in Worldwide Income

By Anton L. Janik, Jr.

In the Beatles’ 1966 song Taxman, George Harrison wrote the following lyrics in protest of Great Britain’s crushingly inequitable tax law:

There’s one for you, nineteen for me… Should five percent appear too small be thankful I don’t take it all…. You’re working for no one but me.1

Anton Janik is an attorney with Mitchell Williams in Little Rock. He leads the Tax Controversy and Litigation practice area and co-leads the Information Security & Privacy practice area. Anton previously served as a Trial Attorney with the United States Department of Justice in Washington, D.C.

As Harrison wrote in his 1980 book I Me Mine, “Taxman was when I first realized that even though we had started earning money, we were actually giving most of it away in taxes. . . . It was and is still typical.”2 The Beatles weren’t the only ones pinched by Messrs. Wilson and Heath,3 but perhaps no British band was more successful in avoiding the heavy hand of the Exchequer than were the Rolling Stones.

Formed in 1962, the rock band the Rolling Stones has remained active for over six decades, releasing studio and live albums and touring worldwide. The band has earned a massive amount of money over this time from concert touring, merchandising, video and music recordings and films, and licensing of its music rights. To provide some perspective into just how lucrative the band is, Billboard reports that in just 2005 and 2006 alone, the Stones earned at least $558 million in touring revenue (that’s $729 million in 2023 inflation adjusted dollars).4

By the mid 1960s, Allen Klein, American business manager and founder of ABKCO Music & Records Incorporated, took over as the Rolling Stones’ manager. By all accounts Klein was a tough negotiator with Decca Records, the Stones’ record label, and was a tough contract drafter when it concerned his publishing rights to the Stones’ catalog. Klein inserted himself as an intermediary owner between the band and the record label, owning the publishing rights to the music, manufacturing the records, selling them to Decca, and paying royalties and cash advances to the band. Years later, this arrangement led to a series of lawsuits over at least 17 years as the Stones sought to wrest control of their early and quite successful works (including the band’s first number one record in America, I Can’t Get No Satisfaction, and songs Jumpin’ Jack Flash, Street Fighting Man, and Sympathy for the Devil) back from ABKCO.5 Allegations were made that Klein had withheld royalty payments worth approximately $100 million. To this day, ABKCO still owns the publishing rights to the Stones’ catalog up through five songs on 1971’s Exile On Main Street 6 (Notably, the Rolling Stones do own full rights to the iconic lips and lapping tongue logo which was introduced in 1971 and is reported to be a core driver of the band’s merchandising earnings.7)

One result of this business relationship was that Klein failed to pay the band’s taxes for seven years, resulting in liabilities of each band member of approximately $1,000,000 in today’s value. Although a one-time student at the London School of Economics (dropping out to pursue his music career), Jagger stated “I just didn’t think about taxes, and no manager I ever had thought about it, even though they said they were going to make sure my taxes were paid. So after working for seven years I discovered nothing had been paid and I owed a fortune.”8 As noted by George Harrison, Great Britain’s tax rates were very high at this time. In the late 1960s, the British government taxed earned income (that from employment, trade, professions) at up to 83%, and unearned income (interest, dividends, royalties) at up to 98%. (For perspective, today the top U.S. individual tax rate is 37%. Arkansas’ top tax rate is 4.9%. Thus, the highest income earner here in Arkansas would pay less than half of the tax rate imposed upon the Stones back then.)

“Rupie the (Financial) Groupie” Was a Real Prince

Prince Rupert Loewenstein,9 also known as Rupie the Groupie,10 was an Oxfordeducated merchant banker and Director of Leopold Joseph & Sons (London).11

Rupie was a business advisor and financial manager with a passion for classical music and offshore financial arrangements. He was decidedly not a Rolling Stones music fan.

Certainly so far as the Stones’ music was concerned I was not in tune with them, far from it. Rock and pop music was not something in which I was interested or listened to. … I had heard some of The Beatles’ music. Their music was sufficiently harmonic to be acceptable to people like me who only liked classical music. I only really took against rock ‘n’ roll when I heard the Stones.12

Rupie met Mick Jagger at a party in Jagger’s home in 1968. The lore is that Jagger’s beautiful home was bereft of furniture, and being curious Rupie inquired about that oddity, learning that Mick Jagger had very high tax debts and very little cash despite very large paper earnings.13 “I realized that, looked at sensibly and without being distracted by the showy trappings of the music business, the problems that Mick and his fellow Stones were experiencing were not unusual. They were straightforward, in fact. I was intrigued.”14 Shortly thereafter,

Rupie became the band’s business manager and the eventual architect behind the Stones’ escape from England into selfimposed tax exile in the South of France, and the creation of the offshore structure protecting nearly the entirety of the band’s assets from any meaningful taxation whatsoever.

