Irish Skype subsidiary was part of tax deal

Internet phone giant Skype negotiated a deal with Luxembourg's tax authorities involving intellectual property held by an Irish subsidiary being licenced through Luxembourg to other group companies.

The agreement negotiated with the Luxembourg authorities in June 2010 by Ernst & Young (now EY) outlined how Irish-registered company, Skype Limited, would licence intellectual property (IP) to Luxembourg company Skype Technologies SA. The Irish company would not charge any royalties but the Luxembourg company would licence the IP to other group companies and charge royalties, accumulating profits in Luxembourg.

The profits in Luxembourg were sheltered from tax because even though Skype Technologies SA did not pay royalties to the Irish firm, it was allowed to deduct a “deemed licence fee” for the use of the Irish IP from its profits. The deemed licence fee amounted “to 95 per cent of the licence fees received” from other group companies, according to leaked documents.

Deemed interest

The arrangement is similar to advanced tax agreements negotiated by other Luxleaks companies with the Luxembourg authorities involving the use of “deemed interest”, with the effect being that a Luxembourg company’s taxable profits would be reduced.

The agreement negotiated by EY for Skype said the Irish company would be part of “arm’s length” financing activity that would have limited credit and exchange risks and an annual gross profit margin of 3/32 of 1 per cent “computed on the corresponding amounts of the payables and the receivable will be considered arm’s length”.

An earlier agreement negotiated by Deloitte in December 2009, when 70 per cent of the Skype group was being bought from Ebay by US private investment firm Sliver Lake Partners and a consortium for $2.7 billion, mentions use of “deemed royalty payments”.

Microsoft bought Skype in 2011 for $8.5 billion. A Microsoft spokeswoman did not respond to queries about the royalty structures. “Microsoft’s acquisition of Skype was finalised in October 2011, so we can only speak to activities after that date,” she said. “As a global business, Microsoft adheres carefully to the laws and regulations of every country in which we operate.”

A discussion paper included with the Deloitte letter setting out the 2009 tax agreement said a 2005 advanced tax agreement letter had been “stamped” in June of that year in respect of the tax treatment of three Luxembourg companies involved in the licensing activity of the group.

Licensing structure

The paper said the letters set out a licensing structure and showed that “royalties income realised by Skype Limited for licences given by Skype Technologies SA” would see the latter Luxembourg company being allowed “to deduct a deemed licence fee amounting to 95 per cent of the licence fees received”.

A schematic that formed part of the 2010 advanced tax agreement showed “royalty-free licence” going from the Irish company to the Luxembourg company, with the royalty-bearing licence then going to other group companies.

The 2009 accounts for Skype Technologies SA show it had a profit of €156 million. It had a royalty-free licence agreement with Skype Limited, and recognised licence income of €168.4 million from another Skype company.

A spokesman for EY told the ICIJ it provides independent advice to clients in accordance with the law. “This includes advice on compliance with tax regulations in the territories in which they operate.”

A spokesman for Deloitte Luxembourg said: “We operate under strict codes of conduct that ensure ethical safeguards in the work we do for our clients. Professional standards preclude us from commenting on client matters.”