Title: What Is the Double Irish With a Dutch Sandwich — How it Worked, Why It Mattered, and What Companies Should Do Now
Key takeaways
– The “double Irish with a Dutch sandwich” was a cross‑border tax-optimization technique that used two Irish companies and a Dutch intermediary to shift large profits into low- or no‑tax jurisdictions (often Bermuda).
– It relied on gaps and differences in national tax residency and withholding rules to convert operating profits into royalty flows that escaped taxation in high‑tax countries.
– The structure drew heavy international scrutiny; Ireland closed the main loophole for new arrangements in 2015 and grandfathered existing arrangements until 2020. OECD and EU reforms (BEPS work and a global minimum tax) further limited these strategies.
– Corporations should focus on compliance, economic substance, transfer‑pricing documentation, and readiness for minimum tax rules (Pillar Two).
Overview — what the label means
– “Double Irish” refers to two Irish-incorporated entities being used together in a scheme to minimize tax.
– “Dutch sandwich” describes the practice of routing royalty or license payments through a Dutch entity to avoid withholding taxes that might otherwise apply on cross‑border payments.
– The combined arrangement converted sales profits in operating jurisdictions into royalty flows to an IP‑holding company resident in a tax haven, reducing or eliminating taxation on those profits.
How the structure typically worked (simplified)
1. An operating subsidiary in a high‑tax market sold products or services to customers. To reduce taxable profit there, this operating unit paid large royalties or license fees to another affiliate that owned intellectual property (IP).
2. The IP was often legally held by an Irish‑incorporated company that, under Irish residency rules at the time, was tax‑resident in a tax haven (e.g., Bermuda) because its central management and control were located there. That made the Irish entity a conduit to a no‑tax jurisdiction.
3. A second Irish company (tax resident in Ireland) collected royalties from European or other affiliates. To avoid Irish or other withholding taxes on payments to the offshore IP holder, the payments were routed through a Dutch company (the “sandwich” layer). Dutch law and tax treaties at the time allowed treaty‑based exemptions or low withholding on outbound royalty payments.
4. The end result: operating profits in many jurisdictions were shifted into royalty flows that ended up (after the Dutch pass-through) in the offshore IP owner — often with little or no tax paid anywhere.
Example (toy numbers, illustrative)
– Operating subsidiary sells $100 of product, reports $5 profit if it pays $95 in royalties to an affiliate.
– The royalties are paid through a Dutch intermediary to the Irish-incorporated IP company that is tax resident in Bermuda.
– If the royalties face no withholding and the Bermuda resident pays 0% tax, the $95 effectively escapes tax; the $5 reported in the selling jurisdiction may be small and taxed at that location’s rate only.
Real-world visibility
– Large technology companies were often identified with variants of this technique because intangible assets (IP, user data monetization) are relatively portable across jurisdictions.
– Media and regulatory attention increased in the 2010s; for example, publications and regulators reported large profit flows routed through Dutch and Irish subsidiaries to offshore jurisdictions (see sources below).
Why it was attractive
– Low effective tax rates: By turning profits into royalties that ultimately landed in a zero-tax jurisdiction, companies substantially reduced their worldwide tax bills.
– Treaty and residency mismatches: The structure exploited differences in how countries determined corporate residence and how treaties and domestic law treated withholding on royalties.
– IP is easy to reallocate on paper: Transferring or licensing IP within a corporate group is administratively straightforward (though legally and economically complex), making it a convenient vehicle to shift profits.
Legal, reputational, and regulatory risks
– Ever-increasing regulatory scrutiny: EU investigations (e.g., state aid inquiries) and national tax authorities have aggressively reviewed and challenged such arrangements.
– Changes in law: Ireland closed the primary “double Irish” residency loophole for new corporate structures in 2015 and provided a phase‑out for legacy structures until 2020.
– Back taxes and penalties: Tax authorities may reassess prior years’ tax liabilities, potentially leading to large additional tax bills, interest, and penalties.
– Reputational damage: Public backlash against perceived tax avoidance can harm brand value and customer trust.
Special considerations
– Substance requirements: Tax authorities and courts increasingly require that tax outcomes reflect real economic substance — actual people, management, and business activity in the jurisdiction that claims the tax benefits.
– Transfer pricing rules: Payments between affiliates must be arm’s‑length in amount and documented; aggressive royalty rates are vulnerable to adjustment.
