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Ferenc Kiss, a Hungarian high net-worth individual living in Budapest, is investing substantial amounts of his wealth in real property, both in Hungary and in other Central and Eastern European countries. Mr. Kiss wonders how the return on his investment can be arranged for in a tax-effective manner. The same question arises in case he sells the property in these countries and he realises a gain. Suggested solution: Assuming that Mr. Kiss is not engaged in developing real property, the nature of his income is rental income or, in the case of sale, a capital gain. In many countries, this is considered "passive income" for tax purposes. The acquisition of the real property in the countries concerned can be made through local companies directly or indirectly controlled by Mr. Kiss. These local companies can be wholly owned by a holding company in a country with a favourable holding company regime. Any dividends distributed by the companies in the countries where the real property is situated should: Not be subject to withholding tax on dividends (or only at a low rate) Not be subject to corporate income tax upon receipt by the holding company Not be subject to withholding tax on dividends paid by the holding company Moreover, if the holding company sells the shares in the real property companies, any capital gains resulting therefrom should not be subject to corporate tax. A country meeting the above conditions for the holding company regime is Luxembourg. A Cyprus company holding the Luxembourg company and directly or indirectly owned by Mr. Kiss would be a tax-effective solution. See the diagram below.

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