Unilever (NYSE:UN) chose to give in to shareholder pressure and not move their headquarters to the Netherlands. Though not completely out of the blue, this decision was a major surprise for investors - and for politics.
The influence of politics on large corporations
In theory, politics and long-term investing should be largely unrelated. As long as the host countries of large successful corporations are stable and business-friendly, company variables should play a larger role than country specifics. Both the Netherlands and the UK have long been investor- and business-friendly countries, so it is all the more interesting that two major developments in these two countries seem to have played a large role in the HQ decision of Unilever.
On the one hand, there is the well-known Brexit. Though Unilever has always been situated in both the Netherlands and the UK, the United Kingdom leaving the EU could complicate the structure of the company. It is likely that, in the light of the Brexit, there is much competition between the Netherlands and the UK to "obtain" the headquarters of Unilever. However, when Unilever proposed its plans to move its HQ to the Netherlands, it actively denied any link to the Brexit. Among analysts, it has been suggested that the Brexit might not be the direct cause, but has set things into motion with regard to the next political development which I am going to discuss: the dividend tax of the Netherlands.
Dividend Tax in the Netherlands
Last year, the new Dutch government unveiled plans to abolish their dividend tax by 2020. At the moment, the dividend tax in the Netherlands is still 15%. This measure was be good news for international investors who want to invest in Dutch companies. When reading here on Seeking Alpha, dividend tax seems to be one of the major headaches of long-term international investors in European stocks, especially when investing in dividend growth stocks. As a result, some large Dutch corporations cheered this measure.
This measure cannot be seen independently from Brexit. Since the UK has a dividend tax of 0%, and two of the largest and influential Dutch companies (Unilever and Royal Dutch Shell (NYSE:RDS.A)) are botch Dutch and British, it is very well thinkable that the Dutch government made this plan with Brexit at the back of their minds.
Interaction between these two political discussions
The decision by the Dutch government to abolish their dividend tax more or less came at the same time as the previous proposal of Unilever to move their headquarters to the Netherlands. This might not be a coincidence. If shareholders of the UK shares would see the country of origin of their dividend change to the Netherlands, they theoretically would need to pay 15% dividend tax, as opposed to the zero percent which the UK has. However, Unilever already announced to use a substitution payment mechanism, which would make sure these shareholders still will not need to pay the 15% dividend tax in case the Netherlands' dividend tax stays in place.
Still, much is unclear about this "substitution payment mechanism", and the question is how robust this mechanism would be and if it would be a legal way to avoid the Dutch dividend tax. As such, it would still be safer for UK shareholders if the Dutch dividend tax would be abolished.
Enter the Dutch dividend tax discussion. After the government plans to put the dividend tax at a level of 0% were unveiled, they were hit with much backlash among the opposing political parties and the public. This happened for a couple of reasons:
- The plans seemed to have appeared from nowhere - no single political party mentioned it before the elections, nor was it used in a political campaign.
- It was suggested that large corporations, especially Royal Dutch Shell and Unilever tried to influence the government to take this measure, which was made worse by the discovery of documentation which suggested very close communication between members of the government and Paul Polman, CEO of Unilever.
- The measure would cost the Netherlands 2 billion euro, but its own inhabitants seemed to have no direct benefit at all. Dutch residents can offset the dividend tax with their yearly capital tax - as a result, most Dutch inhabitants already pay zero percent dividend tax on dividend from Dutch companies.
Especially the third point led to much political discussion, since this would mean that most of the 2 billion would only directly benefit shareholders from abroad. Of course, there would also be indirect benefits, because a dividend tax of zero percent would likely lead to the Dutch stock market becoming more interesting for international investors.
The HQ decision
When Unilever stated this Friday that it would not move its headquarters to the Netherlands, Paul Polman mentioned that the political discussion about the dividend tax was one of the reasons why UK shareholders had large doubts on the move.
In the Netherlands, this statement had a huge impact. Prime Minister Mark Rutte stated later on the same day that the dividend tax measure needs to be reweighed now. In my personal interpretation, in Dutch politics this means that it is very likely that the measure will be pulled and that the Dutch dividend tax of 15% will remain in place.
The influence of large corporations on national tax policy
The statement that the Dutch government will reconsider their dividend tax measure indirectly suggests that this measure was created with the HQ movement of Unilever as an expected result of it. This is very revealing about the degree to which governments are willing to change national policy to satisfy large corporations.
On the background, there might be much more interaction between national governments and boards of directors of large corporations than many people suspect.
Of course, the dividend tax is not the only issue, more powers are at work here. Though Paul Polman specifically mentioned the dividend tax as the main reason why UK investors were skeptical about the move of Unilever's HQ to the Netherlands, removal from the FTSE 100 and the Brexit are also two very likely reasons why these shareholders would like to prevent the HQ move.
The most stunning part of this whole story, in my opinion, is that a decision of UK shareholders is likely to lead to the Dutch keeping their 15% dividend tax policy in place.
For long-term investors, I think it is best to ignore this noise and focus on the prospects of the company instead. Unilever is a very stable company with a good dividend and nice but modest growth perspectives. Though investors will always prefer to pay as little dividend tax as possible, the country where the company's headquarters are situated should not matter much.
In a previous article (author's pick, so everyone can access it for free at this moment) I described why I'm a long-term shareholder of Unilever shares and why I'm not planning to sell, even though the shares were trading at all-time highs then.
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Disclosure: I am/we are long UN.
I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.