Over the past two days, The Currency has revealed how the US-headquartered pharma giant Abbott Laboratories squeezed through the loopholes left open by changes in tax rules intended to shut down the so-called double Irish and single malt schemes.

The group routed international sales of Covid-19 and other rapid diagnostics tests through Ireland, while corresponding profits emerged in Irish-incorporated companies holding intellectual property under tax residency in Malta, where they achieved a 4 per cent corporation tax rate in 2020.

Abbott, however, is not the only multinational using Ireland as a base to minimise its tax bill through what could be described as a double malt corporate structure. There are 373 companies in this country with at least one director resident in Malta. Most of these Irish businesses are not themselves tax-resident in the low-tax Mediterranean country – only individuals sitting on their boards are.

This makes for difficult identification of the structures established specifically for the purpose of shifting profits between two Irish-incorporated companies (a condition to avoid tax exposure in some headquarters jurisdictions, especially the US) and having them taxed at Malta’s de facto 5 per cent corporation tax rate. 

Still, here are a few examples.

Microchip’s debt option

In June 2020, The Currency detailed the complex web of billion-dollar transactions conducted by US-based Microchip to locate intellectual property and trading assets in related companies straddling Ireland and Malta. At the time, the semiconductor group did not respond to The Currency’s questions.

In this case, intellectual property rights attached to the sale of its products in non-American markets moved from a former double Irish structure in the Caribbean to a fully Irish-resident company, and the moves continued as Microchip completed the acquisition of its rival Microsemi – including a factory in Ennis, Co Clare.

Microchip Technology Ireland, the new owner of nearly $16 billion worth of intellectual property, was not however owned directly by the group’s mothership in the US. Through 2018 and 2019, Microchip introduced two intermediary holding entities above its Irish trading company: Microchip Technology Malta Ltd and Microchip Malta BMD Ltd. They both have a business address in the Verdala Business Centre serviced office building, just four doors down from the suite where Abbott’s Malta address is registered. 

Both were, and remain, incorporated in Ireland but tax-resident in Malta. They have conducted multiple capital, intellectual property and intercompany debt transactions with other group entities around the world since. Their role continued to grow even after Revenue officials and their Maltese counterparts amended the tax treaty between the two countries in November 2018 to close a specific loophole that allowed some income to remain exempt from tax in both. In fact, Microchip Malta BMD Ltd (formerly a Microsemi subsidiary) moved its residency to Malta two weeks later.

And it goes on – just last month, Microchip Technology Ireland reported receiving a $1.7 billion investment from its majority shareholder, the Irish-incorporated, Maltese-resident holding company Microchip Technology Malta. On the same day, February 16, the same shareholder contributed another $2 billion to the Irish trading company through the capitalisation of an existing reserve.

Annual accounts are now available for Microchip Technology Ireland and its parents in 2020. The Irish company’s sales of semiconductors grew to $3.4 billion that year, but it had a pre-tax loss of $622 million and therefore paid no tax, instead booking a $60 million tax credit.

Aside from buying the computer chips it re-sold at a 50 per cent gross margin around the world, its enormous expenses did not primarily come from paying its 260-strong workforce, but rather from a $1 billion amortisation charge on its intellectual property assets.

These assets have been funded through intercompany debt. Initially, the Irish company borrowed over $12.2 billion from its sister in the Cayman Islands against the transfer of $13.9 billion worth of intellectual property that was previously domiciled in the Caribbean jurisdiction during the double Irish era. The Cayman company also held deferred and preferred shares in Microchip Technology Ireland valued at $1.7 billion. 

But filings have now revealed that the debt and the hybrid equity-debt shares have since moved on to another sunny island destination. In November 2019, Microchip Technology Malta incorporated a new, fully-Maltese subsidiary, MCHP Technology Malta Ltd. By the end of that year, this new company had acquired the debt’s remaining debt principal of $9.3 billion, plus $7.4 million in accrued interest. The deferred and preferred shares, meanwhile, are now directly held by Microchip Technology Malta itself.

As part of the Microsemi acquisition and intellectual property reorganisation, Microchip Technology Ireland also became liable for a smaller debt of $481 million to its minority shareholder Microchip Malta BMD in March 2019.

In 2020 alone, Microchip Technology Ireland incurred $285 million in interest owed to its parents and $141 million in preference share dividend owed to Microchip Technology Malta. That’s another $426 million shaven off its profit taxable in Ireland, which will instead emerge in Malta. Full figures on the impact of such profit shifting are not yet available because no accounts have been published for MCHP Technology Malta since its incorporation.

