Amanda Sosnovsky lives in Hungary. She has relatives in Italy, who can buy Italian clothes directly from factories at a significant discount. Amanda wants to set up a business where she buys those clothes and sells them to stores in Hungary.
Ms. Sosnovsky would like to structure her business in the most tax-effective manner by using an offshore company.
Ms. Sosnovsky establishes an offshore Company. She chooses to use a Cyprus Trading Company and opens a corporate bank account.
The Cyprus Trading Company becomes the “front player” of Amanda’s business. It’s the Cyprus Trading company that buys from Italy and afterwards sells to Hungary Italian clothes.
NOTE: An arm’s length profit margin needs to be generated by the Cypriot company.
Since there are double-taxation treaties Cyprus-Italy and Cyprus-Hungary, the Cypriot company will pay only 10% on the profit margin after deducting all the expenses resulted in the production of this income.
As a business owner in Hungary, Ms. Sosnovsky is taxed only on the income that she receives as dividends from the Cyprus Trading Company’s profits.
There is no withholding tax in Cyprus on dividends paid form a Cypriot company to non-residents.
NOTE: Although the goods will not pass through Cyprus, the Cyprus company will still need to register for VAT and VIES.
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.