How to Benefit from Double Tax Treaties
The most common mistake when setting up a cross-border structure is assuming the existence of a double tax treaty is enough, without examining the treaty's actual conditions of application.
The treaty's core function
Double tax treaties are signed between two countries to prevent the same income from being fully taxed in both the source country and the country of residence; they typically reduce withholding tax rates or provide a credit mechanism.
But these benefits don't apply automatically; the company has to prove it meets the residency and genuine activity conditions the treaty requires.
The limits of treaty shopping
An intermediary company set up in a country with minimal assets, purely to access a more favorable treaty network, is increasingly flagged by tax authorities in more countries as "treaty shopping" and denied treaty benefits.
Following the OECD's BEPS (base erosion and profit shifting) initiative, most current treaties include a principal purpose test, which asks whether the structure's main purpose was obtaining a tax benefit.
Meeting genuine activity and substance requirements
A holding or financing company generally needs to show a real office, local staff, an independent decision-making process, and a genuine commercial purpose in that country to claim treaty benefits; these criteria are collectively known as "substance."
If substance requirements aren't met, the tax authority can disregard the structure and tax the transaction directly at the level of the ultimate parent company.
The beneficial owner concept
Many treaties require the income recipient to be the "beneficial owner" to claim a reduced withholding rate, meaning they must hold genuine economic control over the income, not just act as a pass-through channel.
An intermediary company that immediately and automatically passes received income on to another country (a conduit structure) makes its beneficial owner status open to challenge.
Dynamically monitoring the treaty network
Tax treaties can be renegotiated or terminated over time; a favorable treaty network at the moment a structure was set up may not offer the same benefit a few years later.
That's why even after an international structure is established, the current status and possible changes to relevant treaties need to be monitored regularly.
International Structuring CapabilityIn transactions where capital crosses borders we build the structure with each jurisdiction's realities in view and the exit route defined from the outset.
Learn moreFrequently asked questions
Is a country with treaties signed with every other country automatically a good structuring hub?
No; the breadth of the treaty network matters, but even a structure in the country with the widest treaty network can be denied benefits if it doesn't meet substance requirements.
What is the principal purpose test?
An anti-abuse test found in most current tax treaties that asks whether the main purpose of a transaction or structure was obtaining a tax benefit.
Are substance requirements the same in every country?
No; they vary by country and by income type, which is why a separate substance analysis needs to be done for each structure.
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