Tag: Double Irish Dutch sandwich
A Double Irish Dutch sandwich is a much used tax avoidance scheme involving Ireland, the Netherland and a Caribbean island like the Caymans or Bermuda.
First a company registered in Ireland (Irish One Ltd), acquires 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 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.
Irish Two Ltd. sends 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.
Finally the management of Irish One Ltd is located in a small sunny Caribbean island like the Caymans or Bermuda.
According to Irish tax legislation, a company is tax resident in the country, where it’s central management is located – even if the company itself is registered under Irish law. As Irish One Ltd’s place of management is located outside Ireland, the company will not be tax resident in Ireland, and therefore, will not have to pay any tax there.
The Caribbean islands rarely impose profit based taxes, but rather collects a fixed few hundred USD per annum from their resident companies. Thus, most of the royalties collected through the structure can be accumulated without any substantial taxation in Irish One Ltd.
The double tax treaty network of Ireland strongly limits source countries’ rights to tax royalties paid to Irish companies. As opposed to this, these source countries rarely have any double tax treaty with Caribbean Islands. Therefore, paying royalties to an Irish company rather than to one in the Caribbeans can save substantial withholding tax in the countries, where the royalties are paid from.
The Double Duch Irish Sandwich is also advantageous from the perspective of certain controlled foreign company rules in the United States.