What’s behind the surge in share buybacks by Dutch companies?

Dutch companies are increasingly buying back their own shares. According to the Centre for Research on Multinational Corporations (SOMO), the tax exemption on these buybacks costs the Dutch treasury around €2.2 billion annually. No other country in Europe has seen more share buybacks in recent years than the Netherlands. So what’s driving this trend? We spoke with Thijs Knaap, Chief Economist at APG, to find out.

Why do companies buy back their own shares?
“Investors put money into companies, which is then used to grow the business—through expansion, innovation, or entering new markets. If that leads to higher profits, those can be shared with shareholders through dividends. But as is often the case when money changes hands—from company to shareholder—the tax authorities step in. In the Netherlands, dividends are taxed at 15 percent; in the U.S., it can be as high as 40 percent. Paying taxes isn’t popular, so companies look for ways to avoid it. One strategy they’ve come up with is buying back their own shares instead of paying out dividends.

When a company buys back shares, the number of outstanding shares decreases. That means future profits are divided among fewer shareholders, which pushes up the share price—something shareholders obviously appreciate.

In the U.S., share buybacks have been allowed since 1982, and due to the relatively high dividend tax, they’ve become common practice. The Netherlands followed suit in 2001. With the globalization of capital markets and the influence of American investors, buybacks have become increasingly popular here as well.

There’s another reason companies opt for buybacks: executive compensation. If the leadership team receives bonuses tied to the share price reaching a certain level, buybacks can help achieve that. Dividends don’t affect the stock price, but buybacks typically do. Elon Musk’s performance-based compensation at Tesla is a well-known example.”

Wouldn’t it be better for companies to invest that money in innovation?

“Companies certainly have other options for using their capital—like launching new products or entering new markets. If buybacks were taxed, investing in the business itself might become more attractive. But that doesn’t always lead to better outcomes. Some companies have more growth potential than others. If a financially healthy company with limited growth opportunities returns money to shareholders, those shareholders can reinvest it in businesses that do have room to grow. That way, the market remains efficient and economic growth may be higher than if buybacks were taxed.”

If a tax on buybacks were introduced, as some political parties propose, would this practice become less common?

“The eternal question with taxation is whether people or companies will change their behavior as a result. The government can tax tobacco all it wants—some people will still smoke. But financial behavior tends to be highly elastic: even a small tax can cause companies to stop a practice immediately and look for alternatives.

You can also look at this from a more ethical perspective. A society benefits when people feel the tax burden is fairly distributed. Assuming this system primarily benefits corporate executives and individuals with large investment portfolios, there’s a case to be made for taxing share buybacks.

That said, nearly every Dutch citizen is a shareholder—at least indirectly. If you’re building a pension here, you’re part of the capital providers behind these companies through your pension fund. In that sense, both dividend taxes and a potential tax on buybacks affect almost everyone in the Netherlands. So there are multiple sides to this story.”