Microchip’s ultimate parent, however, summarised the advantage in a note to its 2020 annual filing in the US, explaining that its tax burden was reduced thanks to “earnings accrued in Ireland at a 12.5 per cent statutory tax rate and earnings accrued in Malta at a 0 per cent to 5 per cent tax rate”.

The semiconductor maker illustrates yet another way of exploiting the double malt loophole. Where Abbott has domiciled intellectual property in Malta and shifted profits there in the form of payments for its use by an Irish trading company, Microchip has instead placed the intellectual property in an Irish-resident company, shrinking profits here through its amortisation as a first step. These assets are in turn financed with intercompany debt, and profit shifting to Malta-resident holding companies occurs through associated interest payments.

Rioters in the tax game

Royalties or intercompany debt? Riot Games has tried its hand at both through successive iterations of its double malt structure. The company is a publisher of video games including the online League of Legends series, for which it claimed 180 million monthly players last year. 

Riot Games is headquartered in Los Angeles but is wholly owned by the Chinese digital giant Tencent, through a holding company registered in the Cayman Islands. Yet as League players send champions to clear their way through virtual jungle towards victory – and pay real money for power-ups and merchandise – many pass through Ireland.

Dublin-based Riot Games Ltd was not only the employer of a growing team of 140 “Rioters” in 2020 – it is also the group’s trading company for Europe, Africa, the Middle East, Brazil and most of the Asia-Pacific region. “The principal activity of the company is the localisation, marketing and support of the players of the company’s online computer games – League of Legends, Valorant, Wild Rift and Legends of Runterra,” the Irish subsidiary reported in its latest accounts for 2020.

Revenue from this business nearly tripled that year to €750 million. Yet it also became loss-making during the same period and, as a result, was not liable for corporation tax in Ireland. 

It did pay €36 million in tax in 2020, but that was all incurred overseas on royalties paid by its subsidiaries into Ireland. The Irish company defines its turnover as a combination of sales of “virtual goods” to players and, from 2020 only, royalty income. This new income stream seems to be weighing heavily on its subsidiaries – for example, Riot Games Ltd’s subsidiary in Singapore, Riot Games Services PTE Ltd, suddenly went from profit to loss in 2020. Although its revenue grew five-fold to the equivalent of €17 million, the Singaporean subsidiary posted a loss of €27 million that year.

That’s because at the end of 2019, advised by the group’s Irish solicitors at Matheson, Riot Games Ltd became the owner of intellectual property assets as the group rejigged its existing double malt structure. 

Until then, the group used payments for use of this intellectual property to shift profits to Malta. A separate company, Riot Games Europe Production Holdings Ltd, was incorporated in Dublin but tax-resident in Malta. In 2019, it collected €232 million in royalties and music revenue from its sister companies selling access to Riot’s video games and merchandise. In turn, it paid €149 million in research and development costs to its parents. For the years until 2019, the difference emerged as profit taxable in Malta.

Then on December 31, 2019, Riot Games Europe Production Holdings “transferred intellectual property to a related company, Riot Games Ltd, for a consideration of €1,146,421,000”. The full sum appeared as a “gain on disposal”, indicating that the book value of the intellectual property was zero prior to its onshoring to Ireland. The increased value is attributable to the formidable potential now associated with Riot’s successful video games. 

The transaction was funded with intercompany debt. The Irish resident trading company, Riot Games Ltd, borrowed the funds from Riot Games Europe Production Holdings at the Euribor three-month rate plus 1 per cent. Then it repeated the operation for another €227 million bundle of assets and, when it closed its 2019 annual accounts that evening, it had acquired €1.4 billion worth of “IP development rights” and contracted new “loans due to group companies” for the exact same amount.

Riot Games Europe Production Holdings immediately transferred the debt to its new fully Maltese subsidiary, RGE Holdings Ltd, created just one month earlier. Its address, just like that of other Malta-resident group companies, is at the same Verdala Business Centre as Abbott’s and Microchip’s. In the new structure, Dublin-based Riot Games Ltd has boosted its revenue with royalties generated on the back of its newly acquired intellectual property.

But the corresponding profit is reduced by amortisation charges for this intellectual property, which the company expect to run for 19 to 23 years. This reduced the profit taxable in Ireland by €70 million in 2020 alone. The Dublin company also paid €145 million in “research and development costs” – it is now its turn to transfer income to sister companies where Rioters develop the next generation of games, mostly in the US. And it continued to pay €142 million in royalties to other group entities in 2020 for the use o those intellectual property rights it didn’t own.