– BEPS and global reform: The OECD’s BEPS project and related EU actions aimed at treaty abuse and base erosion have reduced the effectiveness of such cross‑border mismatches.
– Global minimum tax (Pillar Two): The global minimum effective tax rate agreement (Pillar Two) seeks to ensure large multinationals pay a minimum rate on profits regardless of where those profits are booked, limiting the benefit from routing profits to zero‑tax jurisdictions.
Requirements that historically made the scheme possible (why it worked)
– Favorable domestic rules on corporate residency (e.g., incorporation vs. central management tests).
– Treaty network and local law in intermediary jurisdictions (the Netherlands) that reduced or eliminated withholding tax on intra‑group payments.
– No or very low tax in the final destination jurisdiction (e.g., Bermuda).
– Ability to assign or license valuable IP to a group entity and justify large intra‑group royalty charges.
– Limited enforcement or coordinated challenge across jurisdictions at the time the structure was implemented.
Practical steps — for regulators, corporate tax leads, auditors, and investors
If you are a regulator or tax authority
1. Monitor substance: Enforce substance requirements (management, staff, decision‑making) where tax benefits are claimed.
2. Coordinate internationally: Use information sharing and multilateral instruments (e.g., BEPS Multilateral Instrument) to close treaty and domestic law mismatches.
3. Use transfer pricing audits: Scrutinize intercompany royalty rates and require robust documentation showing arm’s‑length pricing.
4. Consider targeted anti‑avoidance rules: Adopt residency, controlled foreign company (CFC), and anti‑hybrid mismatch rules.
If you are a corporate tax manager or CFO (compliance‑focused steps)
1. Inventory structures: Map all cross‑border IP ownership, licensing arrangements, and intercompany payment flows.
2. Assess economic substance: Ensure the jurisdictions claiming profit and the entities receiving royalties have appropriate people, offices, and management.
3. Document transfer pricing: Maintain contemporaneous transfer pricing studies that support royalty rates and allocation of profits.
4. Reassess legacy arrangements: If you rely on legacy grandfathered rules, plan for transitions and potential closing windows under domestic law.
5. Prepare for Pillar Two: Model the impact of global minimum tax rules and adjust financing, licensing, and operational structures accordingly.
6. Consult independent counsel and auditors: Obtain legal and tax advice in each relevant jurisdiction and consider advanced pricing agreements (APAs) where appropriate.
7. Consider reputational risk: Factor stakeholder concerns into tax policy decisions and consider publishing a responsible tax strategy.
If you are an investor, board member, or auditor
1. Ask for transparency: Request clear reporting on effective tax rates, jurisdictions of profit booking, and the business activities supporting those profits.
2. Stress‑test exposures: Evaluate risk of tax adjustments, fines, and reputational damage from aggressive structures.
3. Ensure controls: Confirm the company has robust internal controls, documentation, and specialist advisors for international tax matters.
What happened to the double Irish with a Dutch sandwich?
– Ireland moved quickly after international scrutiny to close the residency loophole for new structures (announced 2014; legislative change in Finance Act 2015), with grandfathering provisions for existing arrangements that ran until 2020.
– The OECD’s BEPS initiative and subsequent global tax developments (including efforts to curb treaty abuse and implement minimum taxation) have further reduced the viability of such strategies.
Further reading and sources
– Investopedia — Double Irish with a Dutch Sandwich (background and examples): https://www.investopedia.com/terms/d/double-irish-with-a-dutch-sandwich.asp
– OECD — Base Erosion and Profit Shifting (BEPS) project and Pillar Two: https://www.oecd.org/tax/beps/
– European Commission — press materials on state aid and taxation issues (for examples of enforcement actions): https://ec.europa.eu/commission/presscorner/home/en
Closing note
The double Irish with a Dutch sandwich is primarily of historical importance today — it illustrates how international mismatches created aggressive tax planning opportunities and why coordinated reform mattered. For companies, the practical takeaway is to prioritize compliance, maintain substantive operations in jurisdictions used for tax planning, document intercompany pricing carefully, and prepare for continuing international tax reform (including minimum tax rules). If you need, I can:
– produce a diagram of the cash/royalty flow between subsidiaries (non‑actionable, explanatory),
– create a checklist for a corporate tax‑compliance review, or
– draft questions for a board to ask management about international tax risk. Which would you like?