From growth. Remember, half the point of these havens is to shelter money from being taxable. Nothing else matters. You move it over there for favorable treatment. Company 2 received back money from Company 1 that they invested in, so it's off Company 1's books virtually, but not in reality.

This is the hell created by multi-jurisdictional legal fictions. Short of a multi-national crackdown, being able to nail down the vagueries a bunch of well compensated international accounting firms and lawyers can get up to is unlikely at best.

I mean even if the company grew 10x, it'd have to pay 10x to buy back its shares, so it wouldn't be profiting, right?

If I'm understanding this correctly, there are 2 things I'm taking away from this:

1. Cyclic ownerships should be illegal.

2. The investors (i.e. the public, for a public company) are getting scammed here. But it's not because of tax avoidance, but because company valuations (and therefore share prices) are just utterly meaningless, and people are... too oblivious to this? I mean, a "growth" in valuation would (to me) be coupled to increase in the company's net assets. So if company 1 sells a lot of its product and its valuation rises... that means it's gaining assets somewhere. Either that increase in assets is due to sales revenue at home (in which case it'd be getting taxed normally) or it's the stake it has in company 2, and presumably company 2's valuation is growing. But company 2's valuation is just coupled to company 1's, so there's no logical reason for it to rise independently. If it does, and the company is getting rich that way, that just means to me that people are behaving irrationally and paying more for the same thing, and that's what's making companies richer (rather than tax avoidance)? Alternatively if you look at it as company 2 having revenue and thus company 1's stake increasing in value, wouldn't there be an eventual tax on that money before any person can realize it at home, and thus shouldn't that correct the stock price downward? Or am I completely misunderstanding something here?

Edit: I think I'm seeing one way this works: the stock price does get corrected downward, but not enough to cancel out the growth, since the offshore company did gain material assets. But then who (as in which person) is getting rich without paying taxes at home, exactly? Either C1's shareholders are selling long-term capital gains taxes (in which case the complaint is about long-term capital gains taxes) or they're doing it short-term (in which case they're still paying income-equivalent taxes). Who's avoiding taxes here?