This structure makes use of the fact that dividend income for Cyprus companies is exempt from corporation tax.
In the case where a Cyprus company ‘holds’ companies in the EU or companies with zero tax, the effect in most cases would be zero taxation on dividend distributions from the trading companies all the way to the ultimate beneficiary. The overall effect is zero in most cases because either the relevant double tax treaty provides for a 0% withholding tax on dividends or because the conditions for application of the EU Parent Subsidiary Directive are satisfied.
In the case where a Cyprus company ‘holds’ companies in double tax treaty countries, the effect on dividend distributions from the trading companies all the way to the ultimate beneficiary would be a withholding tax in the overseas jurisdiction at a reduced rate as per the double tax treaty.
If the shares of the overseas company are eventually sold, there will be no capital gain tax on the profit of the sale.
With regards to the aforementioned Double Tax Treaties, Cyprus has developed a wide network of such agreements with over 40 countries, including the Russian Federation, Qatar, Romania, United Kingdom, India, etc. ensuring that the same income is not taxed in more than one country. The Double Tax Treaty between Cyprus and the Russian Federation is the best treaty that Russia has signed with any other country. In 2008 Russian statistics showed that out 52 billion US Dollars was invested by foreigners in Russia. (For more information about the double tax treaties that Cyprus maintains visit: Ministry of Finance.)
Another common company structure is that of the Cyprus Financing Company structure. An intermediary Cyprus Finance Company can be placed in between a parent company in a European or no tax jurisdiction and subsidiary companies operating in treaty countries. The Cyprus Company will borrow money from the parent company in a European or no tax jurisdiction and lend money to the subsidiaries operating in treaty countries.