IKEA's and Ingvar Kamprad's tax problems.

WebJournal on International Taxation in Sweden, WITS, no 3/2013.

IKEA's and Ingvar Kamprad's tax problems.

For an international tax analyst like myself Ingvar Kamprad and his IKEA business empire never cease to be of interest. In the recent past I have posted no less than four WITS reports on this blog regarding tax matters concerning Kamprad/IKEA (5 March, 17 September, 26 September and 16 November 2012). My main suggestion on these blogs is that IKEA Systems B.V., the Dutch company that collects all the 3-percent royalties, some 7-8 billion SEK every year, from IKEA stores around the world for the use of the IKEA trademark, should pay tax hereon in the countries where these stores are situated.

In a book ”IKEA på väg mot framtiden” (IKEA heading for the future) which has been published just recently this conclusion is further reinforced. But that is not all. The book also gives rise to serious considerations regarding Mr Kamprad's personal tax situation, now that, as reported, he is moving back to Sweden from Switzerland where he has resided for many years.

The book has three contributing authors: Stellan Björk, an experienced business reporter for Veckans Affärer and Lennart Dahlgren, a close aide of Ingvar Kamprad for more than thirty years both of whom have authored earlier books about IKEA and also, as special researcher, Carl von Schulzenheim who has analyzed many large companies for the past fifteen years and before that was active in financial and accounting matters in a number of companies. Further references to the book will be tagged ”Björck/Dahlgren”.

The taxation of IKEA's royalties

The main reason for my opinion that IKEA Systems B.V. in The Netherlands should pay source tax on the trademark royalties it derives from around the world is that the company is not the owner of the trademarks. Or, more correctly, was not the owner thereof until 1 January 2012. Instead the Liechtenstein foundation Interogo,which was set up by Mr Ingvar Kamprad in 1989, has been the owner of the IKEA trademark until the end of 2011 when Interogo, which was widely announced in the medias, sold the trademark to Inter IKEA Systems in The Netherlands for the mindboggling amount of 75 billion SEK .

 

Interogo was completely unknown to the rest of the world until the beginning of 2011. Then its existence was revealed by a probe conducted by a Swedish television programme team ”Uppdrag Granskning” (Mission Investigation) and Smålandsposten which discovered that Interogo was the real owner of IKEA Systems B.V and also that the capital held by Interogo was about – are you ready - 100 billion SEK (about 15 billion USD), a large part of which apparently is made up of the royalties passed on to Interogo from Inter IKEA Systems. The Interogo funds after the sale of the trademark, about 175 billion, thus add up to more than four times the Swedish defence budget, bank-rolling – it appears – much of the IKEA empire.

Björck/Dahlgren also conclude that the IKEA trademark has been owned not by Inter IKEA Systems but by Interogo which, as mentioned in my aforementioned blogs, has indeed also been admitted by IKEA itself. I refer to the statement reported in Dagens Industri in the beginning of December 2011 by Mr Hans Gydell, CEO of Inter IKEA Holding and also a member of the Supervisory Board of Interogo: ”The ownership of the IKEA trademark has been placed for all eternity in the tax paradise Liechtenstein, and even if Mr Kamprad would so wish it would be impossible to break this up and transfer ownership elsewhere. It was precisly for the purpose of protecting the IKEA concept and trademark for the future that this very special and stable ownership arrangement was chosen and I have never heard him regret this decision.”

And just three weeks later on 1 january 2012 the trademark nevertheless was transferred to Inter IKEA Systems!!

Also, as reported by Mr Anders Bylund, Head of Group Communications Inter IKEA Group, (see again my aforementioned blogs), Inter IKEA Systems, before January 2012, had a separate license agreement with Interogo obliging Inter IKEA Systems to pay a compensation for the right to utilise the IKEA trademarks in its global franchise operations.