Riot Games Ltd also collected an intercompany debt power-up: It incurred over €30 million in new finance costs (a €17 million guarantee fee and €13.4 million in interest) as a result of the debt owed to its Malta group lender (it had no other long-term debt). While all these costs left the Irish company with no taxable income, this was not the case in Malta. 

RGE Holdings reported the corresponding interest as its only source of income and offset most of it with foreign exchange losses, but was still €3.4 million in profit. It ended the year with a tax bill under €100,000 at the statutory 35 per cent rate in Malta, which is subject to refunds if the company makes eligible distributions in the future. 

The final level of the game played out in December 2020 when Riot Games Europe Holdings, the Irish-incorporated, Malta-resident company at the top of the double malt structure, acquired the proceeds of the reorganisation. 

The holding entity took ownership of RGE Holdings in Malta and its debt interest, which appeared as a €1.2 billion dividend received from Riot Games Europe Production Holdings, which has since merged into Riot Games Europe Holdings and disappeared. This translated into an equivalent €1.2 billion profit, which appears to have been entirely disregarded under Malta’s tax legislation.

In summary, the billion-euro-plus revaluation of Riot Games’ potential to generate profits from international players was never taxed as a gain in itself, but this value can now be amortised against Irish taxable profits for the next two decades, and a corresponding portion of profits will be extracted as interest surfacing in Malta over the same period – where its effective tax rate will be around 5 per cent. 

Lufthansa: 6% tax under the double malt rather than 30% in Germany

The use of the double malt is not limited to US-headquartered companies – nor is intellectual property the only asset that can easily be booked in one country and used in another. A number of Irish-incorporated companies with Malta-resident directors have names that suggest a business in aircraft leasing.

One example is a two-tier structure ultimately owned by the German flag carrier Lufthansa. LHAMIH Leasing Ltd and its immediate parent LHAMIH Ltd both have a registered address at One Spencer Dock in Dublin – the office of accountancy firm PwC – but they report being effectively managed and tax-resident in Malta.

LHAMIH Leasing owned 83 aircraft at the end of 2020, including two acquired during the year. They were all leased to Lufthansa group companies. LHAMIH has a second, fully Maltese subsidiary, which owns another 36 jets. This means the holding company channels income from 119 aircraft in total – more than one in seven of the German airline group’s entire fleet.

LHAMIH Leasing, which has just one employee, generated €354 million in revenue in 2020 from its 76 passenger jets and seven cargo aeroplanes. In addition to the usual €192 million annual depreciation charge as they got older, the company also booked a €139 million impairment, in a Covid year when it became clear that “their realisable value will be lower than their book value on the termination of their leases”. 

The Irish-Maltese leasing company have no debt of their own and are instead funded by their Lufthansa shareholders’ capital reserve. This left LHAMIH Leasing with a profit of just under €21 million in 2020, down from €148 million one year earlier as a result of the aircraft impairment.

Under Malta’s tax legislation, much of its income was not subject to tax and it ended the year with a negligible tax charge of just €115,002. In 2019, this was zero. 

“During the year €360,000,000 were distributed from the Capital Reserve and €390,000,000 from Retained Earnings to the parent company,” it reported – the latter qualifying as a straight dividend. Such distributions may trigger tax refunds in Malta.

Although its fully Maltese sister company was reported to be loss-making, it still paid a dividend too, and their common parent LHAMIH collected half a billion euro from them combined in 2020. The holding company itself then “paid a dividend of €390,000,000 from retained earnings (2019: Nil) and distributed €910,000,000 from capital reserves (2019: Nil)”.

Its own pre-tax profit own profit came to €613 million, up from €3 million the previous year when no distributions of accumulated profits had occurred. Its tax charge for the year came to €38.5 million, an effective tax rate of 6.3 per cent. In 2019, it was zero – and in both years, more attractive than the typical corporation tax rate of 30 per cent in Germany.

While the profits associated with the Irish-Maltese portion of Lufthansa’s fleet were having their tax liability minimised in this way, LHAMIH was pledging its two subsidiaries as collateral for the €3 billion state aid loan the airline group obtained from the German government to overcome pandemic-induced lockdowns. 

“In February 2021, the ultimate parent Deutsche Lufthansa AG, has prepaid the above-mentioned facility and all related loans outstanding. Following such repayment, the Company’s assets were no longer pledged as collateral,” LHAMIH reported.

Further reading in the double malt series

Part one: How a pandemic boost to a multinational’s Irish sales left a half-billion profit taxed at 4%

Part two: The double Irish is alive and well, and it officially lives in Malta

Part four: “Structures like these siphon revenue from some of the poorest countries in the world”