Amazon's billion-dollar tax shield (3)

Intellectual property

Amazon turned to Luxembourg. As a member of the European Union, businesses based there can sell across EU borders with less red tape. Then there's the tax rate - it has a headline charge on corporate income of 29 percent, but can exempt income a company earns through intellectual property by up to 80 percent. This cuts the effective rate to below 6 percent.

In June 2003, Amazon registered Amazon Services Europe SARL in Luxembourg. The initials stand for Societe a Responsabilite Limitee - a limited company, liable for tax.

A month later, it told UK clients its terms were changing. Contracts with third-party retailers would no longer be handled in the US but with the Luxembourg unit.

In June 2004, Amazon established another Luxembourg entity - Amazon Europe Holding Technologies - whose purpose was to hold shares in Amazon group companies and "to acquire ... any intellectual property rights, patents, and trademarks licenses and generally to hold, to license the right to use it solely to one of its direct or indirect wholly owned subsidiaries."

This group was set up as a type of limited partnership exempt from income tax in Luxembourg. It has no operational staff or premises, its registered address being the offices of a trust services company in a residential area.

A month later, this company established a third Luxembourg company, Amazon EU SARL, whose principal purpose was to "sell, auction, rent or otherwise distribute products or services of all types" via Amazon websites.

This taxable unit was to become, on paper at least, the supplier of all goods and services to European customers.

To be tax efficient, though, Amazon needed to shift the profit this unit would make into its untaxed parent. The easiest way to do this was for Amazon EU SARL to pay Amazon Europe Holding Technologies a fee to license the Amazon technology it would use to sell things.

There was just one problem: Amazon Europe Holding Technologies had no technology to license. Amazon's patents were held by Amazon Technologies Inc, a unit registered in Nevada.

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