Farewell to the Irish Double and Double-Dutch Sandwich: Changes to Tax Laws Imminent

November 20th 2014

The ‘Irish Double’ and the ‘Irish Double with a Dutch Sandwich’ tax loopholes have provided companies like Google and other big-name players registered in Ireland with a very effective international tax strategy. Due to increasing pressure from the EU and the United States, Ireland has released new proposals to block these loopholes and comply with new international tax directives.

There are over 1000 multinationals based in Ireland including Google, Pfeizer and Apple. Unlike the U.S. where a corporation’s residence is based on where it is incorporated, Ireland recognizes a corporation based on where its management and control is located.  Therefore, companies located in Ireland but managed from another country would be considered non-resident for Irish tax purposes, aka, Irish Incorporated Non-Resident Corporation or INR. In addition, Ireland permits companies to own two entities side by side.

A corporation can take advantage of these tax laws by maintaining INR status and creating two subsidiaries, one that is incorporated in Ireland, and a second subsidiary incorporated in Ireland but a tax resident of a tax haven like Bermuda. With this setup, companies can collect revenue through their Irish INR and pass it on to the second subsidiary located in the tax haven jurisdiction. This releases them from tax obligations to the U.S. and obligates them only to a minimal tax to Ireland on royalties from intellectual property. This is called the ‘Irish Double’.

By including a third subsidiary in the Netherlands, companies can further reduce or avoid the taxes on royalties they would pay to Ireland by channeling revenue through a Dutch subsidiary before it gets to the tax haven jurisdiction. Countries within the EU do not tax one another on royalties from intellectual property. This is the ‘Irish Double with a Dutch Sandwich’ strategy.

In an effort to comply with demands from the EU and the U.S., Michael Noonan, Ireland’s Finance minister said that all companies incorporated on or after January 1, 2015 will be classified as tax-residents of Ireland and cannot benefit from this current loophole. However, all existing companies will maintain their INR status and continue to enjoy the benefits their status allows until December 31, 2020 when the law goes into effect.

If Ireland closes these controversial tax doors, it would cease to remain an attractive choice for foreign businesses. Or would it? On closer inspection, the new laws would block multinationals from the current loopholes but with careful planning, corporations can utilize the extensive treaty network to attempt the same or a similar international tax strategy.

Klueger & Stein, LLP helps many businesses with their international tax structures.