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Dutch Sandwich
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Dutch Sandwich
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Ex. Dutch Minister Joop Wijn is credited with introducing the Dutch Sandwich IP-based BEPS tool (which is often used with the Double Irish BEPS tool), and the "Dutch Double Dip" Debt-based BEPS tool

Dutch Sandwich is a base erosion and profit shifting (BEPS) corporate tax tool, used mostly by U.S. multinationals to avoid incurring European Union withholding taxes on untaxed profits as they were being moved to non-EU tax havens (such as the Bermuda black hole). These untaxed profits could have originated from within the EU, or from outside the EU, but in most cases were routed to major EU corporate-focused tax havens, such as Ireland and Luxembourg, by the use of other BEPS tools.[1][2] The Dutch Sandwich was often used with Irish BEPS tools such as the Double Irish, the Single Malt and the Capital Allowances for Intangible Assets ("CAIA") tools. In 2010, Ireland changed its tax-code to enable Irish BEPS tools to avoid such withholding taxes without needing a Dutch Sandwich.

Explanation

[edit]
See also: Tax haven § Top 10 tax havens

The structure relies on the tax loophole that most EU countries will allow royalty payments be made to other EU countries without incurring withholding taxes. However, the Dutch tax code allows royalty payments to be made to several offshore tax havens (like Bermuda), without incurring Dutch withholding tax.[3]

The method starts with a US parent company which will then create two Irish subsidiaries.[4] Additionally, Ireland company 2 is a subsidiary of Ireland company 1. Ireland company 1 will be domiciled in Bermuda. Ireland company 2 is domiciled in Ireland. Ireland company 1 holds the company’s IP and licenses it to Ireland company 2. Ireland company 2 will then pay royalties to Ireland company 1, making the royalties tax-deductible for Ireland company 2 as it is accounted for as an expense. This means that Ireland company 2 is now only responsible for paying the Irish corporate tax on the remainder of their income at a rate of 12.5%. The Ireland company 2 will also file a check the box election in the US to be a “disregarded entity.”

The Dutch Sandwich therefore behaves like a "backdoor" out of the EU corporate tax system and into un-taxed non-EU offshore locations.[5][6]

These royalty payments require the creation of intellectual property ("IP") licensing schemes, and therefore the Dutch sandwich is limited to specific sectors that are capable of generating substantial IP. This is most common in the technology, pharmaceutical, medical devices and specific industrial (who have patents) sectors.[7]

Its creation is generally attributed to Joop Wijn (State Secretary of Economic Affairs in May 2003) after lobbying from U.S. tax lawyers from 2003 to 2006.[8][9]

[When] former venture-capital executive at ABN Amro Holding NV Joop Wijn becomes State Secretary of Economic Affairs in May 2003 [, ... it's] not long before the Wall Street Journal reports about his tour of the US, during which he pitches the new Netherlands tax policy to dozens of American tax lawyers, accountants, and corporate tax directors. In July 2005, he decides to abolish the provision that was meant to prevent tax dodging by American companies, in order to meet criticism from tax consultants.

— Oxfam/De Correspondent, "How the Netherlands became a Tax Haven", 31 May 2017.[8][9]

Impact

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As of 2020, "The Netherlands is an extremely attractive jurisdiction in which to locate a royalty conduit companies",[10] although a withholding tax on royalties was announced for 2021 "for cases where abuse is involved"[11] after international pressure.

As of 2016, "Multinationals moved some €22bn in royalties and interest through the Netherlands in 2016 in order to avoid tax, according to a new report for the finance ministry". Usage of this tax avoidance structure, alone, produced 10% of the income reported by shell companies in the Netherlands.[12]

The method had a substantial impact on the Irish economy as well.[13] Apple, having used this tax tactic, avoided paying United States corporate tax by using the Double Irish with a Dutch Sandwich on roughly $110 billion worth of overseas profit. By transferring these profits to subsidiaries in Ireland, the taxes were paid on Ireland’s rate instead of companies where people purchased Apple products. This occurrence is a good counterargument for the moral usage of the loophole, as the Irish government lost $13 billion in taxes. The entire situation caused a slight dip into economic recession within Ireland. The European Commission ended up investigating the matter, as tax evasion and avoidance are extremely major topics on the international agenda.[14]

Double Irish

[edit]
Main articles: Double Irish arrangement and Ireland as a tax haven
Irish Taoiseach Enda Kenny and PwC (Ireland) Managing Partner Feargal O'Rourke, the "architect" of the Double Irish, who lobbied successfully in 2010 for changes to the Irish withholding tax rules, thus removing the need for a Dutch sandwich.

The Dutch Sandwich is most commonly associated with the Double Irish BEPS tax structure,[1][2] and Irish-based US technology multinationals such as Google.[15][16]

The Double Irish is the largest BEPS tool in history, helping mostly US technology and life sciences multinationals shield up to US$100 billion per annum from taxation.

