Dublin has served up its last “Double Irish”.

But its decision to sacrifice a highly contentious tax loophole shows a determination to defend an overall low tax regime for foreign companies that has helped underpin Ireland’s economic success.

The Double Irish was a key feature of Ireland’s boom years and enabled the biggest US tech and pharma companies to route billions of dollars of royalty income through minimally taxed Irish subsidiaries.

Google, Facebook, Pfizer and Abbott Laboratories are among the companies that have benefited from what is a legal loophole that exploits the differences between definitions of tax residency in US and Irish law.

Successive Irish leaders for years fended off attempts by other EU governments, particularly France, to overhaul what they regarded as unfair tax competition. The pressure built following the collapse of Ireland’s banks in 2008 and a subsequent EU bailout and became irresistible after the European Commission, threatened to launch a full-scale investigation into the Double Irish.

Brussels is already probing Ireland’s tax arrangements with technology giant Apple.

Dublin on Tuesday it intended to close Double Irish loophole. Those companies using it will have until 2020 to phase out their Double Irish structures.

The move marks a significant concession by Ireland over its cherished but controversial corporate tax regime, which centres on a headline corporate tax rate of 12.5 per cent – one of the lowest in Europe.

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Other jurisdictions with similar tax loopholes that encourage foreign direct investment will be watching closely to see whether they, too, will have to eventually bow to pressure to close down the most egregious tax avoidance measures.

Ireland recognises company residence on the basis of where they are run from, while the US focuses on where they are registered. Companies using the Double Irish put valuable intellectual property into an Irish-registered company controlled from tax havens such as Bermuda. As a result, Ireland considers the company to be tax-resident in Bermuda, while the US considers it to be tax-resident in Ireland. So royalty payments from one to the other go untaxed or are minimally taxed.

The Double Irish helped define the era of the Celtic Tiger, when Ireland’s economy was growing at the fastest pace in Europe in the late 1990s and the early 2000s and attracting hordes of US technology and pharmaceutical companies.

Many set up operations in Dublin’s once-derelict docklands, helping to redevelop large swaths of the city and creating thousands of high-paying jobs for Irish and international graduates.

The loophole emerged in the mid-1990s, when US companies began moving intellectual property assets offshore because of persistently high domestic tax rates. The trend coincided with the growth of the technology and life sciences industries and Ireland’s booming economy. Intellectual property, long a mainstay of pharmaceutical companies, was being given a new lease of life by the surge in technology inventions.

Suddenly, the Double Irish structure, which evolved to favour intellectual property income almost exclusively, began to find favour with US companies setting up or already established in Ireland. “All of that propelled the Double Irish structure into being the structure of choice for technology and life science companies,” says Padraig Cronin, head of tax and legal services at Deloitte Ireland.

The Big Read Tax avoidance: The Irish inversion April 2014: US companies are shifting their headquarters abroad to protect growing overseas cash piles Further reading

The change announced by Ireland’s finance minister, Michael Noonan, on Tuesday means that all companies incorporated in Ireland will be deemed resident here for tax purposes from January 1 next year, and will, in theory, pay tax at the headline rate of 12.5 per cent. Companies with existing Double Irish arrangements can maintain them until 2020, when, again in theory, they will be liable to tax at 12.5 per cent.

Irish business leaders have been wary of any move to close the Double Irish in the absence of any compensating measures. But they have shifted their positions as international criticism of the Double Irish grew, threatening the even bigger prize of the 12.5 per cent headline rate.

Mr Noonan was uncompromising yesterday in his defence of the headline rate, saying it was not and never would be up for discussion. But his simultaneous announcement that Ireland was developing a “knowledge development box” similar to the UK “patent box” reassured investors and US multinationals based in Ireland that the overall tax regime remained competitive.

“After a few months of turbulence and international scrutiny, he has offered a clear road map on the existing arrangements,” says Mark Redmond, chief executive of the American Chamber of Commerce in Ireland. Tax experts said it was unlikely that the closing of the Double Irish would force US companies to move operations out of Ireland.