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Double Irish Dutch sandwich? – Yes, Please!

April 22, 2014 - by Nida U.
complicated corporate tax strategy, or a tax loophole

Some may think it is a nice sandwich with lots of goodies, particularly Dutch cheese in it… In reality it`s not what you think it is!

Unless you think this:

It is a very complicated corporate tax strategy, or a tax loophole. This is a strategy which is designed to help lowering corporate tax liability. Many large corporations around the world uses this strategy to reduce their worldwide taxation liabilities connected with intellectual Property (IP), among these large companies we can mention Apple, Facebook, Google, Microsoft, Amazon, Oracle Corp and Pfizer Inc.
This may be interesting in our world!

"In the late 1980s, Apple was among the pioneers in creating a tax structure — known as the Double Irish — that allowed the company to move profits into tax havens around the world ...".

How does it work?
It is called double Irish because it requires two Irish companies together with the addition of a Dutch sandwich to complete the structure to gain and further reduce tax liabilities.
The strategy is using payments between related entities in a corporate structure to shift income from a higher-tax country to a lower-tax country. It is based on the fact that Irish tax law does not include U.S. transfer pricing rules. Furthermore, Ireland uses territorial taxation, therefore does not levy taxes on income booked at subsidiaries of Irish companies that are outside of the state.

This structure is used mainly by US companies which hold IP. The US Company transfers the IP to an Irish company 1, which is incorporated in Ireland, but tax resident in offshore country. How is that possible? It is the “mind and management” rule, when Irish company is visibly managed from country abroad, it is not considered tax resident in Ireland but where the companies “mind and management” is located, so in the offshore company, where corporate tax is probably 0%. The Irish company 1 sublicenses the IP to a company tax resident, in Netherlands (or Luxembourg, some other sandwiches are also well known). Subsequently the Netherlands Company sublicenses the IP to another Irish company 2, this time incorporated and tax resident in Ireland. Irish company 2 is wholly owned subsidiary of Irish Company 1. Irish Company 2 licenses the OP to companies located in various jurisdictions outside the US.

All in all, the Irish Company 2 receives royalties from various companies from jurisdictions outside US, to whom it granted sub licenses. Itself this company retains a small margin of these royalties, around 10% or less, and passes the rest to the Netherlands Company. Then after the Netherlands Company retaining also a small part of the royalties and passes the rest to Irish Company 1.

Tax part explained:
• Irish Company 2 is liable to Irish taxation only on the part of royalties with it retained. Royalties paid to Netherlands Company are allowed as a deduction against royalty income received.
• There is no withholding tax on royalties paid from Irish company 2 to Netherlands Company. Ireland does not levy withholding tax on certain receipts from European Union member States.
• Same, no withholding tax arises on the royalties paid from Netherlands Company to Irish Company 1.
• Further, royalties received in offshore company suffers no taxation (some jurisdictions may have some low rate).

Thank you for reading my post! And you are welcome to leave comments, feedback, suggestions for other posts or contact me for more information.

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