Update: The Double Irish With a Dutch Sandwich – How Apple Saves Billions

Update from 29 March 2017:

The landscape has shifted slightly following the ruling requiring Apple to pay back taxes in Ireland. For more on this specific development, take a look at my article on Apple's tax payments in Ireland.

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For many entrepreneurs, a Malta company is a straightforward way to optimize their tax situation within the EU and relieve the financial burden on their business. However, you rarely hear about the global giants setting up shop here. So, what are Apple, Microsoft, and their peers actually doing? Why aren't they using the Malta Limited structure? That is exactly what I want to get to the bottom of today.

Billions in Tax Savings: Moving Profits Abroad

It makes perfect sense that companies like Microsoft and Apple invest heavily in minimizing their tax burden. With annual revenues in the tens or hundreds of billions, even small percentage points translate to massive sums. Apple, for instance, secured a specific deal with the Irish government to pay just 2% tax instead of the standard 12.5%.

By shifting licensing deals to foreign subsidiaries and holding cash reserves in tax-friendly jurisdictions, Apple pays very little tax in the US relative to its size—even if the absolute dollar amount remains high. As the late John McCain once put it:

"Apple claims to be the largest U.S. corporate taxpayer, but by sheer size and scale, it is also among America's largest tax avoiders."

The "Double Irish With a Dutch Sandwich" is a Complex Beast

The strategy used by Apple, Microsoft, and Google is known as the Double Irish With a Dutch Sandwich. Without getting too bogged down in the technical details, it involves two Irish companies (Double Irish) and one Dutch company (Dutch). Money flows from the first Irish company to the Dutch one, and then back to the second Irish company (hence the sandwich: Ireland – Netherlands – Ireland).

Thanks to specific treaties between the Netherlands and Ireland, almost no tax is incurred in this process. This is particularly effective for licensing revenue.

Apple's Model is Expensive – For Most, Malta is Better

This explains why these giants aren't relying on a Malta Limited. While Malta's effective tax rate is highly attractive, the "Double Irish" setup allowed for even lower rates in their specific cases. So why doesn't everyone do it?

Simple: It is incredibly complex and expensive. Building this structure takes a long time and walks a very fine line legally. Apple and its peers hire the world's most expensive tax experts to mitigate the risk of back payments. Furthermore, these structures often rely on specific, negotiated deals with governments that aren't available to the average business owner.

Unless you are running a global corporate empire, splitting your business across Ireland and the Netherlands is likely unrealistic. For most entrepreneurs, a Malta Limited is far more interesting—and with the help of my partners at DW&P Dr. Werner & Partners, it is much easier to set up properly.