The Double Irish uses an Irish company (IRL2) that is legally incorporated in Ireland, and thus the US tax code regards it as foreign, but is "managed and controlled" from, say, Bermuda (and thus the Irish tax code also regards it as foreign). The Dutch Sandwich, with the Dutch company as the "Dutch slice" in the "sandwich", is used to move money to this Irish company (IRL2), without incurring Irish withholding tax.[17]

In 2013, Bloomberg reported that lobbying by PricewaterhouseCoopers Irish Managing Partner Feargal O'Rourke,[18] who Bloomberg labelled "grand architect" of the Double Irish,[19][20] led to the Irish Government to relax the rules for making Irish royalty payments to non-EU companies (i.e. IRL2), without incurring Irish withholding tax. This removed the explicit need for the Dutch Sandwich, but there are still several conditions that will not suit all types of Double Irish structures, and thus several US multinationals in Ireland continued with the classic "Double Irish with a Dutch Sandwich" combination.[21][15]

After pressure from the EU,[22] the Double Irish BEPS tool was closed to new users in 2015,[citation needed] however, new Irish BEPS tools were created to replace it:[23][24]

Conduit OFC

[edit]
Main article: Conduit and sink OFCs
The Dutch Sandwich has helped make the Netherlands the largest global conduit OFC in the world, as it facilitates the movement of EU-sourced profits to non-EU tax-havens

The Dutch Sandwich has made Netherlands the largest of the top five global Conduit OFCs identified in a 2017 analysis published by Nature Research of offshore financial centres titled: "Uncovering Offshore Financial Centers: Conduits and Sinks in the Global Corporate Ownership Network".[30][31][32] The five global Conduit OFCs (Netherlands, United Kingdom, Ireland, Singapore, and Switzerland) are countries not formally labeled "tax havens" by the EU/OCED, however, they are responsible for routing almost half the flows global corporate tax avoidance to the twenty-four Sink OFCs, without incurring tax in the Conduit OFC.

Conduit OFCs rely on major offices of large law and accounting firms to create legal vehicles, whereas Sink OFCs have smaller operations (e.g. branches of these larger firms).[5] For example, Ireland has the BEPS tools to enable US IP-heavy multinationals to reroute global profits into Ireland, tax-free. The Netherlands then enables these Irish profits to get to a classical tax haven (e.g. the Cayman Islands or Jersey) without incurring EU withholding tax.[30]

See also

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References

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Revisions and contributorsEdit on WikipediaRead on Wikipedia

Dutch Sandwich

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from Grokipedia
The Dutch Sandwich is a (BEPS) strategy primarily employed by U.S. multinational enterprises to minimize withholding taxes on intercompany royalty payments, by routing funds through a Netherlands-based conduit between Irish operating entities and ultimate low-tax holding companies in jurisdictions such as or . This mechanism exploits bilateral tax treaties between and the , which permit zero or low withholding on royalties flowing within the , combined with the Netherlands' lack of withholding on outbound payments to non-treaty low-tax locations when structured as a transparent conduit. Typically integrated with the , it enables the deferral of U.S. taxation under pre-2018 rules by classifying involved entities to avoid (CFC) income inclusions like Subpart F. The strategy addresses key frictions in international taxation, including Irish corporate income tax on resident entities, withholding taxes on cross-border royalties exceeding treaty limits, and U.S. anti-deferral regimes that would otherwise tax undistributed foreign earnings immediately. By transferring intellectual property rights to a low-tax Irish-incorporated entity managed outside Ireland, operating subsidiaries pay deductible royalties that shift profits untaxed through the Dutch intermediary, culminating in near-zero effective tax rates on mobile income streams like licensing fees. Prominent adopters, including technology firms with significant intangible assets, reported substantial profit reallocations; for instance, affiliates in low-tax locations exhibited markedly higher earnings relative to U.S. parents. Regulatory responses, driven by /G20 BEPS initiatives, prompted to phase out enabling provisions by 2020, while the tightened conduit rules and the U.S. of 2017 curtailed deferral benefits, rendering the structure largely obsolete for new implementations. Despite its legality as tax planning rather than evasion, the Dutch Sandwich exemplified criticisms of hybrid mismatch exploitation, influencing global minimum tax reforms under Pillar Two to curb profit shifting to zero-tax regimes.

Definition and Mechanism

Core Structure and Components

The Dutch Sandwich is a tax avoidance technique that integrates a Dutch intermediary entity into the Double Irish structure to eliminate withholding taxes on cross-border royalty payments, primarily benefiting U.S. multinationals shifting intellectual property income to zero-tax jurisdictions like Bermuda. This setup exploits bilateral tax treaties between Ireland and the Netherlands, and the Netherlands and Bermuda, allowing royalty flows with 0% withholding tax at each step, while the Dutch entity serves as a low-substance conduit exempt from Dutch corporate tax on pass-through income. The core entities typically comprise a U.S. parent corporation, two Irish-incorporated subsidiaries (one tax-resident in Ireland for operations and the other managed from Bermuda for tax residency there), and a Dutch BV (besloten vennootschap, or private limited company) lacking significant economic substance to qualify as a taxable presence. Key components include the intellectual property (IP) holding structure, where valuable IP rights—such as patents, trademarks, or software—are owned by the Bermuda-tax-resident Irish HoldCo to minimize taxation on licensing , which is then routed through the Dutch BV to evade Ireland's standard 20% withholding tax on royalties paid to non-treaty jurisdictions. The Irish OpCo, handling European sales and operations, licenses the IP and pays royalties first to the Dutch BV under the Ireland-Netherlands (effective since 1969, amended periodically, providing for 0% withholding on royalties), ensuring no Irish tax deduction at source. The Dutch BV subsequently remits the royalties to the Bermuda-resident Irish HoldCo, leveraging the Netherlands-Bermuda (signed in 2013 but applicable to prior structures via continuity principles) that imposes no Dutch withholding tax on outbound royalties to treaty partners, with Bermuda applying 0% . This conduit role of the Dutch BV relies on Dutch tax rules permitting "participation exemption" and benefits for entities with minimal activities—often just a letterbox office—avoiding classification as a , though post-2015 OECD BEPS actions have imposed anti-abuse requirements like substance tests (e.g., local employees and decision-making) to claim benefits. Profit flows thus accumulate untaxed in until optional to the U.S., where pre-2017 U.S. deferred taxation on foreign earnings, amplifying deferral benefits estimated at effective rates below 2% for tech firms using this structure in the early . The arrangement's legality stemmed from exploiting mismatches in tax residency rules under Irish law (pre-2015, allowing incorporation without residency if managed abroad) and networks, without violating domestic statutes, though critics argue it undermines global tax bases by eroding over €13 billion annually in EU corporate taxes via such conduits before reforms.

