Sergey Prohorov lives in Russia. He wants to raise funds for his typography and has found an investor in Austria.
Mr. Prohorov would like to structure his business in the most tax-effective manner by using an offshore company.
Mr. Prohorov establishes an offshore Company. He chooses to use a Cyprus Finance Company.
Cyprus Finance Company takes a loan from the Austrian investor company taking advantage of the double-taxation treaty between Cyprus and Austria.
Being a member of the EU, Cyprus benefits from EU Directives such as Parent/Subsidiary Directive and Interest/Royalties directive whereas withholding taxes on dividend/interest/royalty payments may be reduced to Nil provided that some minor conditions are satisfied.
There are no withholding taxes in Cyprus on the interest paid to the Austrian company.
Cyprus Finance Company lends the money to Mr. Prohorov’s typography in Russia.
As per the Cyprus/Russia DTT, there is no withholding tax on interest payments in Russia.
Once Mr. Prohorov’s typography returns the loan to the Cyprus Finance Company, the interest can declared as expense in the typography’s books. This lowers typography’s profit base and, as a result, pay less in taxes.
The spread of interest to be earned by Mr. Prohorov’s Cypriot company ranges between 0,125% to 0,35% as a result of the back-to-back financing situation.
Loan Amount Minimum Interest Margin
Up to €50,000,000 0.35%
From €50,000,000 – 200,000,000 0.25%
Over €200,000,000 0.125%
Cyprus Finance Company returns the loan to the Austrian investor. The rate of interest has to be so much so that the spread to be earned by the Cypriot entity will range between 0,125% and 0,35% depending on the amount of the loan.
NOTE: It will have to be ensured at all times that the transactions are carried out on an arm’s length basis i.e. in the case where the Cypriot company is in a back-to-back situation, an arm’s length profit margin should be earned.
Disclaimer: This scenario is intended only as a general guide and is not to be relied upon as the basis for any decision or outcome on the subject matter.
This is purely an indicative scenario. Professional advice and consultation by tax advisors in all countries involved should be sought before taking action.