Rupie recognized that the United Kingdom has a territorial system of income taxation, which means that a U.K. citizen is subject to income tax to the extent that he or she is deemed a U.K. resident under the tax laws, which focuses upon physical presence in the U.K. This is an important distinction because under the U.K.’s Foreign Earning Deduction, income earned by a U.K. citizen outside the U.K. is generally not subject to U.K. taxation so long as the citizen is abroad for a sufficient amount of time, approximately 305 days a year.15 Rupie was also aware that the French tax regime allowed a noncitizen with physical presence in France to pay no French taxes on their earnings so long as they resided in France for at least a year and spent at least $500,000 a year in the country.16 And so a plan was born.

In April 1971, just before the U.K. tax year began, the Stones exited the U.K. for France. Keith Richards rented Villa Nellcôte, a mansion on France’s Cote D’Azur, for $2,500 a month. (Perhaps he should have bought that property. Reports indicate that a Russian oligarch purchased it in 2005 for $128 million.17) Charlie Watts purchased an apartment in Thorais, France, that he held through at least 2013.18 Mick Jagger spent most of his time at a rental in Biot, France, with his new wife Bianca.19 The band continued to write music, and during this period of tax exile the album Exile on Main Street was written and recorded in the basement of Villa Nellcôte.20 On May 12, 1972, Exile was released and the band began a world tour, rebuilding their finances. The Stones remained residents of France until late 1973, when Keith Richards was given a two-year ban from the country for a narcotics violation.21 (In February 1973, the Stones were also banned from the United States as a result of large concertgoer riots and band scuffles that took place during their 1972 U.S. tour. Arkansas criminal attorney Bill Carter was instrumental in working through the U.S. Government’s objections, which allowed the Stones to enter the United States for their 1975 tour. Carter represented the Stones with regard to their U.S. tour “issues” through 1990, including Keith Richard’s July 5, 1975, arrest in Fordyce, Arkansas, for carrying an illegal weapon, a hunting knife.22 )

Dutch Processed: Johannes Favie and the Dutch License Royalty Conduit Shelter

Beating the U.K.’s physical presence test was not the only present Rupie offered. His greater gift to the Stones was in establishing the Dutch License Royalty Conduit shelter to limit taxation of the Stones’ earnings.

Rupie set up a management company in the Netherlands called Promogroup and brought in reclusive Dutch accountant Johannes Favie to manage Promogroup’s holdings. (Jan Favie still manages it today.) Promogroup has four subsidiary Dutch companies called Promotour (for concert touring revenues), Promopub (merchandising), Promotone (video and music recordings and films), and Musidor (music rights). Each subsidiary holds a worldwide license to that given intellectual property, which is important because that license means each subsidiary receives the royalties from use of that licensed intellectual property from any place it is used in the world. Thus, Promogroup is called a Dutch License “Royalty Conduit” company, because it is a conduit for those royalties: all of the royalties earned upon the worldwide use of its subsidiaries’ licenses flow up through the subsidiaries to it.23

This is the important part. The worldwide income is pushed from the country in which it was earned to the Netherlands. What makes that so valuable is that the Netherlands has income tax treaties with most foreign countries that have preferential rates which fall between 0% and 5%, so income earned in those jurisdictions are subject to no or low tax before they are transferred to the Netherlands, and once received in the Netherlands, the Netherlands charges no tax upon those royalties, dividends or interest. Further, the royalties, dividends and interest payments that flow out of the Royalty Conduit are also exempt from Dutch taxes. (Starting January 1, 2021, the Netherlands instituted a conditional withholding tax of 25% on royalty payments and 15% on dividend payments made to entities in low-tax jurisdictions or jurisdictions listed by the EU as “noncooperative,” unless the entity meets an eight-point economic substance test. That does not affect transfers made to the Netherlands.24)