Tax Flows and Withholding Avoidance

The Dutch Sandwich mechanism primarily facilitates the avoidance of withholding taxes on royalty payments within the broader by inserting a Dutch intermediate entity between two Irish-incorporated companies, one of which is tax-resident in a zero-tax jurisdiction such as . In this flow, royalties generated from (IP) licensing—typically derived from European sales by an operating subsidiary—are first channeled to an Irish company tax-resident in Ireland (IrishCo1). IrishCo1 then remits these royalties to a Dutch BV (), benefiting from a zero withholding tax rate under the EU Interest and Royalties Directive (2003/49/EC), which exempts such payments between associated companies in EU member states provided ownership thresholds are met (at least 25% held for one year). The Dutch BV serves as a conduit, immediately forwarding the royalties onward to the second Irish company (IrishCo2), which is incorporated in but managed and controlled from , rendering it tax-resident there under Irish tax rules (which prioritize place of effective management over incorporation). The imposes no domestic withholding on outbound royalty payments to non-residents, regardless of the recipient's location, allowing the full amount to pass through without deduction. This step circumvents the standard 20% Irish withholding that would apply to direct royalty payments from IrishCo1 to a -resident entity, as lacks a with providing for reduced rates on such flows and is outside the directive's scope. Without the Dutch intermediary, Irish tax authorities would treat the payment as outbound to a non- resident, triggering the levy unless offset by specific exemptions, which were unavailable in this context pre-2015. This structure enabled untaxed accumulation of profits in , where rates are effectively zero, with annual royalty flows through Ireland-Netherlands- channels peaking at approximately €25 billion in 2018 before regulatory closures. The avoidance relied on treaty shopping and hybrid entity mismatches, where IrishCo2's nominal Irish incorporation masked its residency for Dutch purposes, preventing any Dutch-side recognition of withholding obligations. Empirical data from bilateral royalty statistics confirm the scale, showing disproportionate Ireland-to-Netherlands payments relative to genuine economic activity, underscoring the conduit role in eroding the base of source countries.

Integration with Double Irish Arrangement

The Dutch Sandwich integrates with the Double Irish Arrangement by inserting a Dutch intermediate holding company to circumvent Irish withholding taxes on royalty payments directed to low-tax jurisdictions lacking tax treaties with Ireland. In the core Double Irish structure, an Irish-tax-resident company (Irish Co. 2) licenses intellectual property from another Irish-incorporated entity claiming tax residency in Bermuda (Irish Co. 1) via central management and control there, enabling royalty payments that shift profits to Bermuda's zero corporate tax rate. Direct royalties from Irish Co. 2 to Irish Co. 1, however, trigger Ireland's standard 20% withholding tax on payments to non-treaty countries like Bermuda. This integration employs a Dutch BV () as a conduit: Irish Co. 2 pays royalties to the Dutch entity, exempt from withholding under the Ireland- double , which sets a 0% rate on royalties between residents of the two countries. The Dutch entity then remits the royalties to Irish Co. 1 in , avoiding further taxation because the imposes no withholding tax on outbound royalty payments. This "sandwiching" effect minimizes leakage from the profit-shifting chain, allowing near-complete deferral of taxes on U.S.-sourced income routed through European operations to until . U.S. multinationals, such as , exploited this combined mechanism extensively in the 2000s and 2010s; for instance, 's European sales arm in funneled billions in royalties through the to entities, reducing effective tax rates on foreign earnings to below 3% in some years prior to regulatory changes. The structure's reliance on treaty benefits and residency rules highlighted vulnerabilities in bilateral tax agreements, prompting base erosion and profit shifting (BEPS) actions starting in 2013 to curb such conduit arrangements.

Historical Origins and Evolution

Emergence in the Late 1990s

The Dutch Sandwich emerged in the late 1990s as a refinement to the Double Irish arrangement, which had been utilized by U.S. multinationals since the late 1980s to channel profits through Irish subsidiaries taxed at Ireland's then-prevailing low corporate rates, often below 12.5% in certain zones. The core innovation involved inserting a Netherlands-based conduit entity between the two Irish companies to evade Ireland's 20% withholding tax—reduced to 5% under certain conditions—on royalty payments flowing to non-EU tax havens such as Bermuda or the Cayman Islands, where ultimate IP-holding subsidiaries incurred negligible taxation. This structure exploited the Netherlands' participation exemption regime, which imposed no withholding tax on outbound royalties to treaty partners, and bilateral tax treaties that minimized Dutch corporate tax on inbound flows, effectively creating a near-tax-free conduit for intangible asset revenues. The timing aligned with the expansion of U.S. technology firms into amid the late-1990s boom, when licensing became a dominant profit driver, necessitating sophisticated cross-border tax planning to shelter royalties from U.S. worldwide taxation under deferral rules. Early implementations focused on software and online services companies, which routed European subsidiary payments as deductible IP royalties to the first Irish entity (managed from a ), then onward via the Dutch "slice" to the second Irish entity, ultimately booking profits in zero-tax locales. This hybrid yielded effective tax rates on foreign earnings below 3%, far undercutting the U.S. 35% headline rate, and scaled rapidly as global digital revenues surged from $100 billion in 1998 to over $300 billion by 2000. Prior to the Dutch addition, Double Irish flows encountered friction from EU and Irish treaty limitations on non-EU payments, but the Netherlands' liberal conduit rules—unchallenged until later scrutiny—facilitated seamless profit migration without immediate regulatory pushback, reflecting the era's lax international coordination on base erosion. By the decade's end, the full structure had become a staple for multinationals with significant non-U.S. IP income, predating its widespread documentation in the 2000s.

