The name is very eloquent….Okay, Okay, maybe not that suggestive to those of you who do not work in International tax law boutique firms, but revealing enough to advocate the contingency that sees these structures as surely complex, controversial and elaborate. This tax scheme enabled the major firms involved in the “IT business” to considerably reduce their tax burden, saving tens of billions of tax dollars, whilst exploiting their intellectual properties at their full potential through transfer pricing mechanisms.
The following exemplification aims at emphasizing how IP can be “managed” within highly sophisticated schemes, purposed at constructing the most efficient tax optimization castles. From a merely managerial standpoint, we could deem these tax planning techniques as ways for the prospective beneficial taxpayer of optimizing, maximizing, the value and utility of their assets. The Double Irish with a Dutch Sandwich has been particularly popular amongst IT multinationals over the last decades. Pioneered by Apple in the late 80’s, whose ability to save up to US $ 44 Billion of taxes tempted its competitors to follow the same path, creating subsidiaries in Ireland (where taxation for active trading amounts to 12,5%). In fact, this structure has also been used by other giants like Microsoft and Google.
In substance, the Double Irish scheme runs as follows: it starts with the (American) holding company (“H”) creating a fully owned subsidiary in Ireland (“A”), to which it licenses its intellectual property rights. In the case of Apple, for instance, only the economic rights are transferred to the subsidiary through a cost-sharing agreement, while the legal ownership stays in the hands of Apple Inc. in the US where the IP protection is stronger. Now, this first company A is not tax resident in Ireland, but in a Caribbean tax haven (with corporate tax rates close to 0% and no Treaty with Ireland). The latter is possible due to a loophole in the Irish corporate taxation system allowing a company managed by foreigners abroad not to be considered as a local tax resident (see alternative scheme below). Profits made in the US by H are lowered by paying royalties to A. Meanwhile, a second Irish subsidiary (“B”) is created, to which A licenses the non-US rights for substantial amounts. Thus, revenues from outside the US are channeled to B, who however registers low overall profits in reason of the substantial royalty fees (which are tax deductible expenses in Ireland).
It is worth mentioning the role of the same-country exception to certain categories of income. This is one frequently cited reason they used two Irish companies (only one of which is considered to be Irish for Irish tax purposes).
This structure can be additionally “twisted” by adding the “Dutch Sandwich” (“C”), that is forwarding profits from B to the Netherlands (thanks to Irish Convention against Double taxation with the Netherlands, making, in brief, inter-European transfers tax-free). Once there, the profits are pushed back to the original subsidiary A, which takes advantages once again of its overseas tax haven position, effectively making the profits almost tax-free. This entire complex legal web is centered on an optimal exploitation of royalties relevant to intellectual properties. With regards to the capital amounts involved, this further highlights the utmost importance of managerial decisions to maximize the use of intellectual properties, along with the evaluation of opportunities different IP law regimes can offer.
Nonetheless, it should be noted that this particular scheme is not possible anymore, as following international pressure Ireland has amended its corporate taxation rules. From January 2015, all newly incorporated companies in Ireland will be registered as Irish tax-residents. Companies already benefiting from the scheme could keep on doing so until 2020, when the preferential ‘double Irish’ tax system will cease to apply definitively. Be aware that this does not mean the objective cannot still be achieved in other ways. Ireland has an extensive treaty network. At least a couple of these treaties contain management and control residency standards and are with countries that have similarly low tax rates. More in detail, pursuant to the treaty between Malta and Ireland (which should not be overridden), a company may be treated as a Maltese tax (and not Ireland)(See Article 4(3) of the treaty) [See, alternatively, the treaty with UAE – no WHT; no Tax].
Thus, notwithstanding the Irish turnover, it should still be possible to achieve the same results using a company managed and controlled in Malta or the UAE, rather than in an OFC. Be careful to make sure to have effective management in these States (ex: hold board meetings, qualified personnel, sufficient capital and premises compared to the intended business activity). Personnaly, I would rather travel to Bermuda or the Cayman Islands for such purposes, but Dubai or Malta should not be too burdensome or undesirable… This may on the other hand show a major limitation of such schemes: these techniques have become increasingly difficult to implement, as they are often opaque and on the verge of legality, thus apart from being (potentially) harmful at International level, they may also damage the company and its image in case of a bad move
In any case, declaring the Double Dutch part of our past seems to be a bit overstated. The only real change concerns the scope of jurisdictions to which management and control may be moved to achieve the desired preferential tax regime. As we say in Italy: “If the Pope dies, We will make another…”.
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