IKEA’s Flat-Pack Tax Scheme: a Corporate Structure Designed to Facilitate Profit-shifting and Tax Avoidance

Forget about the Gates Foundation. The world’s biggest charity owns IKEA — which is not only devoted to interior design.

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Taaks Avoyd | IKEA's tax avoidance schemes

We all know how simple IKEA’s instructions for assembling its flat-pack furniture are. At the other end of the scale of simplicity, in fact, at a level of preposterously complexity, is IKEA’s corporate structure. What appears at the other end is a structure that ingeniously exploits the quirks of different jurisdictions to create a charity, dedicated to a somewhat corny cause, that is not only the world’s richest foundation, but is at the moment also one of its least generous. The set-up of IKEA’s structure minimizes tax and disclosure, adequately rewards the founding Kamprad family and makes IKEA immune to takeovers. And if that seems too good to be true, it is: these measurements are almost impossible to undo.

IKEA-founder Ingvar Kamprad claims that his company is open about its structure, and has published what he says is the full extent of the structure of ownership. However, a report by the Greens/EFA party in the European Parliament shows that his picture of the company’s structure does not even come close to the actual web of artificial ambiguity.

IKEA’s Quest To Run From Tax

Ingvar Kamprad despised paying tax. For IKEA he constructed a corporate structure designed to facilitate profit-shifting and tax avoidance, centered around the Netherlands. Illegally, as proclaimed by the European Commission.

‘Kamprad pays tax in Sweden again’, headlined the Swedish newspapers about three years ago. For decades, Kamprad was known as an ultimate ‘tax refugee’. Frustrated with the high tax rates, the IKEA-founder left Sweden and moved himself, his family and many administrative functions to Denmark in 1973. Egalitarian Sweden was deemed unfit for entrepreneurs like him. In 2015, after his wife passed away, he returned to Sweden as a multi-billionaire. He then reportedly paid the Swedish Tax Authorities 640,000 Euros in tax for his 1,9 million yearly income. Nothing that clouds the horizon.

Kamprad, who passed away in 2018 at the age of 91, always shrugged his shoulders for tax. Although his net worth reached billions, the Swedish entrepreneur wanted to save every penny. He drove a Volvo, flew economy class and is even said to visit local flea markets every now and then.

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IKEA’s Founder Ingvar Kamprad

Kamprad’s desire for IKEA's business operations was to focus on efficiency and cost reduction as well. “That is our secret. That is the foundation of our success”, he wrote in The Testament of a Furniture Dealer.

Where Kamprad settled outside of Sweden to limit his personal taxes, he moved the greater part of IKEA in an effort to give his concern the same treatment. ‘Incidentally’ a tax structure was constructed, far more complicated then a Pax Wardrobe’s manual. The IKEA empire was split up, with parts located in the Netherlands, Luxembourg and Liechtenstein to escape a wealth and inheritance tax regime in Sweden that Kamprad described as “unsuitable for private ownership”.

Since the start of the 1980's, the IKEA concern leans heavily on the Netherlands. Near the picturesque central station of Leiden we find Ingka Holding, owner of 355 IKEA stores worldwide and with a turnover of 36 billion Euro. Five hundred meters down the road, the Ingka Foundation has its office — owner of both Ingka Holding and the philanthropic organisation. Last year alone this foundation gave away 144 billion Euro to charities like UNICEF.

The pièce de résistance is located close to highway A13 in Delft, the Netherlands. At first it looks like a regular IKEA-store — a big parking lot, escalators at the entrance, personnel dressed in blue-yellow, Swedish meatballs and children waiting to be picked up from Småland. But when you head to the restrooms you encounter a big glass wall you don’t see in any other IKEA-store. On this door it says ‘Inter IKEA System BV’.

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.

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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.

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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.

Improvise, Adapt, Overcome

Liechtenstein is popular among the rich of this world. Others like the Saudi King Fahd and the Ukrainian president Viktor Janoekovitsj have settled in Liechtenstein to keep their immense equity in place.

In 1982 already, Kamprad transferred legal ownership of the IKEA Group’s parent company, Ingka Holding BV, to a Dutch domiciled foundation, the Stichting INGKA. Such an ownership structure makes its finances exempt from public disclosure under Dutch law. The Kamprad family also owns the IKANO Group, which split off from IKEA in 1988. IKANO is controlled by Kamprad’s three sons and owned through a holding company in Curacao. Kamprad also transferred legal ownership of the Inter IKEA Group to the Liechtenstein-domiciled Interogo Foundation in 1989. This foundation is nominally independent, though its ruling council is comprised solely of the Kamprad family. This council is supervised by a seven-member Supervisory Council on which the Kamprad family is guaranteed up to three seats. However, the remainder of the council “is composed largely of men with long-standing and close ties to the Kamprads and both of the major IKEA business groups.”