Adoption by U.S. Multinationals in the 2000s

During the , U.S. multinationals, especially firms with rapidly expanding international revenues, adopted the Dutch Sandwich to minimize taxes on non-U.S. earnings by integrating it with Irish subsidiaries and low-tax conduits like . This strategy exploited differences in tax treatment of hybrid entities and royalty payments, allowing profits from licensing to flow through an Irish company taxed at Ireland's 12.5% rate, then via a Dutch entity to avoid withholding taxes, and ultimately to a with near-zero taxation. Adoption accelerated as U.S. firms sought to defer the 35% U.S. on foreign profits until , amid growing scrutiny of profit shifting but before major regulatory pushback. Apple Inc. exemplified early implementation, pioneering the "Double Irish with a Dutch Sandwich" by the early to route European sales royalties through Irish holding companies lacking physical presence in Ireland, achieving effective foreign rates under 2% on billions in profits. By , Apple's offshore structure, including Dutch intermediaries, had accumulated over $30 billion in untaxed income, deferring U.S. liabilities while complying with then-existing rules on controlled foreign corporations. This approach was facilitated by Ireland's tax residency rules, which permitted management from , and the ' participation exemption for certain capital gains and dividends. Google followed suit, establishing Irish operations in 2003 and layering the Dutch Sandwich by mid-decade to channel advertising royalties, resulting in an overseas effective tax rate of 2.4% in 2009 despite generating tens of billions in non-U.S. . Microsoft and other tech giants similarly incorporated the structure during this period to shield software and IP-related income, contributing to a broader trend where U.S. multinationals' foreign effective tax rates dropped sharply post-adoption. By decade's end, these arrangements underpinned an estimated $100 billion in annual U.S. multinational profit deferral, though exact figures varied by firm and were not publicly disclosed until later investigations.

Peak Usage and Scale Pre-2015

The , frequently integrated with Ireland's , achieved its zenith of adoption among U.S.-based multinational corporations during the late and early , coinciding with the rapid expansion of the technology sector and escalating global profit shifting. This period marked widespread implementation to minimize withholding es on royalty payments routed from European operations to low- jurisdictions like , enabling effective rates on foreign earnings as low as 2.4% for some firms. By , the structure had drawn international scrutiny for facilitating billions in annual deferral, with U.S. multinationals leveraging Dutch conduit entities to exploit treaty networks and participation exemptions that avoided on outbound flows. Google exemplified the scale of usage, employing the Double Irish Dutch Sandwich to channel substantial non-U.S. revenues through Irish subsidiaries to a Dutch before onward transfer to . From 2007 to 2009, this mechanism contributed to $3.1 billion in cumulative tax savings for , primarily through reduced foreign tax liabilities on and licensing , as reflected in the company's annual reports attributing benefits to "foreign rate differentials." In , 's Dutch subsidiary received €8.6 billion in royalties from its Irish operations and forwarded nearly €8.8 billion to , underscoring the strategy's role in shifting profits equivalent to a significant portion of the firm's international earnings. By 2014, the volume escalated further, with €10.7 billion routed through the to , highlighting the pre-2015 intensification amid growing overseas revenue streams. While precise aggregate figures for all users remain elusive due to proprietary structures, the strategy's prevalence extended beyond to other tech giants, enabling collective annual profit shifts in the tens of billions via Dutch intermediaries during this era. Reports from the period indicate it formed part of broader (BEPS) practices that prompted early concerns, with conduit flows through the alone supporting avoidance on royalties and interest exceeding €100 billion yearly across similar arrangements by the early . This peak utilization persisted until Ireland's policy announcements began phasing out enabling elements, though legacy implementations continued into the late .

Notable Implementations

Tech Sector Examples

Inc. utilized the Dutch Sandwich in conjunction with the to shift royalties from European sales through an Irish subsidiary to a Dutch conduit entity and ultimately to a -based affiliate, thereby avoiding substantial withholding taxes on payments. In 2017, transferred €19.9 billion ($22.7 billion) via a Dutch shell company to as part of this structure, contributing to an effective foreign below 6% on non-U.S. earnings. By 2018, Dutch filings indicated routed 21.8 billion euros ($24.5 billion) through its under similar mechanisms. This approach allowed to defer U.S. taxation indefinitely while minimizing European levies, with the company announcing in December 2019 that it would phase out the strategy by 2020 in response to Ireland's policy changes. Apple Inc. similarly employed the Dutch Sandwich to channel profits from international operations, routing funds through two Irish subsidiaries and a Dutch intermediary to low-tax jurisdictions like the , as detailed in analyses of its 2011-2012 tax structures. This facilitated an effective of approximately 1.9% on overseas profits in the early , with the strategy enabling the avoidance of an estimated $8.5 billion in taxes by through profit allocation to Irish entities. Apple's use involved licensing intellectual property to Irish branches, which then paid royalties to the Dutch entity exempt from withholding under bilateral treaties, before onward transfer. Microsoft Corp. applied variants of the Dutch Sandwich via Dublin-registered subsidiaries to achieve single-digit effective overseas rates on royalty streams, integrating Dutch conduits to bypass withholding on payments to tax havens. Inc. (now ) also leveraged the structure, relocating over $700 million in assets to the in 2013 as part of a Double Irish setup incorporating Dutch routing for efficiency. These implementations by tech giants exploited networks and Ireland's 12.5% corporate rate, shifting tens of billions annually while complying with prevailing laws until regulatory closures post-2015.

