€ 101 million fine for Morgan Stanley for dividend tax evasion
The Dutch Public Prosecutor's Office (PPO) is imposing fines totalling 101 million euros on two Morgan Stanley (MS) companies in London and Amsterdam for dividend withholding tax (dividend tax) evasion. The value of these penalty orders together is close to the statutory maximum. This amount comes on top of the tax owed, which Morgan Stanley paid, plus interest, to the Dutch Tax Administration at the end of 2024.
If you own Dutch shares and receive dividends (profits) on those shares, you are liable for Dutch dividend tax. The law, as in many other countries, makes a distinction between domestic and foreign recipients of dividend. In the Netherlands, domestic recipients of dividends are entitled to offset or reclaim this dividend tax. This can be done by crediting it, or claiming a refund for that dividend tax from the Dutch Tax Administration. Under Dutch law, domestic recipients are entitled to do so only if they are the ultimate beneficiary of those dividends.
The PPO is of the view that MS - through a specially designed structure - enabled parties, who were not entitled to credit or to reclaim dividend tax, to nonetheless be able to wrongfully obtain the benefit of a portion of the set-off dividend tax.
On the basis of an investigation by the FIOD (the Dutch Fiscal Information and Investigation Service), led by the PPO, the PPO has determined that MS established the Dutch company Morgan Stanley Derivative Products (Netherlands) BV (MSDPN) for this purpose in 2006. Subsequently, in the period from 2007 to 2012, this company acquired Dutch listed shares but held these only for short periods of time over dividend dates (whilst lending them to other parties between those dates). A total of 830 million euros in dividend was paid out on those shares during the brief periods of ownership. MSDPN offset the dividend tax withheld on these dividends, totalling 124 million euros, in five corporate income tax returns in the period from 2009-2013.
The PPO is of the view that MSDPN had no legal right to do so. Through closely coordinated share and derivative structures, an average of 90% of the dividends received by MSDPN automatically flowed across the border via Morgan Stanley & Co International Plc (MSIP) to underlying financial institutions, which, according to the PPO following the investigation conducted by the FIOD, were themselves not entitled to compensation. As a result, the PPO considers that MS engaged in dividend tax evasion and intentionally filed false tax returns.
Tax audit and criminal investigation
The Dutch Tax Administration discovered the transactions in late 2010 and proceeded to ask questions about them. This resulted in a process of tax audits and tax litigation that lasted years. Following additional fact-finding by the FIOD, a view of the full factual complex was obtained for the first time and it turned out that there was a closed circular structure.
PPO issues penalty orders on MS
The PPO announced earlier this year that it would subpoena MS. However, just before the start of the criminal proceedings, MS agreed to accept fines totalling 101 million euros in the form of penalty orders issued by the PPO on the two companies. The PPO thus determined the bank’s culpability with regard to the prohibited conduct.
The PPO considers the penal orders appropriate because, with regard to legal persons, if found guilty, the court is also only able to impose a fine in criminal proceedings. The case can now be closed with respect to these two companies.