Letterbox-type practices: avoiding taxes and exploiting workers across the EU

Further to specific developments in the case of Vos Transport in the period between the end of SOMO's research and the publication of the report, SOMO has published the following annex providing an update including a recent case ruling, reference to the Dutch Labour Inspection report and Vos reply

 

A new ETUC report shows how businesses use ‘letterbox practices’ not only to pay lower taxes, but also lower wages and to impose bad working conditions.
 
Letterbox companies are legal entities established in an EU country, where they have no (or minor) economic activities, in order to “regime shop” for lower taxes, wages etc.
 
The report ‘The impact of letterbox – type practices on labour rights and public revenue’, published today, features case studies from Germany, the Netherlands, Italy and Sweden, covering the meat, road transport, car manufacturing and construction sectors. It shows how tax avoidance often combines with exploiting workers.*
 
The cases include

  • Danish Crown, a German-based holding company, owns slaughtering and meat processing factories which subcontract workers on the site from letterbox companies in Poland, Hungary and Romania. Workers have 14-20 hour working days and no pension and health insurance payments, are not employed by the same ‘subcontractor’ for more than 6 months, have contracts passed from one letterbox company to another. 
  • Vos Transport, a Dutch road transport company, earns 70% of its revenue from Dutch activities, but 50% of journeys are carried out under contract by letterbox companies in Romania and Lithuania. These companies have no proper offices, drivers’ contracts are signed by a Dutch manager, they receive instructions from the Netherlands and are obliged to open a Dutch bank account. Wages are €200 a month with the rest made up of expense payments and illegal bonuses. 
  • Serneke, a Swedish construction company that allegedly sacked its workers and subsequently subcontracted workers from a Polish registered letterbox company which shares an office and telephone with the Polish-Swedish Chamber of Commerce. According to first findings, social security contributions could have been unpaid for four years (in Sweden and Poland) despite being deducted from the workers’ salaries. 
  • FIAT, historically owned by an Italian family, is registered in Amsterdam and headquartered in London. It pays corporate tax in UK and tax on dividends and capital gains from foreign subsidiaries in Holland (and pays less that if it did so in Italy).     

 
The report also reveals that 83% of foreign direct investment in the Netherlands, and 96% in Luxembourg, are into ‘Special Purpose Entities’ (letterbox companies): so the vast majority of ‘foreign investment’ in those countries is for the purpose of paying less tax! 
 
“Letterbox-type practices are bad for workers’ rights and public revenue” said Esther Lynch, Confederal Secretary at the ETUC. “Letterbox-type practices exploit workers, disadvantage decent enterprises that pay proper wages and their fair share of tax, and deprive public services of much-needed revenue.”
 
“This report shows that letterbox-type practices are not isolated cases but widespread across many countries and economic sectors, and that tax avoidance often goes hand in hand with exploiting workers. Letter box companies are facilitated by EU law and by weak national enforcement of labour and tax law.” 

 
The next phase of this ETUC project, funded by the European Commission, will examine solutions to this avoidance of taxes, wages and social security payments.  
 
 
*For the purpose of this report, the term “letterbox companies” shall be considered as not only including legal entities without any material substance, but also companies with potentially artificial incorporations where, for instance, it is questionable whether management or financial decisions are made at the place of incorporation, whilst the legal entity enjoys material benefits from the incorporation.