Quantifiable Profit Shifts

In 2014, routed 10.7 billion euros through a Dutch subsidiary to a Bermuda entity as part of the Dutch Sandwich structure, enabling the avoidance of European withholding taxes on royalty payments from non-U.S. operations. This flow represented intellectual property income generated primarily in and , shifted to zero-tax without incurring the typical 20-30% withholding rates imposed by source countries. The scale escalated in subsequent years: in 2016, filings revealed 15.9 billion euros moved via the to , shielding equivalent profits from taxation. By 2017, the amount reached 19.9 billion euros, and in 2018, it climbed to 21.8 billion euros through the Dutch holding company, reflecting growing global ad revenues funneled through the arrangement. These transfers, derived from Dutch regulatory disclosures, underscore how the strategy integrated with Ireland's Double Irish to defer U.S. taxes indefinitely while exploiting treaty networks for near-zero effective rates on shifted income.
YearProfit Shifted (Euros)Equivalent USD (Approximate)Source Jurisdiction Flow
201410.7 billion$12.1 billion/ to
201615.9 billion$19.2 billion to
201719.9 billion$23.0 billion to
201821.8 billion$24.5 billion to
While dominated documented cases, other U.S. tech firms like and Apple employed analogous Dutch routing for IP royalties, though specific Dutch Sandwich volumes for them remain less granular in public filings; aggregate BEPS flows through the exceeded hundreds of billions annually pre-closure, with royalties comprising over 70% of outbound payments. These shifts, verified via mandatory Dutch Chamber of Commerce reports, highlight the mechanism's efficiency in eroding tax bases in high-rate jurisdictions like the U.S. (35% pre-2018) and members, often reducing effective rates below 5%.

Variations and Adaptations

The Dutch Sandwich structure has been adapted by integrating it with alternative Irish BEPS tools, such as the Single Malt arrangement, which substitutes the second Irish entity in the Double Irish setup with a company tax-resident in but managed and controlled in to leverage the Ireland-UK tax treaty's absence of withholding tax on royalties. In this variation, royalties flow from an Irish operating subsidiary to the Scottish-managed entity, then through a Dutch conduit company to a like , exploiting the ' participation exemption and short-term treaty relief to defer or eliminate withholding taxes on outbound payments. This adaptation maintained low effective tax rates for U.S. multinationals in the tech sector until regulatory closures around 2020. Another variation, the Double Irish Single Malt, replaces the Dutch conduit with a Maltese entity, where Irish companies relocate management to under bilateral tax treaties, enabling deduction of payments without inclusion or remittance-based . This mechanism achieves double non-taxation similar to the original Dutch Sandwich by routing IP-related royalties through Malta to low-tax jurisdictions, and was employed by firms like before being curtailed by the OECD's Multilateral Instrument and actions by and Malta effective 2019. Post-BEPS adaptations shifted away from explicit Dutch routing toward hybrid structures like the , which funnels profits from Irish subsidiaries to (a zero-tax ) via IP licensing or intra-group debt financing, allowing full deductions in Ireland while deferring tax indefinitely in under their . Reported effective rates under this approach ranged from 1.7% to below 1% for entities like Apple starting in 2015, though such arrangements faced scrutiny and partial invalidation by state aid rulings in 2016 (overturned on appeal in 2020). These evolutions reflect multinational efforts to replicate withholding tax avoidance amid tightened conduit rules in the , which introduced anti-abuse measures like a 2021 minimum substance requirement for holding companies to qualify for participation exemptions. Emerging hybrid mismatch schemes post-2015, such as those exploiting entity classification differences across borders (e.g., opaque in one , transparent in another), have served as indirect adaptations by enabling deduction/non-inclusion outcomes without relying on Dutch intermediaries, though these too are targeted by BEPS Action 2 rules implemented in over 50 s by 2023. Quantifiable shifts include U.S. multinationals repatriating $777 billion in pre-2018 accumulated foreign earnings under the 2017 , prompting restructurings that phased out legacy Dutch Sandwich variants in favor of domestic incentives or new treaty-based conduits in jurisdictions like .

Regulatory Responses and Closure

Ireland's Policy Shifts from 2015 Onward

In October 2014, Irish Finance Minister Michael Noonan announced during the annual budget speech that the , a key component enabling the Dutch Sandwich strategy, would be closed to new corporate structures effective January 1, 2015, while granting a phase-out period for existing users until December 31, 2020. This measure amended Section 23A of the Taxes Consolidation Act 1997 to deem Irish-incorporated companies as tax resident in Ireland unless a double taxation treaty's tie-breaker rules applied otherwise, thereby preventing new non-resident Irish entities from being used to channel untaxed royalties through the to zero-tax jurisdictions like . The policy shift responded to recommendations from the OECD's (BEPS) framework, which Ireland endorsed to curb artificial profit shifting without altering its core 12.5% rate. To offset potential revenue impacts and maintain competitiveness, the 2015 budget introduced enhanced incentives for (IP) development, including the framework for the Knowledge Development Box (KDB), a reduced 6.25% tax rate on qualifying IP profits tied to activities conducted in Ireland. The KDB, legislated in 2016 and operational from January 1, 2020, required substantial economic substance—such as core IP research in Ireland—contrasting with the prior stateless entity's minimal presence under the Double Irish. These reforms aimed to transition multinationals toward structures emphasizing genuine activity over treaty-based , though critics noted that grandfathered Double Irish uses persisted, allowing firms like to retain low effective rates on pre-2015 IP until the 2020 deadline. By 2017, Ireland further aligned with BEPS Action 6 through controlled foreign company (CFC) rules and anti-hybrid mismatch provisions in the , targeting arrangements like the Dutch Sandwich that exploited differences in entity classification between and the . The phase-out's completion in 2020 prompted a reported exodus of some IP-holding entities, but Ireland's overall inflows remained robust, with IP-related assets growing due to the KDB and other substance requirements. Empirical analyses indicate that while the Double Irish closure reduced profit shifting via Ireland-Netherlands-Bermuda chains, it did not eliminate Ireland's role as a conduit for U.S. multinationals, as firms adapted to compliant variants emphasizing local substance over pure shopping.

