17th Dec 2020
It’s about time that we educate you about the most appetizing tax scheme known by the name Double Irish with a Dutch Sandwich. What does it do? It is associated with minimizing the tax burden when using intellectual property. This system is widely used by American corporations and is slightly less common among European companies, but it is still present there.
So, to begin with, we should turn attention to the prerequisites for using this method of minimizing taxes. If we consider the United States, then income received from intellectual property (royalties) is subject to a very significant tax - 35%. At high turnovers, this interest rate is incredibly burdensome for companies. As a consequence, many firms use tax optimization. This should not be confused with tax evasion. Optimization is the reduction of the tax burden by applying legally acceptable mechanisms.
Famous companies such as Apple, Google, Facebook, Coca-Cola, and others appear among the notorious cases of the “double Irish with a Dutch sandwich” scheme. For example, Google allegedly underpaid about 1 billion Euros in taxes to the French budget for 2016, due to tax optimization.
Now, let's move on to the “tastiest” part, and consider the structure of such tax planning and how the above media giants managed to significantly save on tax payments.
This scheme is a kind of chain, through which intellectual property rights are transferred from one company to another. This chain uses two Irish companies and one company registered in the Kingdom of the Netherlands (hence the name "double Irish with a Dutch sandwich").
Under Irish law, a company is considered a resident of the country from which it is directly managed. Thus, a company incorporated under Irish law with an office and a current director in another country will be considered a resident of the latter. The first Irish company (hereinafter we will call it I1) is geographically located in an offshore zone - in Bermuda or the Cayman Islands, in which dividends and royalties are not subject to income tax. The second Irish company (hereinafter I2) is already registered and located in Ireland, but at the same time, it is a 100% subsidiary of I1. The third company is registered in the Kingdom of the Netherlands (hereinafter - N).
The very scheme of interaction between companies is as follows: A company that owns the intellectual property (located in a high tax area, for example, the United States) transfers intellectual property rights to I1 through a licensing agreement, then I1 sublicense these rights to the company N. The Dutch company, in turn, also transfers sublicense agreement with the same rights to I2. It directly collects profits from the use of intellectual property rights and conducts real business (excluding US consumers). This is because Ireland does not tax funds that are transferred by its residents to some countries of the European Union, incl. Kingdom of the Netherlands. In this case, I2 must pay tax only on the part of the income received from royalties, which it retains with itself (at a rate of 12.5%). From the Netherlands, funds are transferred to I1 (also bypassing taxation), which is a tax resident of the offshore zone, in which it is exempted from paying taxes for royalties. As a result, money is concentrated in the offshore jurisdiction. The popularity of the described scheme is confirmed by media reports, according to which foreign companies carried about 13 trillion euros through the Kingdom of the Netherlands in 2012.
It is worth remembering the worldwide trend towards de-offshorization and the introduction of BEPS rules, which are aimed at eradicating such phenomena. This means that in the near future such ways of tax optimization will be closed and global corporations, together with their lawyers, will have to look for new options for tax planning or pay taxes in the form in which they are provided by law. Already in 2017, US authorities directed corporations to end the system. Ireland is pressured to close this loophole.
Clevver Legal Services LLP is able to develop the ideal IP optimization concept for your company.
Although we can establish a Dutch Sandwich for you, in most cases this is not advisable unless your company is taxable in the USA. In general, there are sufficient and simpler, cost-effective solutions to this model within the EU.
For example, a mixed company in Switzerland as an IP holding company or an IP offshore company with a permanent establishment in Malta are worth considering.
In this context, we would be pleased to refer you to our team of lawyers to discuss your possibilities with the Clevver Network.
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