Ending Regulatory Avoidance through the Use of Letterbox Companies

Abstract

Letterbox companies are legal entities set up by businesses to benefit from a regulatory framework in a jurisdiction in which they have little or no material operations. They enable ‘regime shopping’ for lower taxes, wages, labour standards and social contributions, as well as for different legal rights under bilateral treaties.

According to research commissioned by the European Parliament, a conservative estimate of the costs to the EU of corporate tax avoidance alone is €50-70 billion annually. Investigations show that letterbox companies are used to circumvent the Posting of Workers Directive and the Road Transport Regulation for the purpose of minimising responsibilities under labour law (ETF 2012).

This policy brief provides a definition of letterbox companies and, drawing on two case studies, shows how they are used to avoid labour standards and taxation. It concludes with a number of recommendations for combatting regulatory avoidance through letterbox companies.

Keywords: multinational enterprise ; labour law ; taxation ; social security ; collective agreement ; regulation ; labour standard