OECD BEPS Framework Influence

The OECD/G20 (BEPS) Project, launched in July 2013, identified aggressive planning structures like the Dutch Sandwich as exemplars of profit shifting that exploited gaps in international rules, particularly hybrid entity classifications and treaty networks. The project's 2015 final reports outlined 15 actions to realign taxation with value creation, emphasizing of annual global revenue losses exceeding $100 billion from such practices. Action 2 focused on neutralizing hybrid mismatch arrangements, where entities were treated as transparent in one (e.g., for U.S. check-the-box elections) but opaque in another, enabling deduction/non-inclusion outcomes central to routing Irish royalties through Dutch entities without effective taxation. Recommendations included domestic rules to deny deductions for payments linked to hybrids or mandate inclusion of exempt income, with implementation guided by the 2015 report released on October 5. Action 6 targeted treaty abuse, including conduit financing and treaty shopping via low-substance Dutch holdings, by advocating preambles clarifying treaties' intent to avoid without creating non-taxation opportunities, alongside limitation-on-benefits clauses and principal purpose tests. These measures directly challenged the Dutch Sandwich's reliance on Netherlands-Ireland and Netherlands-U.S. treaties to minimize withholding taxes on outbound royalties. The BEPS framework catalyzed national reforms; Ireland, under pressure from ongoing OECD discussions, announced on October 14, 2014, the closure of the complementary , barring new setups from January 1, 2015, and phasing out existing ones by December 31, 2020, to align with anti-hybrid rules. The Netherlands incorporated BEPS via the EU Anti-Tax Avoidance Directive (ATAD), transposing Actions 2 and 6 into domestic law by January 1, 2019, with anti-hybrid provisions denying treaty benefits for conduit entities lacking substance, such as minimal Dutch payroll or assets relative to routed flows. The Multilateral Instrument (MLI), signed June 7, 2017, by 68 jurisdictions including the Netherlands (ratified 2019) and (2018), swiftly modified over 2,000 treaties to embed BEPS standards, applying principal purpose tests that scrutinized Dutch intermediaries for economic rationale beyond . These changes rendered the Dutch Sandwich non-compliant without substantial operations in the Netherlands, reducing its prevalence as firms incurred costs for restructuring or faced benefit denials; for instance, post-MLI audits confirmed relief withholdings for arrangements failing substance thresholds. While BEPS enhanced transparency via Action 13's country-by-country reporting (adopted by the in 2016), critics from tax competition advocates argue it overreaches by favoring coordinated minimum taxes over jurisdictional autonomy, potentially stifling investment without proportionally recouping shifted profits. Empirical assessments indicate BEPS curtailed hybrid conduits but prompted adaptations, with profit shifting estimates dropping 10-20% in affected structures by 2020.

Post-2020 Transitions and Alternatives

The complete closure of the Double Irish arrangement by December 31, 2020, compelled U.S. multinational enterprises utilizing the Dutch Sandwich to restructure holdings, resulting in a documented repatriation of $59 billion in royalty payments to the during that year. Affected firms reported an average increase of $609 million in U.S.-directed royalties post-closure, reflecting a partial reversal of prior profit shifting that had routed an estimated $1.2–1.4 trillion to low-tax affiliates between 1998 and 2018. Ireland positioned the Knowledge Development Box (KDB) as a primary domestic alternative, effective from January 1, 2016, under which qualifying income from patents and similar IP assets—linked via OECD-compliant nexus rules to R&D expenditures in —is taxed at an effective rate of 6.25%. This regime, designed to incentivize substantive IP development rather than pure , has enabled retention of certain operations amid the phase-out, though its utilization remains tied to demonstrable economic activity to withstand base erosion scrutiny. Broader transitions have included IP migrations to other jurisdictions offering competitive yet BEPS-adjusted regimes, such as or , or consolidation in the U.S. under the Foreign-Derived Intangible Income deduction, which provides a 13.125% effective rate on export-related IP income. The Pillar Two framework, enforcing a 15% global minimum tax from 2024 in adopting countries, further curtails sub-threshold structures by triggering top-up taxes on low-effective-rate IP entities lacking sufficient substance, thereby shifting incentives toward locations with integrated R&D and operational footprints over nominal tax minimization.