As I have carefully explained in my earlier blogs, and which I will therefore omit repeating here, Inter IKEA Systems for tax purposes cannot be considered to have been the beneficial owner of the royalty payments received from around the world. And under most tax treaties source tax on royalties is waived only for payments to such a beneficial owner. Because of the licence agreement between Inter IKEA Systems and Interogo, where Inter IKEA over the years has passed on the 100 billion SEK to Interogo, the legal owner of the trademarks, Inter IKEA Systems has not had ”the full right to use and enjoy the income received unconstrained by any contractual or legal obligation to pass the payment received to another person.” This last mentioned quote is the language used by OECD's Committe on Fiscal Affairs when determining the meaning of ”beneficial ownership” in its Model Tax Treaty.

Somewhat surprisingly, Björck/Dahlgren maintain that the trademark in the past was owned by Kamprad personally. ”At the time” (page 38) ”a dispute arose with the Swedish tax authorities who claimed that the trademark had been sold by IKEA to Kamprad and that this money was taxable income for the company. But Kamprad had insisted that the rights had never been sold to him. He owned them personally. Period. Kamprad had enlisted the well-known tax professor Göran Grosskopf in this complicated affair which finally petered out and never went to court”...”What subsequently happened to the trademark rights is unclear other than that when the information about the existence of the Interogo foundation surfaced in 2011 the trademark at that time was owned by this foundation.”

”This”, continues Björck/Dahlgren, ”has given rise to a number of questions: When was the trademark transferred to Interogo? Did Kamprad donate the trademark to Interogo or did he sell it? Were there any other owners in between?” They have put these questions to IKEA/Kamprad who have responded that such questions relate to business transactions of a non-public character upon which we cannot comment.

The choice of The Netherlands as the base for Inter IKEA Systems B.V. is not haphazard. The Netherlands is renowned as a major player in international taxation. It has been reported that the amount of money passed through foreign-held holding companies in The Netherlands amounts to some thirty to forty times the gross national product of the country!

The Netherlands also has one of the most extensive tax treaty networks in the world usually exempting royalties alltogether from taxation in the source state. In The Netherlands this income, when it accrues to a company which is part of an international group, is taxed under very beneficial terms normally upon a negotiation/advance ruling with the tax authorities. The results of such rulings, by request of these authorities (!), remain confidential. The part of the royalty income which is passed on to the ultimate licensor in a third state is deductible for the payor and tax free in The Netherlands for the foreign recipient, also those that reside in pure tax havens. Björck/Dahlgren also report that the books of Inter IKEA Systems are not open to scrutiny due to some special exemption in Dutch company law.

In May 2006 i.e. three years before the discovery of Interogo, The Economist ran an article about IKEA titled ”IKEA: Flat-pack accounting” concluding that Inter IKEA ultimately was owned by a Netherlands Antilles company, run by a trust company in Curacao and that the beneficial owners remain hidden from view – IKEA refuses to identify them – but that they almost certainly are the members of the Kamprad family. With regard to taxation The Economist declared that clearly the Kamprad family pays the same meticulous attention to tax avoidance as IKEA does to low prices in its stores and further reports that out of earnings of several hundred million dollars which undoubtedly come from the collection of franchise fees, IKEA paid 3.5 percent in taxes. In 2007, The ”Berne Declaration”, a non-profit, non-governmental Swiss organisation that promotes corporate responsibility, formally criticizising IKEA for its tax avoidance strategies, gave Kamprad its ”Public Eye” award for corporate irresponsibility which was announced at that year's World Economic Forum in Davos. (http://www.evb.ch/cm_data/Ikea_e.pdf.)

As mentioned, Interogo's existence and its relations to the rest of the IKEA structure were completely unknown until the discovery that was made by Uppdrag Granskning and Smålandsposten in the beginning of 2011. Not even Mr Anders Dahlvig, CEO of the IKEA Group between 1999 and 2009 had any knowledge of Interogo (Björck/Dahlgren page 13).

And this lack of knowledge is probably the reason why the beneficial ownership question has never been raised by the tax authorities concerned in this matter. They simply didn't know that the royalties received were passed on to Interogo.

