This has amongst others to do with a tax sparing credit facility included in the Cyprus-Denmark double tax treaty.

We will explain this below.Structure (see picture 1)

Suppose we have a Danish businessman (DB) owning a Danish company (DC) with a lot of undistributed profit reserves. In case DC would distribute a dividend to DC, DC would be liable to Danish income tax that may rise to 42 percent.

Underneath we will show how the businessman can in this case achieve a significant tax saving through the use of a Cypriot company (CC).

Step 1; set up of a Cyprus company (see picture 2)

First of all DB sets up a Cyprus company (CC).

Step 2; transfer DC shares to CC (see picture 3)

DB transfers his shares in DC to CC. As we have understood, the Danish income tax laws have a facility to effect such transfer income tax-free.

Step 3; dividend distribution from DC to CC (see picture 4)

DC distributes a dividend to CC. Based upon Danish legislation (among which the broad implementation of the EU Parent-Subsidiary Directive in this legislation), this can easily take place free of Danish withholding tax. At CC’s level such dividend will easily be tax exempt as well.

Step 4; dividend distribution CC to DB  (see picture 5)

Based upon Cyprus’ legislation, such dividend should not be subject to any withholding tax.

Based upon Danish legislation, as mentioned, this dividend may become subject to 42 percent income tax. However, based upon a so-called ‘tax sparing credit facility’ in the double tax treaty between Denmark and Cyprus,

Denmark should grant a 15 percent deduction from this taxation, per balance leading to effective taxation at a rate of 27 percent only over such dividend. In other words, through the interposition of a Cyprus company DB can reduce his taxation over (indirect) dividend distributions from DC by more than 1/3.

Below we make a calculation of the tax consequences of two different scenarios, one is a scenario under which DC is owned directly and one is a scenario under which the DC shares are owned through Cyprus company CC.

We assume that a dividend of 500.000 EURO is received. From these calculations it becomes clear what the advantages of the use of a Cypriot company are.


So, through the interposition of a Cyprus company, a tax saving of 75,000 EURO can in the above example be achieved.

Consulco has received confirmation from various reliable sources in Denmark that the above structure should work and has even (tacitly) been confirmed by the Danish tax authorities in at least one case.


                                                                                      Tony Harkén