Interogo Foundation’s main goal was to “ensure a long life”, answered IKEA when Swedish research reporters discovered the presence of this Foundation seven years ago. The Unternehmensstiftung in Liechtenstein — ultimate beneficial owner of the IKEA brand — basically had to protect Kamprad’s successors from splitting or selling IKEA. Additional advantage: there is no tax to be paid on dividends or other income received from foreign subsidiaries.

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Assembly instructions | Source: IKEA

On 1 January 2012, IKEA deployed their Liechtenstein component as an alternative for the cut-off ‘Luxembourg-route’. For only 9 billion Euros Inter IKEA now bought the trademark rights from the Luxembourg component, to which they paid a (illegal, according to the European Commission) 3 percent licence fee in the years before. The majority of this deal was funded with a repayment-free loan from the Interogo Foundation in Liechtenstein. As a result, Inter IKEA owed the Foundation hundreds of millions a year in interest expenses. A diagram in the report notes that, since 2012, “the Dutch conduit subsidiary pays interest on debt incurred to acquire the IKEA trademark.” Since there is no withholding tax on royalties and interest sent abroad in the Netherlands, this means that this money is not taxed. IKEA’s accounts also show an “Other charges” expense which is deducted from taxable income. Not only is this money also not taxed in the Netherlands, no one knows to whom these charges are paid. And as mentioned above, in Liechtenstein, where Interogo is based, dividends received from foreign subsidiaries are tax free.

The second Dutch tax ruling in 2011 allowed the deduction of these interest payments from Inter IKEA Systems’ taxable profits, despite the European Commission’s concerns. This meant that most of Inter IKEA’s franchise profits were shifted to its parent company. This behavior was described by Kamprad as adopting an “optimized tax structure”.

Firstly, the European Commission questions whether the purchased trademark rights are really worth 9 billion Euro. Secondly, the repayment-free loan of 5,4 billion Euro doesn’t look like something a third party would engage in. There is no bank in the world that would provide such a loan. The amount is simply too high in comparison with Inter IKEA's equity, the enormous amount of interest (6 percent) is unsubstantial and lending billions with no repayment obligation has not been done by a bank in ages.

Taaks Avoyd | IKEA's tax avoidance scheme explained

IKEA’s Corporate Social Responsibility at Risk

IKEA is often admired for its Corporate Social Responsibility. There is no company in the world that donates more to UNICEF and the UN refugees organization UNHCR. IKEA even won the Retail Sustainability Award last year and was voted best performing company in terms of circular economy in the Netherlands. “We want to create an IKEA business model that is sustainable. The IKEA vision, to create a better everyday life for the many people, is our inspiration”, IKEA declares in its sustainability strategy guide People & Planet Positive.

That image is at risk due to their extensive tax avoidance operations. When the European Commission assessed that Starbucks had an unfair tax advantage as a result of their ruling with the Dutch Tax Authorities, it was all over the global news. From then on, Starbucks was the example of a global tax evader, symbolizing what is wrong with so-called ‘Tax Havens’ and its rulings.

The Commissions’ investigation into IKEA is expected to be completed next year, and according to experts IKEA is on track to top Starbucks’ story. The coffee maker had to repay their unfair gained tax advantage of 25,7 million Euro; IKEA’s tax avoidance supposedly runs into the billions of Euros. “From 1991 to 2014,” says the Taaks Avoyd report, “IKEA franchisees paid €13.6 billion in tax-deductible royalties to the Inter IKEA Group” and continue to pay around €1 billion annually. IKEA Group subsidiaries “move a large part of their income to Inter IKEA Systems BV in the Netherlands. Subsequently the Inter IKEA Group makes sure much of this income remains untaxed by transferring it (directly or indirectly) to other entities,” including to Interogo.

Thanks to all kinds of tax avoidance scandals, Corporate Social Responsibility — or paying your Fair Share — is in the global spotlights. Companies need to address paying taxes as an integral part of their policy for Corporate Social Responsibility. In this respect IKEA had a problem. Their organizational structure dates back to a time tax avoidance wasn’t such a big part of Corporate Social Responsibility and a risk for your company’s image. IKEA’s organizational structure is set in stone by Kamprad with his Foundations in Liechtenstein and the Netherlands. Or, how he puts it: “No-one can guarantee eternal life for a company or concept, but you can’t blame me for not trying.”

Thank you for reading. Interested in more? Try 5 Reasons Doing Taxes is Like Preparing Your Resume, Introducing Blockchain Technology to the world of Tax or follow me on Medium to stay tuned for more articles.

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Tax & Technology enthusiast | Entrepreneurial adventurer | Wanna-be writer

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