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Dutch Sandwich: A Croissant-Shaped Tax Haven

The “Dutch Sandwich” is a term used to describe a complex international tax avoidance strategy employed by multinational corporations, particularly those in the technology sector, to minimize their tax liabilities. It typically leverages loopholes within the tax systems of the Netherlands, Ireland, and other jurisdictions. The phrase itself is a colorful metaphor, illustrating how profits are routed through various entities like layers in a sandwich.

Here’s how the Dutch Sandwich typically works:

1. Profit Diversion: Revenue generated in a country with high corporate taxes (like the United States) is channeled to a subsidiary in a lower-tax jurisdiction, such as Ireland. This is often achieved through the payment of royalties for intellectual property (IP) held by the Irish subsidiary. These royalties are effectively a deductible expense in the high-tax country, reducing taxable income there.
2. The Dutch Intermediary: The royalties are then transferred from the Irish subsidiary to a Dutch entity. This transfer is facilitated by the Netherlands’ favorable tax treaty network and, crucially, its historically permissive rules regarding royalty payments. The Netherlands often acts as a conduit, allowing funds to flow through with minimal taxation. This is where the “Dutch” part of the sandwich comes in.
3. The Irish “Single Malt”: Finally, the funds are routed from the Dutch entity to another Irish entity, often a “stateless” company or one registered in a tax haven like Bermuda or the Cayman Islands. This second Irish entity is sometimes referred to as a “Single Malt” because it’s often managed and controlled from another jurisdiction, even though legally based in Ireland. This Irish entity is often not considered tax resident in Ireland (or anywhere else), thus escaping Irish corporate taxes.

The key benefit of the Dutch Sandwich is that it significantly reduces the overall tax burden on the multinational corporation. Profits are diverted from high-tax jurisdictions to low-tax or no-tax jurisdictions, allowing companies to accumulate wealth offshore with minimal tax implications.

Criticisms and Regulatory Scrutiny:

The Dutch Sandwich, along with other aggressive tax avoidance strategies, has faced increasing criticism from governments, international organizations like the OECD, and the public. It’s seen as unfair, as it allows large corporations to avoid paying their fair share of taxes, placing a greater burden on smaller businesses and individual taxpayers.

In response to this criticism, both the Netherlands and Ireland have begun to tighten their tax laws and close loopholes that enable these strategies. For example, Ireland has phased out its “Double Irish” structure, and the Netherlands has implemented measures to restrict the use of conduit companies and address tax treaty abuse. However, corporations are constantly adapting and finding new ways to minimize their tax obligations, so the fight against tax avoidance is an ongoing process.

While the classic Dutch Sandwich may be less prevalent today due to regulatory changes, the underlying principle of using complex international structures to shift profits to low-tax jurisdictions remains a common practice in global tax planning.

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