Björck/Dahlgren maintain that ”Kamprad on many occasions has declared that he ”gave away” IKEA to a Dutch foundation. But he has never said anything about the trademarks. Obviously they were not included when he gave IKEA to the Dutch foundation. In other words, he has told only half the truth. Probably we are dealing with a number of property rights. Apparently Kamprad has owned a small part thereof entitling him to a share of the royalties, a right which has subsequently been transferred to the sons."

”The main thing is, however,” continue Björck/Dahlgren, that a franchising system was set up. But the royalty company Inter IKEA Systems B.V. did not own the trademarks. This was solved by drawing up a license agreement between this company and Interogo under which Inter IKEA Systems paid licence fees to Interogo thus enabling Inter IKEA to franchise the trademark to all IKEA stores worldwide. The whole setup is quite ”insidious” (lurig) declare Björck/Dahlgren. ”On the price tags of all IKEA products one reads Copyright Inter Ikea Systems B.V. which undoubtedly gives the impression that the company owns the trademark. In fact, however, the company has ”hired” it from the owner the Interogo Foundation. The licence fees have been deductible in the Netherlands company. And certainly taxed very moderately in Liechtenstein.When the existence of the Interogo foundation was disclosed it appeared that the foundation had capital reserves of almost 100 billion SEK including the holding of the Inter IKEA group. Today this figure has probably risen to 160 billion due to the sale of the the trademark for a sum of 75 billion SEK. This sale by Interogo of the IKEA trademark(s) to Inter IKEA took place on 1 January 2012 maybe to get out of the much critisized Liechtenstein affair”.

The most contentious allegation by Björck/Dahlgren is that Ingvar Kamprad has been involved in a bitter controversy with his three sons Peter, Jonas and Mathias regarding the Interogo billions, suggesting that Kamprad, when he set up a number of his ingenious Dutch foundations back in the eighties, something that was widely announced at the time, has ”forgotten” to mention anything about Interogo and the fact that he had retained personal ownership of the IKEA trademark. And he has also failed to disclose that he had preserved the right to a portion of the royalty income derived from the payments flowing into Interogo. Over the years this albeit tiny percentage has of course grown into several billion SEK which, according to Björck/Dahlgren, thus constitutes ”a nice little ”deal” for Ingvar Kamprad Elmtaryd Agunnartorp”. The conflict with his sons had focussed on the rights to the Interogo funds. The Kamprad sons insisted that they had the legal rights hereto and after enlisting prominent American legal expertise which supported their position the old Kamprad, but only after serious bargaining, finally threw in the towel.

In an angry letter, signed also by his sons and printed in the recent issue of the IKEA News Magazine, Kamprad has vigourously denied the existence of any family controversy involving American ”star lawyers”. The letter, however, provided no comment to the allegation that money had been been passed through Interogo to the Kamprad family members personally.

All this has given rise to exited comments in the Swedish medias. Kamprad's longtime personal friend, and former editor of Dagens Industri and Svenska Dagbladet, Bertil Torekull, referring to private conversations from the Kamprad fishing cottage in Bölsö back in the late nineties, confirmed (in Dagens Industri 20 September 2013) that he had indeed been informed about the royalties picked up by Kamprad from his IKEA trademark. Torekull, however, found this no more remarkable than that Björn Borg had sold out his name and that Astrid Lindgren's children now held the property rights to her name. He also declared that the ”coppers” (slantar) so earned by Kamprad, the amount of which he estimated had risen to maybe 500 billion SEK , would in any case wind up with the sons upon Kamprad's death. (But I am sure he must have meant millions.)

Already in 1997 Torekull wrote a book, sanctioned by Kamprad and titled ”The IKEA Story” (Historien om IKEA) based on numerous and candid interviews with Kamprad and his close aids. He was also given free acess to all IKEA files. But there was not a word about Interogo in the book. Torekull, in 2011, has published a new edition of the book. In its foreword he reproaches Kamprad for not having told the whole truth about the details of the ownership relations of IKEA, its financial muscles nor its real steering instruments. He further declares that the close economic and ideological connection between owner and business activities, where the ultimate control of the enterprise continues to be in the hands of Kamprad, is symbolized by the 3 percent royalties of all IKEA's sales that goes to the family as owner of the concept. On page 146 he mentions that ”these amounts are deposited in various (probably the founder does not himself know how many) foundations, one of them beeing Interogo. But Interogo is just one of many deposits (placeringsinstanser)”. Torekull further concludes that Inter IKEA Systems is just ”a caretaker of the trademark (märkesvårdare) functioning a bit like The Vatican for Catholicism: It carefully oversees that the prescribed smalandish (småländsk) faith is exercised in all IKEA temple-stores, sometimes, one will find, down to the level of the last rosary...”