Here’s how the Royalty Conduit works. The income coming from a foreign country where, say, an album was sold, enters the Netherlands never having been taxed or only having been minimally taxed pursuant to a treaty. Because the Netherlands charges no tax on royalties, dividends or interest, there is no tax charged upon that income while it sits earning interest in the Netherlands. When the income leaves the Netherlands to be paid to the individual artist, the Netherlands charges no tax on that so long as after January 1, 2021, that artist is not in a low-tax or noncooperative country. Certainly, the greatest taxreduction impact would be realized if that artist finally receiving the royalties from that album sale lived in a jurisdiction that imposes no income tax, or if that jurisdiction was prevented from imposing an income tax on income earned outside that home country by action of a treaty or, say, a physical presence test. Because the U.K. does employ a physical presence test, so long as the Stones are not physically present in the U.K. longer than that allowed by the U.K.’s Foreign Earning Deduction, by using the Royalty Conduit to shelter their worldwide royalty income from tax, the Rolling Stones’ royalty, dividend and interest income can effectively be sheltered to somewhere between 0% and 5% tax. By using the Royalty Conduit shelter, between 1986 and 2006, the Rolling Stones paid $7.2 million on earnings of $450 million, which equates to a tax rate of about 1.6%.25

Could this play work for those of us that are U.S. taxpayers? The United States Supreme Court stated in Gregory v. Helvering that “[t]he legal right of a taxpayer to decrease the amount of what otherwise would be his taxes, or altogether avoid them, by means which the law permits, cannot be doubted.”26 And Second Circuit Court of Appeals Judge Learned Hand has famously stated, “a transaction, otherwise within an exception of the tax law, does not lose its immunity, because it is actuated by a desire to avoid, or, if one choose, to evade, taxation. Anyone may so arrange his affairs that his taxes shall be as low as possible; he is not bound to choose that pattern which will best pay the Treasury; there is not even a patriotic duty to increase one’s taxes.”27 However, both Arkansas and the United States require individuals to report and be taxed upon their worldwide income (although our federal tax law does allow a credit for foreign tax paid, and there are exclusions for foreign earned income; in 2023 that exclusion is capped at $120,000). The United States taxes royalties at the same rate as ordinary income. So, given those two factors, this tax play would not work for U.S. taxpayers.

What about that old adage about death and taxes? Can the Rolling Stones tell the Taxman to Get Off Of [Their] Cloud? At least two can. Jan Favie has set up two private Dutch foundations, so that when Mick Jagger and Keith Richards die their assets will pass to their heirs tax-free.28 As Keith Richards has said, “[t]he whole business thing is predicated a lot on the tax laws. It’s why we rehearse in Canada and not in the U.S.29 A lot of our astute moves have been basically keeping up with tax laws: where we go, where not to put it, whether to sit on it or not. We left England because we’d be paying ninety-eight cents on the dollar. We left, and they lost out. No taxes at all.”30 So, despite what your mother told you at age 14, it really does pay to be a rock ’n roll star. Especially if you are a taxpayer not subject to worldwide taxation, and the licenses to your intellectual property are held by a Dutch License Royalty Conduit company. In that case, it appears that the Taxman (Can’t Get No) Satisfaction

Endnotes:

1. Harrison, G., Taxman (1966).

2. Frank Mastropolo, How the Stones, Rod Stewart and David Bowie Ran From the Taxman, Ultimate Classic Rock, (Apr. 15, 2015), available at https:// ultimateclassicrock.com/rock-bandstaxes/?utm_source=tsmclip&utm_ medium=referral (last visited Jan. 6, 2023).

3. Harrison poked at British Prime Minister Harold Wilson and opposition leader Edward Heath in Taxman, with the lyrics “Don’t ask me what I want if for (ha-ha, Mr. Wilson), if you don’t want to pay some more (ha-ha, Mr. Heath).”

4. Ray Waddell, Rolling Stones Tour Grosses More Than Half A Billion, Billboard (Oct.

3. 2007), available at https://www.billboard. com/articles/news/1048656/rolling-stonestour-grosses-more-than-half-a-billion (last accessed Jan. 28, 2023). The 2023 inflation adjusted figures are from Wikipedia and use Waddell’s numbers, available at https:// en.wikipedia.org/wiki/List_of_highestgrossing_concert_tours (last visited Jan. 28, 2023).

5. John McMillan, Beatles vs. Stones (Simon & Schuster, Inc., 2013), excerpted in You Never Give Me Your Money: How Allen Klein Played The Beatles and The Stones, Newsweek (Dec. 17, 2013), available at https://www.newsweek.com/sympathydevil-how-alan-klein-played-beatles-andstones-224703 (last visited Feb. 3, 2023).

