Tax Sandwich: Made in Ireland

John Gulliver, Head of Tax, at Mason Hayes & Curran

US and Asian As a low-tax onshore OECD-compliant Whilst the Irish tax system now contains a EU location, Ireland holds a good supply transfer pricing system that enables multi- corporations looking of young, well–educated and multilingual nationals to demonstrate that arm’s length to build a European, staff. These features make Ireland the profi ts comparable to the activities carried premier location from which to staff, build on here are subject to tax in Ireland, its tax Middle East and out and grow the critical mass necessary code is not cluttered with anti-avoidance African (“EMEA”) for a fully functioning EMEA hub. legislation. Hence, a foreign multinational hub are increasingly may establish operations in Ireland and Ireland’s 12.5% Corporate Tax accumulate cash offshore without risk of a focused on Ireland as a Rate and Access to Ireland’s controlled foreign companies challenge. business location. This Treaty Network Similarly, the absence of detailed and aggressive rules that apply withholding article highlights some Companies conducting trading activities taxes makes Ireland an attractive location of the key structures in Ireland are liable to corporation tax at to generate outfl ows of dividends, interest used by multinational 12.5% on trading profi ts. Typically, such and royalties. And should the time come companies enjoy the benefi ts of access for an orderly exit from Ireland, the regime corporations as they grow to Ireland’s double tax treaty network does provide means for foreign-owned their EMEA footprint out as well as certain exemptions from companies to exit the country tax-free. withholding taxes embodied into Irish law Ireland’s full EU membership means of Ireland. and practice. that any pan-EU regulated activity Unlike tax haven locations, Ireland’s that is compliant with Irish law can be growing treaty network provides passported into all other EU member protection against other tax authorities states free of additional regulation. This that may seek to claim a portion of the is highly relevant to multiple sectors profi ts earned by the Irish hub. In certain including regulated fi nancial services or instances, where foreign tax authorities social networking hubs which hold or have sought to challenge the measure process EU consumer data. of profi ts attributable to the Irish hub, the Irish Revenue Commissioners have assisted the Irish hub in its discussions with the foreign tax authorities and agreed advance pricing agreements between the respective trading partners.

MASON HAYES & CURRAN • Page 5 Tax Structures in Ireland Clearly, if the Irish EMEA hub does in fact Irish / Luxembourg Sandwich own the underlying intellectual property, Double Irish Sandwich We occasionally advise groups that good or service that is being provided to The colloquially known “Double Irish wish to own intellectual property in the end user in another EMEA country, Sandwich” is a structure that builds upon Luxembourg and license it into an Irish this argument can be rebutted. Of key the ability of US corporations to own EMEA hub. For these groups, their end relevance is the degree of substance non-US intellectual property in an Irish game is to get a tax deduction at 12.5% located in Ireland which can be used to incorporated but non-Irish tax resident in Ireland on the licence fee, and then demonstrate that the critical mass and company ( see Irishco 1 in Figure 1) and through a Luxembourg ruling, they can hence beneficial ownership of IP is in fact enter into a licensing agreement with an pay a sliver of tax in Luxembourg. For US located in Ireland. Irish incorporated and Irish tax-resident tax purposes, the Irish and Luxembourg company (see Irishco 2 in Figure 1) that companies are treated as one and ignored acts as the EMEA hub. As can be seen Double Dutch Alternative until the funds are repatriated. from Figure 1, Irishco 1 is resident in The“Double Irish Sandwich” is often The Irish / Luxembourg Sandwich a tax haven like the Cayman Islands or compared and contrasted to the Double structure may diminish the Irish Revenue Bermuda. A cost share arrangement Dutch structure, illustrated in Figure 2. A Commissioners’ ability to assist the between Irishco1 and the US parent Netherlands Antilles CV owns intellectual Irish EMEA hub’s defence against any allows the increase in value of developed property and enters into a licence and challenges from other tax authorities on IP to grow in an offshore jurisdiction. cost share with a Dutch incorporated BV the amount of tax assessable in Ireland that acts as the EMEA hub. The margin of rather than overseas. Similar questions profit taxable at rates of 25% in the BV is of beneficial ownership of intellectual the subject of a ruling given by the Dutch property also arise. US Parent tax authorities. For US purposes, the CV/

BV structure is again treated as one and Conclusion - Just Plain Irish Please? Irishco 1 gives rise to a deferral of Federal tax until such time as profits are repatriated. Despite all the colloquially known Irishco 2 structures involving Ireland, Dutch, Luxembourg or Swiss variants there Non-US is no particular structure that suits any IP US Parent one business.

Figure 1 It is increasingly clear that all major CV Licence economies will require extra cash to This structure enables pan-EMEA income finance their borrowings in the future. earned by Irishco 2 to be shifted free BV Meanwhile, the continued acceptance of Irish taxes to Irishco 1. Irishco 2 can that profits and monies can be built up then enjoy the benefit of Ireland’s double Non-US in tax haven locations does not seem tax treaty protection from challenges by IP likely to continue. Focusing on countries foreign authorities. For US purposes, both such as Luxembourg, Switzerland, Malta Irish companies are treated as one, giving Figure 2 or Cyprus as locations in which to own rise to a deferral of US Federal tax until The Double Dutch structure is attractive intellectual property rather than on the monies are repatriated Stateside. For new for those wishing to establish substantive countries where the intellectual property entrants in the Irish market to maintain the operations on the continental EU land is actually developed and sold, is likely to benefits of the Double Irish Sandwich, they mass. The long-term viability of building invite increased scrutiny. will need to demonstrate that the transfer structures around offshore locations does price payable by Irishco 2 to Irishco 1 At its simplest, dismantling double Irish however merit further analysis. With the represents an arm’s length return. structures into a one-tier plain Irish EMEA US Presidential elections looming and trading company may give rise to a Foreign tax authorities may seek to apply continued OECD pressure on the havens, robust structure that minimises withholding taxes on income payable to a variation to the Double Irish or Double overseas challenges. an Irish EMEA hub. They attempt this by Dutch structure may be necessary. arguing that the payments are in fact to the company that is a tax resident in the Cayman Islands or Bermuda and that the treaty rates or EU absence of withold should not apply.

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