A Corporate Structure Designed to Facilitate Profit-shifting and Tax Avoidance

In the early 1980’s Kamprad decided to implement a franchise model similar to Mcdonald’s, splitting IKEA’s retail stores from its trademarks/concepts. All stores, from San Francisco to Shanghai, had to pay 3 percent of their turnover as a franchise fee to Inter IKEA in Delft for using the IKEA trademarks. In turn, Inter IKEA passes the majority of that money to other jurisdictions without paying any tax. And that is where the shoe starts to pinch.

List of countries with IKEA stores (blue current, yellow expected) | Wikipedia

In 2016 the European Parliament published its revealing research report Taaks Avoyd, elaborating on the tangle of companies, foundations, holdings and tax avoidance tactics of the furniture giant. “We wanted to show that tax avoidance is not limited to American companies like Starbucks and Apple, but European companies like IKEA, with its adorable, Swedish image, take part too”, says member of the European Parliament Bas Eickhout.

Inter IKEA reacted strongly to the acquisitions — the research report was filled with “wrong assumptions” and “false conclusions”. The European Commission, responsible for assertion of the EU-law, was not impressed and began a preliminary investigation. That resulted in a high number of alarming signals — enough for Danish member of the European Parliament Margrethe Vestager, in charge of competition policy, to request an in-dept investigation into the Netherlands’ tax treatment of Inter IKEA. Commissioner Margrethe Vestager said: “All companies, big or small, multinational or not, should pay their fair share of tax. Member States cannot let selected companies pay less tax by allowing them to artificially shift their profits elsewhere. We will now carefully investigate the Netherlands’ tax treatment of Inter IKEA."

According to the European Commission, Inter IKEA was favored by the Dutch Tax Authorities twice. The Commission “has concerns that two Dutch tax rulings may have allowed Inter IKEA to pay less tax and providing them an unfair advantage over other companies, in breach of EU State Aid rules.” Preliminary inquiries indicate that “two tax rulings, granted by the Dutch tax authorities in 2006 and 2011, have significantly reduced Inter IKEA System BV’s’ taxable profits in the Netherlands.”

A tax ruling is a tailor made, confidential particular taxation arrangement between a multinational and a countries’ Tax Authority. The written interpretation of law clarifies and confirms which part of the profit is taxed and which prices a company should charge when trading with affiliated companies. In this case, with an IKEA holding company in Luxembourg and an IKEA foundation in Liechtenstein.

IKEA's ownership breakdown | Source: Financial Times research

The 2006 tax ruling “endorsed a method to calculate an annual licence fee to be paid by Inter IKEA in the Netherlands to another company of the Inter IKEA group called I.I. Holding, based in Luxembourg.” It’s a textbook tax avoidance scheme. From the 3 percent franchise fee IKEA stores pay to Inter IKEA each year, Inter IKEA itself pays yet another licence fee — for its own use of the name ‘IKEA’ and the overall business formula — to the IKEA holding in Luxembourg. This holding held certain intellectual property rights required for the IKEA franchise concept.

That way, “a substantial part of IKEA Inter’s franchise profit” is re-allocated without any tax effect, concludes the European Commission. Not only is the amount of licence compensation “excessive” according to experts, it’s also unauthorized because of the Luxembourg part not adding any value to the IKEA concept. As an illustration, the total number of employees at Inter IKEA in Delft (almost 1,000) was compared with the number of employees in Luxembourg (none, apart from 3 directors in writing).

Then there is Belgium. “Prior to 2010, a Belgian company called Inter IKEA Treasury SA acted as an internal financing arm for the Inter IKEA Group,” says the Taaks Avoyd report, “generating income from interest on loans offered to group companies and paying out interest to unspecified Inter IKEA affiliates from whom it borrowed the money in the first place.” At that time, the Treasury was designated a “coordination center” allowing it to benefit from a super low tax rate of 1.98 percent, compared to a regular 33 percent in Belgium. Because the Belgian “coordination center” regime was terminated by order of the EU in 2011, the company shifted activities to Luxembourg. This resulted in “an arrangement which guaranteed that an Inter IKEA Group subsidiary (now called Inter Finance SA) domiciled in Luxembourg would pay almost no tax on an estimated €6 billion in loans funded by subsidiaries in Curacao and Cyprus and funneled to affiliates through a newly established Swiss branch of Inter Finance SA.” This resulted in an effective rate of just 2.4 percent, “as compared with the Luxembourg statutory rate of 29.2%.”

The billions of Euros transferred to Luxembourg, remain untaxed over there as well. For that purpose, IKEA exploited an infamous 1929 loophole in the Luxembourg tax law — holdings do not owe any tax on capital gains and (payment of) royalty’s and dividends. When the European Commission committed Luxembourg to plug the loophole as from 2011, IKEA — with the help of their tax advisers — responded with an ingenious new corporate tax avoidance structure. This time with the IKEA Foundation Interogo in Liechtenstein as the star of the show.