Mr Kamprad's personal tax situation in Sweden.

Someone has said that the use of foreign trusts and foundations is unknown to half the world and indispensable to the other half. Mr Kamprad no doubt belongs to that second half. The new book reports how Kamprad has set up not only Interogo but a number of other foundations in various jurisdictions. The main reason herefor, allegedly, is to preserve IKEA for the future. On Interogo's website the purpose of ”securing the independence and longevity of IKEA” is mentioned no less than three times over half a page. But there is no doubt that tax aspects have been a driving force too. The reason for setting up Interogo in Liechtenstein is surely also to protect it from outside observation. Indeed, paragraph 12 of the statutes of Interogo declares: ”These statutes including specific changes thereof and all other factual and legal circumstances affecting the Foundation may not be disclosed to outsiders, in particular not to foreign administrative bodies.”

It can be safely suggested that in Sweden the taxation of foreign trusts and foundations is unknown to much more than half the Swedish population. There are no specific rules hereon in Swedish tax law and case law is very sparse. There are a couple of articles written on the subject. I myself, in 1996, wrote a thirty page report on these matters for the Information Bulletin of The Institute of Foreign Law, (IUR-INFORMATION 24/97, Beskattning av utländska privata truster och familjestiftelser). In that same bulletin in 1998, no 21/98, and in 1999, no 9/99, I published another 17 pages on theses issues. (They are all in Swedish).

Due to the alien legal charachter of foreign foundations and especially of anglo-saxon trusts and the poor regulatory supervision of these foundations and trusts in many jurisdictions, the Supreme Administrative Court in Sweden, especially in such cases where the taxation of these problems has been brought up in applications for advance rulings, has been very reluctant to give any answers and simply dismissed them.

A basic problem to be confronted for tax purposes is whether the foreign trust/foundation should be recognised as a separate tax entity. The main requirement is to establish that the assets transferred to the trust/foundation have been properly and sufficently separated from (avskiljda från) the settlor. And special safeguards must have been taken to prevent the settlor or his nearest of kin from continued posession and control of the funds of the trust/foundation. And these safeguards must be absolute and irrevocable. No ”letters of wishes” or other instructions to protectors and trustees etc. at the time of the settlement or later may be issued allowing the settlor in any way to claw back or gain control of the assets of a foreign trust/foundation.

The separation of powers also requires that the settlor be excluded from the management and supervision of the trust/foundation. The constitutional council (Stiftungsrat) of Interogo consists of two Liechtenstein lawyers (partners of Marxer & Partner Vaduz, Liechtenstein). They, however, belong to the so called ”pin-stripe mafia” and only take care of the paper work of Interogo. The real nerve centre is the special Supervisory Board of Interogo which is chaired by Ingvar Kamprad. He, and after him the Kamprad family members, one of which is already a board member, can veto any appointment to the board. (In the past the activities of the Supervisory Board were conducted within a separate foundation set up in Canada!)

If the ”separation” of the settlor from the trust/foundation is not carried out appropriately the settlement of the trust/foundation for Swedish tax purposes will be ignored as if the trust/foundation did not exist. In such case, the settlor will continue to be regarded as the owner of the trust's/foundation's assets. And thus personally liable to taxation for the income from the assets thereof. If the settlor is resident in Sweden he will be subject to world-wide tax liability on the proceeds from these assets. If the settlor is not resident in Sweden he will be liable to tax on such income that is sourced in Sweden. Such as income from Swedish permanent establishments, dividends from Swedish companies and royalties from Swedish licencees/franchisees.

