shareholders representing €5m are required. Under Dutch law it would require 5% of shares — about €12bn.

A spokesperson for Shell told RI: “Since 2005, we have frequently made policymakers aware that Shell would welcome its abolition.”

The dividend withholding tax “can create a hurdle in access to the international capital markets” because “international dividend payments can attract higher taxation than national dividend payments”.

The spokesperson said: “Once the relevant legislation has been drafted and enacted, the Board will consider whether it presents the opportunity for the company to simplify its capital structure by combining the A and B shares.

“Our financial framework and financial policies, including dividend policy, are unchanged. Shell remains committed to its London listing.”

The spokesperson said there is no tax violation or avoidance since the agreement is lawful, in line with the tax authorities, and transparent having been mentioned in the 2017 annual report what investment beliefs support their choice of Class A or B shares, the following institutional shareholders declined to comment: Aberdeen Standard Investments, the Church Commissioners, Legal & General Investment Management, USS, the Central Finance Board of the Methodist Church, Norges Bank Investment Management.

At the time of writing Aviva Investors, BMO, AXA, Merseyside Pension Fund, the Local Authority Pension Fund Forum, CalSTRS, CalPERS and Japan’s GPIF did not reply to requests for comment.