What is Double Irish?
While it may sound like a fancy cocktail, Double Irish is one of the most effective and complicated tax strategies around. Companies like Google, Apple, and dozens of other companies have used it as a way to save billions of dollars in taxes.
So how does it work?
A corporation organized under United States law faces a federal tax rate of 35 percent on its worldwide profits, one of the highest rates in the developed world. There is, however, one key exception: a U.S. corporation’s foreign profits are not taxed until they are repatriated to the United States, although they may be taxed currently by the foreign country. The Double Irish is a tax strategy that is meant to take advantage of this exception by having a U.S. corporation utilize two Irish subsidiaries. The strategy works as follows:
Suppose there is a U.S. based corporation called NewCo. NewCo owns valuable intangible property rights (such as intellectual property) that it wishes to develop and sell to the global public. However, NewCo wants to avoid paying the high U.S. corporate tax rate on its profits.
NewCo forms two subsidiaries under Irish law, called BermudaSub and IrishSub. According to Irish law, BermudaSub (even though it was founded in Ireland) is a resident of Bermuda because it is operated from Bermuda.
NewCo then transfers the valuable intangible property to BermudaSub (a tax-free transfer under U.S. law).
BermudaSub now owns the intangible property rights and licenses the intangible property to IrishSub in exchange for royalties.
IrishSub makes sales to the global public and out of its profits pays royalties to BermudaSub. IrishSub can deduct these royalty payments as a business expense, which greatly reduces IrishSub’s income. IrishSub’s little remaining income is taxed at Ireland’s maximum 12.5 percent corporate tax rate on active businesses.
Any income of BermudaSub is not taxed in Bermuda because Bermuda has no corporate income tax. Under U.S. law, the profits of BermudaSub are not taxed by the U.S. as long as they are held in Bermuda and not repatriated to Bermuda Sub’s parent, NewCo.
The Double Irish tax strategy has drawn great scrutiny and prompted comprehensive policy changes. In October 2014, the Irish Finance Minister indicated that the Double Irish would likely be eliminated starting in 2015, except “grandfathered” companies would be allowed to use the scheme until 2020.