The Double Irish Dutch Sandwitch

The Double Irish Dutch Sandwich


In other news we started hearing, Google is now making plans to abandon the Double

Irish Dutch Sandwich arrangement. And almost immediately everyone went-"What on

earth are they talking about?". So, here's an explainer that's going to leave you

scratching your head for the next 5 hours.


Say you have a company in the United States that wants to sell cool air pods in the

United Kingdom. The problem — when profits on sales of these uber cool air pods make

its way into the US, you’ll have to pay an effective tax rate of 35%. You think that’s too


So, you consult a tax lawyer. The tax lawyer tells you he has a workaround. But for the

plan to be successful, you have to set up another entity in Ireland. Don’t ask too many

questions. You’ll just have to believe him for now. But the promise has been made.

This is going to work.

Anyway, you start using the Irish company to sell those air pods in the UK. This way

all the income accrues to the Irish subsidiary now. So instead of paying 35%, you only

have to pay 12.5% tax according to Irish laws.

But wait. The tax lawyer comes up with another scheme.

According to Irish laws, if the Irish entity is controlled by managers elsewhere, then

the profits will be taxed in that jurisdiction. So, if this Irish company that you’ve set up

had a controlling presence in say, Cayman Islands, then you only have to pay tax in

this small Caribbean territory. And since the effective tax rate here is nil, you won’t

have to pay anything at all.

So, you quickly set up another entity in the Cayman Islands until somebody tells you

there’s another problem. If US authorities find out you have a subsidiary in Ireland

whose controlling owners reside elsewhere (like the Cayman Islands), they can

implement the “Controlling Foreign Corporation” (CFC) rule and force you to pay taxes

in the US. So, you can’t do that.


But there’s still hope.

You figure this requires a game plan straight out of the greatest tax playbook ever. So

you go back to the drawing board once again. And you come out with a new strategy.

First, you set up an Irish subsidiary “A”, that makes all the sales as usual. This entity

will be incorporated in Ireland and will have a controlling presence in Ireland. Not in

the Cayman Islands. This way the CFC rule won’t kick in and the US won’t be able to

tax you anymore. But then the Irish will tax you 12.5%. So you set up another Irish

entity “B” with a controlling presence in the Cayman Islands and you begin working

your magic.


Let’s say “A” sells its air pods and makes a total profit of $100. It then contests that the

only reason it could make all this money, was because it kept using intellectual

property owned by entity “B”. So “A” makes a $100 royalty payment to “B”. This way

the net profit at “A” drops to 0. So “A” doesn’t have to pay any taxes. What about “B”

though? Since “B” has a controlling presence in the Cayman Islands, the Irish won’t

tax you.

But here’s the kicker. If the arrangement is done right. The US will consider the whole

"A" & "B" structure as one single entity originating in Ireland, not subject to CFC rules.

And you get away scot-free. Hurrahh!!!

However, there is one last problem. When A makes the royalty payment to B, the Irish

will walk in and throw a withholding tax on the payment. This puts your entire plan in

jeopardy. So, you introduce the Dutch angle here. The Irish and the Dutch have an

arrangement where they agree to not tax certain kinds of payments flowing between

the two nations.

So now you’ll have “A” make a royalty payment to a Dutch subsidiary “X”. No tax here.

And X will make another royalty payment to “B”. No tax once again.

And before you know it, your income is finally tax-free.


The US authorities finally plugged the loopholes in 2015 and offered tech companies

like Google a 5-year window to abandon this shoddy practice. And as part of that long-

standing agreement, Google has finally decided to comply. So now they are moving

on from the Double Irish Dutch Sandwich.