page_title: Double Irish arrangement
section_title: Basic structure (no Dutch sandwich)
hierarchical_section_title: Double Irish arrangement / Double Irish / Basic structure (no Dutch sandwich)
caption_attribution_description: English: My recreation of the "classic" diagram of the Double Irish arrangement BEPS tool (with the Dutch Sandwich included), as used by the IMF, BIS, and OECD in various presentations; used the same colours etc. so that it is faithful to the original diagrams
context_page_description: The Double Irish was a base erosion and profit shifting corporate tax tool used mostly by US multinationals since the late 1980s to avoid corporate taxation on non-U.S. profits. It was the largest tax avoidance tool in history and by 2010 was shielding US$100 billion annually in US multinational foreign profits from taxation, and was the main tool by which US multinationals built up untaxed offshore reserves of US$1 trillion from 2004 to 2018. Traditionally, it was also used with the Dutch Sandwich BEPS tool, however, changes to Irish tax law in 2010 dispensed with this requirement.
  Despite US knowledge about the Double Irish for a decade, it was the EU that in October 2014 forced Ireland to close the scheme, with closure to begin in January 2015. However, users of existing schemes, such as Apple, Google, Facebook and Pfizer, were given until January 2020 to close them. At the announcement of the closure it was known Ireland had replacement BEPS tools, the Single Malt, and Capital Allowances for Intangible Assets:
  Single malt is almost identical to the Double Irish, and was identified with Microsoft, and Allergan in 2017;
context_section_description: While there have been variations (e.g. Apple), the standard Double Irish arrangement, in simplified form, takes the following structure (note that the steps below initially exclude the Dutch sandwich component for simplicity, which is explained in the next section; Chart 1 includes the Dutch sandwich):
  A U.S. corporate (CORP, or X) develops new software in the U.S. costing $1 to build;
  CORP sells it to its wholly owned Bermuda company (BER1, or H) for $1 (at cost, ideally);
  BER1 revalues it to $100 (as an intangible asset under GAAP), and books gain in Bermuda (tax free);
  BER1 licenses it to its wholly owned Irish subsidiary (IRL1, or B) for $100;
  IRL1 then sells it in Germany to a customer for $100;
  IRL1 uses the $100 from Germany to pay the $100 royalty to BER1 (no profit in Ireland);
  BER1 holds the $100 cash in perpetuity, thus avoiding U.S. 35% tax;
  BER1 lends the $100 cash back to CORP (and other subsidiaries).
  This structure has a problem. The pre–TCJA U.S. tax code allows foreign income to be left in foreign subsidiaries (deferring U.S. taxes), but it will consider BER1 to be a controlled foreign corporation (or "CFC"), sheltering income from a related party transaction (i.e. IRL1). It will apply full U.S. taxes to BER1 at 35%.
  To get around this, the U.S. corporation needs to create a second Irish company (IRL2, or A), legally incorporated in Ireland (so under the U.S. tax code it is Irish), but which is "managed and controlled" from Bermuda (so under the Irish tax code it is from Bermuda). IRL2 will be placed between BER1 and IRL1 (i.e. owned by BER1, and owning IRL1). Up until the 2015 shut-down of the Double Irish, the Irish tax code was one of the few that allowed a company be legally incorporated in its jurisdiction, but not be subject to its taxes (if managed and controlled elsewhere).
  The U.S. corporation will "check-the-box" for IRL1 as it is clearly a foreign subsidiary selling to non–U.S. locations. The U.S. tax code will rightly ignore IRL1 from U.S. tax calculations. However, because the U.S. tax code also views IRL2 as foreign (i.e. Irish),  it also ignores the transactions between IRL1 and IRL2 (even though they are related parties). This is the essence of the Double Irish arrangement.
  Note that in some explanations and diagrams BER1 is omitted (the Bermuda black hole), however, it is rare for a U.S. corporation to "own" IRL2 directly.
caption: Chart 1: Reproduction of the classic IMF diagram of the full "Double Irish with a Dutch Sandwich" BEPS tool:
  From the corporation:CORP (X) creates the software.CORP (X) sells IP to BER1 (H).BER1 (H) revalues IP higher.BER1 (H) licenses IP to IRL2 (A).IRL2 (A) licenses IP to DUT1 (S).DUT1 licenses IP to IRL1 (B).IRL1 sells software to customer.
  From the customer:Customer pays $100 to IRL1 (B).IRL1 pays $100 to DUT1 (S) as royalty.DUT1 pays $100 to IRL2 (A) as royalty.IRL2 pays $100 to BER1 (H) as royalty.BER1 accumulates the cash.BER1 can lend cash to CORP.
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