Economic Effects

Corporate Efficiency and Investment Incentives

The Dutch Sandwich tax strategy facilitated multinational corporations' ability to minimize withholding taxes on intra-European profit flows, resulting in lower effective global tax rates on foreign earnings and greater retention of capital for productive uses. This mechanism reduced the fiscal drag on returns, allowing firms to allocate resources more efficiently toward operations, expansion, and innovation rather than tax compliance or payments. Empirical evidence from cross-country analyses demonstrates that higher burdens consistently correlate with reduced rates, as elevated taxes increase the and diminish after-tax profitability. By enabling profit shifting through Dutch subsidiaries, the strategy effectively lowered the marginal effective on incremental s in and other mobile assets, incentivizing greater R&D expenditures and technological advancement. Studies show that a 10 increase in rates can lead to a substantial decline in , often by 2-3 s in the investment-to-GDP ratio, underscoring how minimization structures like the Dutch Sandwich counteract such disincentives. from these arrangements have been linked to heightened and firm entry, as lower effective taxes preserve incentives for risk-taking and . Critics of profit-shifting arrangements often overlook the efficiency gains, but data from U.S. multinationals indicate that access to low-tax conduits correlates with accelerated domestic reinvestment upon policy shifts allowing , suggesting that trapped profits under high-tax regimes stifle broader economic activity. In jurisdictions facilitating such strategies, corporations reported enhanced operational flexibility, with post-tax cash flows supporting mergers, acquisitions, and optimizations that would otherwise be curtailed by higher liabilities. Overall, the Dutch Sandwich's role in tax competition promoted investment responsiveness to productivity rather than jurisdictional differentials, aligning with principles that lower effective rates foster long-term and growth.

Fiscal Impacts on High-Tax Jurisdictions

The Dutch Sandwich enables multinational corporations, particularly U.S.-based firms, to route profits through Dutch subsidiaries to low- or zero-tax jurisdictions like Bermuda, thereby eroding the taxable base in high-tax countries where economic activity originates or where parent companies reside. This profit-shifting mechanism primarily affects revenues by deferring or permanently avoiding taxation on foreign earnings that would otherwise be subject to rates exceeding 20-30% in jurisdictions such as the (pre-2017 rate of 35%) or high-tax EU members like (33%) and (around 30% effective). The strategy exploits treaty networks and withholding tax exemptions on intra-EU royalty payments, channeling untaxed income streams away from source countries. In the United States, the predominant high-tax jurisdiction impacted, the Double Irish with Dutch Sandwich facilitated the deferral of taxes on hundreds of billions in foreign profits; one analysis estimates that U.S. multinationals using the structure shifted $1.2–1.4 trillion to low-tax havens between 1998 and 2018, contributing to annual federal revenue shortfalls in the tens of billions from unrepatriated earnings. For instance, Google reported saving $3.1 billion in taxes over 2007–2009 through Irish and Dutch entities, implying equivalent foregone U.S. revenue on deferred income. Broader profit-shifting via such routes formed part of an estimated $60 billion annual U.S. corporate tax gap attributable to avoidance techniques in the early 2010s. The 2017 Tax Cuts and Jobs Act's shift to territorial taxation mitigated some deferral losses but did not retroactively recover prior shortfalls. High-tax EU countries experience indirect fiscal strain through reduced withholding taxes and base erosion from subsidiary profit outflows; for example, royalties from operations in or the routed via Dutch conduits avoid local levies, exacerbating national deficits amid EU-wide BEPS losses estimated at €245 billion globally in 2017, with disproportionate burdens on higher-rate members. Empirical studies indicate that such Dutch-facilitated shifts lower effective tax rates on mobile income like IP to near zero, prompting revenue shortfalls equivalent to 1-2% of GDP in affected economies, though precise attribution to the Dutch Sandwich remains challenging due to its integration with broader hybrid mismatch schemes. OECD data underscores that high-tax jurisdictions lose 4-10% of potential yields to profit-shifting conduits, including Dutch routes, fueling pressures for anti-avoidance reforms.

Broader Market and Innovation Outcomes

The Dutch Sandwich tax strategy contributes to lower effective rates for multinationals, enabling greater retention of earnings that can be directed toward (R&D) and other innovation activities. Empirical studies demonstrate that reductions in burdens enhance firm-level innovation by increasing internal funds available for risky, long-term investments, which are critical for technological breakthroughs. For example, research analyzing data and variations across countries finds that a 1 decrease in the rate leads to a 0.5-1% increase in innovative output, as measured by citations and quality-adjusted patents. Profit shifting mechanisms, including those routed through the , are particularly prevalent in R&D-intensive sectors such as and pharmaceuticals, where firms leverage retained capital to fund domestic while booking profits abroad. A analysis of U.S. multinationals shows that tax-motivated income shifting tied to R&D activities boosts foreign profit margins by an average of 11-15% in these industries, with the associated flows supporting higher U.S.-based R&D expenditures compared to non-shifting peers. This dynamic aligns with broader evidence that low effective tax rates correlate with elevated risk-taking and , as higher taxes erode incentives for entrepreneurs and firms to pursue uncertain projects. In market terms, the strategy fosters competitive advantages by allowing adopters—often high-growth tech firms—to outpace rivals constrained by higher tax liabilities, resulting in accelerated market entry and product iteration. Silicon Valley companies defending such structures have argued that tax optimization preserves resources for talent retention and continuous , preventing loss of to less efficient competitors. Overall, these outcomes manifest in superior firm and economic spillovers, with studies estimating that tax competition via profit shifting indirectly elevates global rates by reallocating capital from inefficient public spending to private-sector dynamism.

