Today, we would like to give you a brief summary on the structure and use of the now-famous tax arrangement called Double Irish Dutch Sandwich, which is used by many large US based multinationals to lower their overall corporate tax burden.
The model aims to provide beneficial taxation on royalty incomes deriving from the worldwide utilisation of brands, patents, copyrights and intellectual property rights (“IP rights”) held by these companies.
The structure builds up as follows:
At first stage, a company registered in Ireland (Irish One Ltd), acquires an IP right, which will be utilised by subsidiaries or partners of the US Company worldwide. There are various arrangements, how Irish One Ltd can get the IP right at a price much lower than it may be worth on the basis of the actual revenue it is likely to generate, e.g. Irish One Ltd concludes a cost sharing or an R&D agreement with the US company, which is doing the actual development of the IP right, and thus Irish One Ltd acquires the IP right at around cost price.
Then on, Irish One Ltd licenses its IP right to a Dutch tax resident company (“Dutch BV”). Dutch BV then sublicenses the IP to a 100% subsidiary of Irish One Ltd also registered in Ireland (“Irish Two Ltd”), which collects the royalties from all over the world. Then, it will upstream the royalties to the Dutch BV, which will forward it to Irish One Ltd. Irish Two Ltd and Dutch BV keep only a tiny part of the royalties collected, which covers their cost of operation and a small profit.
Now, let us see those little tricks that makes this structure very very attractive and tax efficient.
The management of Irish One Ltd is located in a small sunny Caribbean island like the Caymans or Bermuda. You may ask what is it good for? According to the Irish tax legislation a company is tax resident in that country, where it its central management is located, even if the company itself is registered under Irish law. For this reason, as Irish One Ltd’s place of management is located outside Ireland, the company will not be tax resident in Ireland, and therefore, it will not have to pay any tax there. As the above mentioned small Caribbean islands rarely impose profit based taxes, but rather collects a fixed few hundred USD per annum from their resident companies, the royalties will not suffer any material taxation there either. Thus, most of the royalties collected through the structure can be accumulated without any substantial taxation in Irish One Ltd.
In addition to this, the double tax treaty network of Ireland strongly limits the source countries’ rights to tax royalties paid to Irish companies. As opposed to this, these source countries rarely have any double tax treaty with any Caribbean state. Therefore, paying royalties to an Irish company rather than to one in the Caribbeans can spare substantial withholding tax in the countries, where the royalties are paid from.
Finally, the Sandwich is also advantageous from the perspective of certain controlled foreign company rules in the United States. It is also important to note that structures like this have originally been set up with the consent of the relevant US authorities.
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