Moreover, Björck/Dahlgren have extensively discussed whether the statutes of a foundation can be changed (page 31-33 and 169-170). Mr Per Heggenes, Kamprad's personal spokesman, insists that, according to the present wording of the statutes, the Kamprad family has no access to the capital of any of the foundations. Legal (American) expertise, discussing Kamprad's net wealth, disagree of whether the statutes can be changed thus allowing the capital to be available to Kamprad. Björck/Dahlgren have noted that when Jan Stenbäck died in 2002 the main part of his fortune was locked into a Liechtenstein trust but since then the shares -”eureka” (simsalabim) - have been divided into personal holdings by his heirs. Also the Tetra Pak foundations in Liechtenstein were dissolved when Gad Rausing's three heirs became owners of the packaging giant when buying out their uncle Hans Rausing. Björck/Dahlsten thus conclude that, albeit difficult, it should be possible to change the statutes of foundations in Liechtenstein. Interesting to observe too in this context is that there seems to have been no problems for Interogo to transfer its most valuable asset, the IKEA trademark, to Inter IKEA Systems in The Netherlands despite Mr. Gydell´s firm declaration to the contrary as mentioned above. And transferring the trademarks elsewhere from Inter IKEA Systems in a subsequent transaction, for instance back to the Kamprad family members, should pose no special legal problems. Mr Heggenes' reference to the ”present” wording of the statutes of Interogo also gives rise to concern. Most disturbing, however, when considering the tax status of Interogo are the allegations that the Kamprad family should have ”rights” to and may withdraw funds therefrom. It invites the suggestion that Interogo serves as the Kamprad family's private money-box. (And Mr Torekull's idea that these funds would wind up with the Kamprad sons upon their father's death suggesting that Interogo could be inherited by the sons represents, with all respect, a grave misunderstanding of the basic legal character of foundations.)

Conclusion

In my opinion IKEA under its royalty/franchise structure has been operating under tax conditions which to a large extent provide unwarranted competitive advantages. This calls for an examination of the beneficial ownership issue. Today a tax information exchange agreement (TIEA) has been concluded by Sweden with Liechtenstein – and there is also one with The Netherlands - which will now allow the tax authorities to investigate these matters. Mr Kamprad's objection that these matters relate to business transactions of a non-public character upon which he cannot comment can be ignored.

The fiscal consequences of such an investgation are enormous. I would suggest that the tax to be collected in Sweden alone would be enough to finance a couple of hospitals or several miles of super highways in our country. Maybe, however, the Swedish tax administration will shy away from litigating a case of such a magnitude and which would attract such worldwide publicity. On the other hand the beneficial ownership issue is something that should be of concern to all countries that have an IKEA store and a tax treaty with The Netherlands.

Moreover, considering the circumstances and contradictions that have recently become known regarding Ingvar Kamprad's links to Interogo and the conditions under which Interogo is managed and controlled, the tax consequences hereof in Sweden have become critical. It can be assumed that the Swedish tax authorities will take a serious look at these matters when Kamprad returns home to Sweden.

Also of interest to those tax jurisdictions concerned is to determine if/when and to what extent payments have been actually made by Interogo to the Kamprad family members in the past (possibly through various other deposits (placeringsinstanser). In Sweden all payments made to resident beneficiaries of foreign trusts/foundations are taxed as employment income subject to full municipal and federal progressive tax rates. Björck/Dahlgren (page 39) believe that the sums involved may run into several billion.

We live in a globalized world, many of us in democratic societies and under deregulated economies. This calls for corresponding transparency, rectitude and honesty in financial and tax matters. In this context, and considering again Mr Torekull's reference to the Vatican, one may report that its national bank IOR (Istituto per le Opere di Religione) has recently launched a website and embarked on ”a process of comprehensive reform, to foster the most rigorous professional compliance standards”. For his final legacy Mr Kamprad should do the same.

Stockholm, November 2013.

Peter Sundgren

peter.sundgren@gmail.com