6. The liner notes to Exile On Main Street reflect that ABKCO owns the publishing rights to Sweet Virginia, Loving Cup, All Down The Line, Stop Breaking Down, and Shine A Light Exile On Main Street, Album Liner Notes, available at http:// albumlinernotes.com/Exile_On_Main_ Street.html (last visited Jan. 29, 2023). See also BMG To Represent Rolling Stones’ Mick Jagger and Keith Richards’ Post-1983

Publishing, Billboard (June 26, 2013), available at https://www.billboard.com/ music/music-news/bmg-to-representrolling-stones-mick-jagger-and-keithrichards-post-1568163 (last visited Jan. 29, 2023), noting that “ABKCO, however, still owns the 1963-1971 Stones’ catalog” and Andy Serwer, Inside the Rolling Stones Inc., Fortune (Sept. 30, 2022), available at https://money.cnn.com/magazines/fortune/ fortune_archive/2002/09/30/329302/ (last visited Jan. 29, 2023) (discussing “Klein (whose company, ABKCO, still owns rights to the Stones’ songs from the earliest days through 1971)”).

7. British trademark registrations: Intellectual Property Office, owner: Musidor B.V., UK00001051130, UK00001051131, UK00001051132 (Aug. 20, 1975), UK00001176150 (June 3, 1982), UK00001184204, UK00001184205 (Oct. 27, 1982), UK00001576067 (June 21, 1994), UK00001576068, UK00001576069, UK00001576070 (June 21, 1994), available at https://trademarks.ipo.gov.uk/ipotmowner/page/search?id=260795&doma in=1&page=1 (last visited Jan. 29, 2023); United States trademark registrations, U.S. Patent & Trademark Office, owner: Musidor B.V., numerous hits, but see, e.g., 1071347 (June 7, 1976), 2825378 (June 14, 1999), 4874833 (Dec. 22, 2015), available at https://tmsearch.uspto.gov (last visited Jan. 29, 2023). For U.S. results not requiring use of the United States’ Trademark Electronic Search System, see https://www.gerbenlaw. com/trademarks/musicians/the-rolling-stones (last visited Jan. 29, 2023).

8. Barry Nicolson, Rolling Stones: The Grisly Death-And-Drugs Filled Story of ‘Sticky Fingers’, NME (Apr. 23, 2015), available at https://www.nme.com/features/rollingstones-the-grisly-death-and-drugs-filledstory-of-sticky-fingers-757406 (last visited Jan. 6, 2023).

9. Rupert Louis Ferdinand Frederick Constantine Lofredo Leopold Herbert Maximilian Hubert John Henry zu Löwenstein-Wertheim-Freudenberg, Count of Loewenstein-Scharffeneck.

10. Jerry Hall gave him this name. See Christopher Wilson, How late pop-hating Bavarian prince became ‘Rupie the Groupie’ and made penniless Rolling Stones billions in tax exile (while also keeping them out of jail for drugs), Daily Mail (May 22, 2014), available at https://www.dailymail.co.uk/ news/article-2636853/How-Rupie-Groupiesent-Stones-tax-exile-kept-jail-drugs-PrinceRupert-Loewenstein-penniless-rock-starsbillions-falling-Jagger.html (last visited Jan. 28, 2023).

11. Rupie managed the band until 2008 and died in 2014. See Adam Sweeting, Prince Rupert Loewenstein Obituary, The Guardian (May 22, 2014), available at https://www. theguardian.com/music/2014/may/22/ prince-rupert-loewenstein (last visited Jan. 28, 2023).

12. Prince Rupert Loewenstein, A Prince Among Stones: That Business with the Rolling Stones and Other Adventures 69 (Bloomsbury USA, 2013).

13. A 2002 Fortune interview of Mick Jagger notes that “By the mid-’60s the Stones had reportedly sold ten million singles, including ‘Satisfaction,’ and five million albums, but the band was still living hand to mouth.”

Andy Serwer, Inside the Rolling Stones Inc., Fortune (Sept. 30, 2022), available at https://money.cnn.com/magazines/fortune/ fortune_archive/2002/09/30/329302/ (last visited Jan. 29, 2023).

14. Loewenstein, supra note 12, at 69.

15. Current British law indicates that an individual will be treated as a non-UK resident for income tax purposes by applying one of three tests, including if they have not been a UK resident in any of the three previous tax years and will spend fewer than 46 days in the UK in the relevant tax year. See KPMG, Taxation of international executives: United Kingdom, January 2023, available at https://assets.kpmg.com/ content/dam/kpmg/xx/pdf/2023/01/TIESUnitedKingdom.pdf (last visited Mar. 16, 2023).

