In recent years, some of the biggest corporations around the world have been utilizing tax strategies that help to minimize the amounts that have to be paid each year in corporate tax. With tax rates around the world getting higher every year, corporations have a higher incentive than ever to find ways to avoid certain tax liabilities. In the United States, corporations like Google and Apple have been successfully using a tax strategy that legally avoids a second layer of corporate tax. This article will explain how the double Irish tax arrangement works.
What Businesses Gain
Under normal circumstances, shareholders are subjected to at least three layers of income taxation when doing business in the European Union. First, the entity doing business in the European Union would pay the domestic corporate income tax rate. In France, this is 33.33 percent. Next, the parent company in the United States would pay a 35 percent tax on repatriated profits. Finally, shareholders would pay at least 43.4 percent in United States federal income tax and net investment income tax. This means that profits derived from the sale of a widget at a $100 profit would net less than $24.52 after taxes. However, the double Irish enables shareholders to net $32.19 or more. Therefore, this can potentially be a very lucrative tax arrangement.
Before the double Irish tax strategy can be implemented, it first requires that corporations have a network of subsidiary entities. Before starting the tax strategy, most businesses will already have their base operations in the United States and in the European Union country that they are doing business in. The double Irish requires that businesses legally incorporate in Ireland. However, these businesses then maintain their headquarters in the United States to prevent being considered an Irish tax resident. Businesses will also need to open new subsidiary operations in Bermuda and the Netherlands. Finally, businesses will need to form a second entity in Ireland. All of this can be done for a few thousand dollars.
How It Works
Now that the business has all of its subsidiaries set up, it can now begin using the tax strategy. For example, assume that a company made a $100 profit in France. Normally, the business would be subject to French corporate tax. However, laws in the European Union only apply corporate tax in the jurisdiction where the company is headquartered and where the intellectual property is owned. In Ireland, corporate taxes are 12.5 percent. However, the tax strategy mandates that the intellectual property owned in Ireland is only held under a lease contract. This means that a tax-deductible royalty payment must be paid to the subsidiary in the Netherlands. As soon as the funds arrive in the Netherlands, they are immediately sent to the second entity in Ireland. To avoid transfer pricing laws, the funds are then stored in Bermuda. These funds can then be reinvested into any European Union business operation without any additional taxation.
After the Process
The double Irish enables businesses to reinvest European Union profits without having their growth rates hindered by corporate taxation. However, receiving any personal benefits from these profits still requires that taxation be paid. Once shareholders decide to issue a dividend to themselves, the funds are transferred to the United States, where ordinary corporate and personal income taxes apply.