Debates and Perspectives

Legality Versus Morality Claims

The Dutch Sandwich tax strategy, involving the routing of royalties through a Dutch intermediate entity to minimize withholding taxes on payments to low-tax jurisdictions, has consistently been classified as legal rather than evasion, as it adheres to existing bilateral tax treaties and domestic laws in participating countries. For instance, the structure leverages the ' participation exemption regime and treaty networks, allowing deductions for outbound royalties without triggering Dutch taxation, while complying with arm's-length principles under guidelines prior to BEPS reforms. Critics, including advocacy groups and some policymakers, contend that its morality is questionable despite , asserting that the deliberate exploitation of mismatches and shell entities contravenes the spirit of international cooperation and erodes public trust in equitable revenue collection. Organizations like the International Centre for Tax and Development have labeled such avoidance "illicit" on ethical grounds, arguing it prioritizes corporate over societal contributions, even when transactions lack substantive economic activity. Academic analyses, such as those examining aggressive planning, further claim it represents a form of "aggressive legal interpretation" that shifts burdens to ordinary taxpayers, potentially justifying reputational penalties beyond strict . Proponents counter that legality inherently confers moral legitimacy in a where tax rules are enacted by governments, emphasizing corporate fiduciaries' to shareholders to minimize legally payable es as an extension of efficient . This view posits that moral opprobrium directed at firms ignores governmental incentives in offering favorable treaties to attract investment, with the deriving economic benefits from such inflows estimated at billions in annual activity. Empirical defenses highlight that such planning fosters tax competition, which has empirically reduced effective corporate rates globally from 40% in 1980 to under 25% by 2020, spurring without net losses when jurisdictions adapt. Sources framing it as immoral often stem from institutions with progressive leanings, such as NGOs, which may overlook countervailing of growth benefits from low-tax regimes.

Empirical Critiques of Revenue Loss Narratives

Empirical studies of profit shifting, encompassing strategies like the Dutch Sandwich, reveal that reallocated profits constitute only 2 to 4 percent of multinational firms' total profits to low-tax locations, a magnitude that overstates potential recoverable revenue owing to high avoidance costs, enforcement hurdles, and incomplete adoption—such as only 38 percent of U.S. firms operating tax haven affiliates between 1982 and 1999. This equates to less than 1 percent of overall government tax revenues, underscoring BEPS as a modest rather than catastrophic issue. U.S.-specific estimates peg annual corporate tax losses from such shifting at around $10 billion as of 2012, or roughly 4 percent of collections, far below higher-end projections that ignore data adjustments for double-counting and genuine economic activity in havens. Recent analyses further qualify that only about 60 percent of tax haven profits reflect artificial shifting, with the balance tied to substantive operations, while profit-shifting elasticities (0.2–0.8) suggest limited responsiveness to tax differentials. In Ireland, the primary conduit for Dutch Sandwich flows paired with the Double Irish, corporate tax revenues surged post-2015 phase-out announcements, climbing from approximately €6.6 billion in 2015 to over €25 billion by 2023—now exceeding 25 percent of total Irish tax receipts despite real GDP growth of just 67 percent over the same period. This expansion, driven largely by foreign multinationals contributing 80 percent of receipts by the late , implies that these structures channeled taxable activity into rather than eroding its base net, with 2010 withholding tax reforms rendering the Dutch element obsolete without disrupting profit flows. The , as the intermediary in the sandwich, similarly retained fiscal benefits through taxed royalties and participation exemptions on conduits, with no of downstream revenue shortfalls post-reforms. Broader critiques highlight that loss narratives overlook causal links to incentives: shifting effectively lowers effective rates, boosting and wages in host economies, which expands the overall base beyond static profit projections. Fewer than 50 percent of U.S. multinationals even engage haven affiliates, limiting systemic impact. Global collections have trended upward amid BEPS , from $500 billion in 2000 to over $1 trillion by 2020, challenging attributions of widespread without for growth effects. These data points collectively indicate that revenue loss claims, often amplified by institutional estimates like the 's $100–240 billion annual figure, inflate harms by disregarding dynamic responses and verifiable fiscal gains in low-tax venues.

Defenses Based on Tax Competition Principles

Proponents of tax competition principles defend structures like the Dutch Sandwich as mechanisms that enhance global capital mobility and efficiency, arguing that jurisdictions vie to offer favorable treatments to attract multinational , thereby allocating resources to their most productive uses. Under this view, profit shifting through conduits such as the responds to disparities in statutory rates—such as the U.S. combined federal and state corporate rate exceeding 25% historically—enabling firms to reduce the tax burden on marginal investments and stimulate without creating net revenue losses worldwide, as capital merely relocates rather than vanishes. In the Dutch context, the strategy leverages the absence of withholding taxes on outbound royalties and dividends until , positioning the as a conduit for flows totaling €4,200 billion in special purpose entities' participations, loans, and by 2016, which sustains a network of over 90 double tax and fosters ancillary economic activity. This competition draws and operations, generating spillovers including jobs in legal, financial, and advisory services, as well as revenues from , VAT, and property taxes that offset any foregone corporate . Empirical assessments rank the 14th in the 2024 International Tax Competitiveness Index for its neutral treatment of structures and broad treaty network, crediting such policies with bolstering long-term growth by curbing excessive . Critics of anti-avoidance measures, including those targeting the Dutch Sandwich, contend that curbing such invites fiscal indiscipline in high- regimes, as mobile profits discipline governments to prioritize efficient spending over maximization through rates averaging 22-25% in by 2025. First-principles analysis supports this by highlighting how profit shifting aligns taxation with value creation loci, reducing distortions from residence-based systems that worldwide regardless of activity location, thus promoting and incentives over protectionist barriers. Studies distinguishing from evasion estimate minimal true erosion—around 3% for European corporate taxes to traditional havens—while emphasizing that conduit jurisdictions like the capture real economic value through heightened activity.

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