16. Kathy Copeland Padden, Exile in Villefranche, available at https:// kathycopelandpadden.medium.com/exilein-villefranche-4b1a63e83775 (last visited Feb. 3, 2023). It’s been difficult to determine whether the Rolling Stones met this spending qualification that first year, where they were not touring and were instead focused on partying and recording Exile on Main Street It is likely that they didn’t have much income that year, or at least much income to worry about, and the greater import was that they exported themselves out of the U.K. for the requisite period so as to exclude any worldwide earnings they did have from the usurious clutches of the Exchequer. Prince Rupert’s biography indicates that there was a negotiation made with the French tax authorities prior to the Stones entering the country. He doesn’t provide details, simply stating “[a] deal was struck with the AplesMaritimes authorities where the Stones were allowed to reside and only had to pay a negotiated income tax….” which may mean that negotiated tax was less than $500,000. See Loewenstein, supra note 12, at 100.

17. Peter Howell, Stones fans not welcome at French ‘Exile’ mansion, Toronto Star (May 21, 2010), available at https://www.thestar. com/entertainment/movies/2010/05/21/ howell_stones_fans_not_welcome_at_ french_exile_mansion.html (last visited Jan. 6, 2023).

18. Loewenstein, supra note 12, at 100; Richard Havers, Exile in Paradise: The Rolling Stones’ French Villa of Excess, Udiscovermusic (Apr. 5, 2022), https:// www.udiscovermusic.com/stories/le-rollingstones-aller-en-france/ (last visited Feb. 3, 2023); Danica Baker, Rolling Stones’ Charlie Watts eight figure fortune is leaked in his will, Tone Deaf (May 18, 2022), available at https://tonedeaf.thebrag.com/rolling-stonescharlie-watts-will/ (last visited Feb. 3, 2023).

19. Loewenstein, supra note 12, at 146.

20. That title is, apparently, intended. “That new album in due course became Exile On Main Street, which may be one of the few top-selling albums, if not the only one, to contain a reference to tax planning in the title.” Loewenstein, supra note 12, at 101.

21. On October 15, 1973, Keith Richards was found guilty of trafficking marijuana by a Court in Nice, and of possession of marijuana, heroin and cocaine at Villa Nellcôte and on his yacht Mandrax in 1972. Richards was given a one-year suspended sentence, a 5,000 franc fine and was banned from entering France during two years. See, e.g., https://www.needsomefun.net/october15-1973-keith-richards-and-anita-pallenburgwere-both-found-guilty-of-traffickingcannabis (last visited Jan. 29, 2022).

22. Bill Carter, Get Carter 126–27, 129, 149 (Fine’s Creek Publishing, 2006).

23. Although we see that the subsidiary Promotour appears to gather funds for concert touring, the earnings from the

Stones’ own concert performances are not royalties, dividends or interest, so they would not appear to fall within the shelter provided by the Royalty Conduit. (Under U.S. tax law, such fees would be treated as payments for services and be taxed at ordinary income rates.) Given the disparity between the $450 million in income known to have been sheltered by the Royalty Conduit between 1986 and 2006 and the known touring revenue in 2005 and 2006 of $558 million, it may be that the Stones are not sheltering much if any of their concert touring revenues.

24. See https://www.orbitax.com/taxhub/ withholdingtaxrates/NL/BM/Netherlands/ Bermuda (last visited Feb. 3, 2023).

25. Simon Wilson, It’s only tax planning, but I like it, MoneyWeek (Feb. 28, 2007), available at https://moneyweek.com/32638/ its-only-tax-planning-but-i-like-it (last visited Jan. 28, 2023).

26. Supreme Court Associate Justice George Sutherland in Gregory v. Helvering, 293 U.S. 465, 469 (1935).

27. Helvering v. Gregory, 69 F.2d 809, 810 (2d Cir. 1934).

28. Wilson, supra note 25.

29. Under the Internal Revenue Service’s substantial presence test, a foreigner will be treated as a United States resident for tax purposes if that person is physically present in the United States 31 days during the current year and 183 days during the three-year period that includes the current year and the two years immediately before that, counting all the days present in the current year, 1/3 of the days present in the first prior year and 1/6 of the days present in the second prior year. See Internal Revenue Service, Substantial Presence Test, available at https://www.irs.gov/individuals/ international-taxpayers/substantial-presencetest (last visited Jan. 29, 2023).

30. David Remnick, Groovin’ High, The life and lures of Keith Richards, The New Yorker (Oct. 25, 2010), available at https://www. newyorker.com/magazine/2010/11/01/ groovin-high (last visited Jan. 28, 2023) (emphasis added). ■

By William A. Waddell, Jr.