No, your assessment is inaccurate but not illogical, it was what I︀ figured too before I started doing international structuring.
There's a specific set of rules to︁ prevent this (contrary to comments here CFC rules likely have nothing to do with this︂ particular structure in many cases, in some cases yes, but often no). The specific set︃ of rules that apply to this are called Transfer Pricing rules, which concern cross border︄ non-arm's length transactions and essentially state that you must deal at fair market value when︅ engaging in related party cross border transactions. In other words Company A would need to︆ genuinely provide value equivalent to what is being provided to Company B if an unrelated︇ third party was providing the same good/service.
Now, as for the "simplified Dutch Sandwich", again,︈ this represents a misunderstanding of what a Dutch sandwich is how and why it works.︉
A Dutch sandwich when they were using it was a form of treaty shopping designed︊ to essentially get around a variety of the withholding tax rules. Increasingly there are anti-treaty︋ shopping provisions to help avoid some of this though it depends where you're operating in︌ the world.
What you're describing will vary dramatically in how it is treated around the︍ world but let's look at it from two different perspectives just for simplicity the two︎ I'll take are US rules and Canadian rules.
Under US rules the first thing that️ would happen is whatever company B paid to company A would be subject to transfer pricing rules. This would mean you'd have to start off by doing a transfer pricing study to see what the fair market value would be for the services, IP, etc. being provided. This would need to be documented and reported to the government and if it was found you priced it unfairly this would be considered transfer mispricing and you'd be subject to fines on the difference of up to 400% of what you'd have needed to pay originally.
Next, once the money got to the foreign company it would︀ now be subject to the new GILTI tax introduced in the Trump Tax reforms that︁ started last year (prior to last year you'd have only needed to worry about Subpart︂ F and quite likely could have kept the money offshore (there were some cases where︃ they'd have got you on Subpart F so you'd have wanted to do some fancy︄ things, which is what Apple, Microsoft, etc. would do) but they've mostly ended this with︅ GILTI unless you had physical real assets in the foreign country). This would mean you'd︆ be forced to bring that money back to the US and be taxed on it︇ (the calculations of how this work are complicated you could potentially end up paying as︈ little as 10.5% tax but you would pay tax for sure.
At this point there's︉ no value in lending the money back to the onshore company but let's say you︊ did lend money back to the onshore company. If you were to do so then︋ you'd need to do so again according to transfer pricing standards doing another transfer pricing︌ study to determine fair market pricing for the loan and charge interest to your own︍ company and if you didn't repay the loan the loan would be considered income to︎ the onshore company and taxed. The interest from the loan would be subject to withholding️ tax at the US side at a rate of 30% and then the income when received in say Cayman would again be subject to GILTI tax.
Bottom line, horrible situation.
Looking at it from a Canadian tax perspective is slightly though not much better.
Once again you need a transfer pricing study, the transfer pricing needs to be reported and you can be fined for transfer mispricing.
In this case if the income was paid for example for royalties or something similar then it would be subject to something called FAPI, which applies to passive income earned by a foreign controlled foreign affiliate (the Canadian term for CFC) so it would be taxed in Canada as though brought back. If︀ you managed to characterize it as say services then it wouldn't be subject to FAPI︁ so that's good you've got money in Cayman.
Now, at this stage you could loan︂ it but that would be stupid. The loan would be subject to another transfer pricing︃ study, interest would need to be paid, the interest would be subject to withholding in︄ Canada and then it would be taxed as FAPI income in Cayman. The better way︅ to do it would be you could qualify to repatriate those dividends to Canada tax︆ free under what's called the Exempt Surplus rules and keep them in the Canadian company︇ IF instead of having those two companies owned independently Company A was owned by Company︈ B. You could then use that money to invest or whatever and it would be︉ taxable locally accordingly. You could of course simply spend it so long as you're not︊ spending it on personal expenses.
Those are two examples, every major developed country has similar︋ rules that would play out in various permutations but that's the gist of it.
