The Dutch government’s recent decision to scrap a 15 per cent dividend withholding tax from January 2019 made the front pages in the Netherlands, sparked parliamentary debates and protests, and has seen the populist politician Geert Wilders question why his country should approve a measure that benefits foreign investors.
On this side of the English Channel, the news had hardly registered — until now.
Unilever, the Anglo-Dutch consumer giant, has told the Financial Times it will delay a decision on streamlining its dual structure — involving two parent companies, two headquarters and stock market listings in the UK and the Netherlands.
The review by the board is continuing, and the company said on Tuesday that it intends to maintain listings in both countries. Regardless, the news will rattle income investors in both Unilever and Royal Dutch Shell.
On the face of it, the change to the Dutch withholding tax regime is good news for British investors. Foreign investors have been able to claim exemption from taxes levied by their own governments to avoid double taxation, but because Britain does not levy any dividend withholding tax, UK investors have had no way to claw back the Dutch tax.
This is the key reason why Unilever and Shell have maintained their unusual dual-nationality structure over the years: to maintain a way of paying dividends directly to British shareholders. The removal of the tax would mean they no longer need to. So could either company be tempted to say “vaarwel” to its British listing?
Unilever, in which a third of shareholders are British, has been reviewing its dual corporate structure and has already eliminated its preference shares — a sign it is simplifying its shareholder base. However, these actions have more to do with the rebuffed Kraft-Heinz bid as the company is under pressure to improve its margins before another external party forces it to.
Shell, which openly lobbied for the Dutch dividend tax cut, could make significant cost savings if it were to scrap its dual share structure. While the oil price remains low, such a move could be well received. But Shell is also one of the biggest dividend payers in the UK. If it did shift its listing to Euronext, the implications would be enormous for domestic pension funds and investors — not to mention hugely symbolic as the Brexit negotiations roll on.
Shell’s combined equity (A and B shares) makes up 7.9 per cent of the UK market, and is currently yielding 6 per cent. Hypothetically, if both Shell’s A and B shares moved to the Netherlands, the overall FTSE All Share dividend yield would fall from 3.6 per cent to 3.1 per cent, a decline of 14 per cent. Dividend yields on UK equity income funds would also fall — unwelcome news given the current income drought.
On the other hand, it has never been easier for UK funds or private investors to hold shares in foreign-listed companies. If investors are not disadvantaged from a dividend income point of view, will the country of listing really matter that much? In any case, UK equity income funds can hold up to 20 per cent of their assets outside UK equities, so they could hold Netherlands-listed companies if they chose.
The Dutch government’s thinking behind scrapping the withholding tax on dividends is that it would make the country’s blue-chip shares more attractive to foreign investors, raise their valuations and make them less likely to be taken over. It is worth noting that Anglo-Dutch companies such as Shell, Unilever and other multinationals account for more than 2m jobs, or about 40 per cent of all employment in the Netherlands.
The political motivation for the Dutch is clear, but would any company want to turn its back on Europe’s largest liquidity pool?
Tineke Frikkee, a Dutch national and UK-resident equity income fund manager at Smith & Williamson, thinks that liquidity is not an issue for large multinational companies so long as they are listed on a well-regulated stock exchange in a well-regulated country. “The UK and the Netherlands would be viewed in the same light here,” she says.
Yet there is also political risk: the reaction to either multinational dropping its London listing is bound to be more emotional than rational.
The impact on passive investments is also worth considering. Shell’s shareholder base is very fragmented and international. Its sheer size means many passive funds — ranging from oil and global ETFs to FTSE-based trackers — have to own its shares. It is a similar story at Unilever. If the benchmark changes, some of these “investors” could be turned into forced sellers.
And there is the thorny issue of currency risk. Shell reports and declares its dividend in US dollars. If all its shares were to be priced in euros rather than pounds, this would add further forex risk for sterling-based investors.
Nevertheless, having a single share class could save Shell a packet in administration costs, remove a hard-to-explain share price differential and create a more widely traded (and potentially higher-rated) single share class. Corporately, if it is seen that Shell is open to big changes, that might also be rewarded favourably.
Of course, none of the above is a given — it is unlikely that either company will be asking shareholders to vote on whether to end their dual listings any time soon. But it does provide investors with some food for thought.
Against the backdrop of Brexit, competition to attract multinational companies has become fierce. The Dutch are also cutting the corporate tax rate from 25 per cent to 21 per cent.
In a post-Brexit world, one of the UK’s policy levers could be the ability to introduce a highly advantageous corporate tax regime — in fact, it could prove very valuable if discussions with the EU do not go to plan. For now, though, the Dutch seem to be ahead of the curve.
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