“Principal purpose test and wholly artificial arrangements, can substance rules really solve the problem of conduit companies and treaty shopping?”
Submitted by: Esteban Alonzo Montenegro Guillinta Date: 27/07/2018
2 TABLE OF CONTENTS
Introduction ……….4
CHAPTER 1 THE PRINCIPAL PURPOSE TEST, CHARACTERISTICS AND THE BEPS CONTEXT 1. Definition ……….5
1.1. Subjective test (intentions and how to find them) ………5
1.2. Objective element (the all-important consequences) ………..11
2. Guide for the application of the PPT Rule ………..13
2.1. Treaty shopping arrangements ……….14
2.2. Contract splitting: circumvention of the twelve-month threshold………17
2.3. Direct investment scenarios: two states situations……….17
2.4. Investments by intermediaries: three (or more) states situations………18
CHAPTER 2 THE CONCEPT OF “WHOLLY ARTIFICIAL ARRANGEMENTS” IN EU LAW, ITS LIMITS AND APPLICATION TO DATE 1. Definition and scope of the criteria used in EU case law to combat tax avoidance (what do we talk about when we talk about wholly artificial arrangements?) ………29
2. Are all abuses and anti-avoidance measures created equal? (Comparison with the VAT case law precedent) ………34
3. Abusive arrangements in the wild: how are the standards to determine abusive arrangements applied and what has been said about them ……….38
CHAPTER 3 THE STANDARD REVISITED (WHERE RUBBER MEETS THE ROAD) 1. Why we talk about wholly artificial arrangements and not ATAD (looking at the forest not the tree) ……….40
2. The working standard (words to live by) …………...……….41
2.1. Subjective ……….41
2.2. Objective ………...41
2.3. What constitutes a tax benefit ………..42
2.4. What constitutes Intent or purpose ………..42
3 2.6. The transfer pricing approach – How to measure commercial reasons against tax
motives when both are present ………44
2.7. Artificiality ………45
CHAPTER 4 THE STANDARD IN PRACTICE (WHERE WILD THINGS ARE) 1. Pure holdings ………47
2. Conduit loans ………49
3. Change of residence for the sale of shares ……….52
CLOSING REMARKS ………54
4 INTRODUCTION
For brevity’s sake and given the constrains of the words limitation for this thesis we will present a very succinct introduction that will describe our main question and the context and reasons why it is important.
Our main question is “can the Principal Purpose Test rule, as it is foreseeable to be applied, be effective against the forms of tax planning that it seeks to prevent?”.
In this thesis we will use the term “effective” in its simplest acceptation, that is, being successful in producing a desired or intended result.
The intended result of the BEPs project in general is to “ensure that profits are taxed where economic activities take place and value is created”1. In that context, the goal of the Principal Purpose Test (PPT) rule in particular is to prevent treaty abuse through treaty shopping and conduit arrangements2. Therefore, the PPT rule should be deemed effective only if it is suitable to prevent treaty abuse.
In its wording, the PPT rule casts a wide net that could potentially prevent all abusive transactions or arrangements within the scope of its goal. However, in its application the PPT rule would have to face a series of restrictions, both intrinsic and extrinsic, which will severely limit its reach and, therefore, its effectiveness.
To analyze this effectiveness, we will first examine the PPT rule as it is established by the 2015 final report on Action 6 of the BEPs project (later included in the 2017 OECD model convention and commentary - MOECD). This will reveal the intrinsic limits of the PPT rule. From its inception, its broad wording notwithstanding, the PPT was saddled with necessary limitations that restrict its initial scope. This process is indispensable to understand what the PPT rule really prescribes. The second step will be to analyze the limits that will be imposed to the rule in its application at the national level. The PPT rule will not be applied in a vacuum but by specific countries, and most countries have already in place standards about anti-abuse rules that will limit the scope of the PPT rule as conceived by Action 6 of the BEPs project. For this thesis, we have chosen the European Union as an example of local limits3. This is because of the level of development of the case law on anti-abuse rules and because of the economic significance of the European Union. The third step, will be to establish a “working standard”, a set of steps or rules that need to be followed to apply the PPT rule. The working standard will try to mesh the text of the rule with the practical limitations to its application. In this step we will establish how, in our opinion, it is foreseeable that the PPT rule will be applied in Europe.
Finally, we will apply the working standard of the PPT rule to cases of tax planning strategies in order to determine if the PPT rule, as it is foreseeable to be applied, fulfills its goal of preventing
1 BEPs Plan, Explanatory statement, point 1.
2 For more details on this see Introduction of Action 6 BEPs project.
3 In the EU the standard is established a multinational level (the EU) but need to be followed by each individual member state.
5 treaty abuse through treaty shopping and conduit companies, thus answering the main question of this thesis.
CHAPTER 1
THE PRINCIPAL PURPOSE TEST, CHARACTERISTICS AND THE BEPS CONTEXT
In this point we will describe the concept of the principal purpose test, the idea behind it and its intended application.
1. Definition
As the simplest definition possible, the PPT rule is a general anti-avoidance rule (GAAR) that seeks to deny the application of treaty benefits when a transaction/arrangement has as its main purpose or one of its main purposes the access to the benefit.
The PPT rule is included in the final report on action 6 of the BEPs plan, as follows:
“Notwithstanding the other provisions of this Convention, a benefit under this
Convention shall not be granted in respect of an item of income or capital if it is reasonable to conclude, having regard to all relevant facts and
circumstances, that obtaining that benefit was one of the principal purposes
of any arrangement or transaction that resulted directly or indirectly in that benefit, unless it is established that granting that benefit in these
circumstances would be in accordance with the object and purpose of the relevant provisions of this Convention”4 (emphasis added).
This text was later incorporated as article 29.9 of the 2017 OECD Model Tax Convention on Income and Capital (MOCDE) and article 7.1 of the Multilateral Instrument (MLI). This latter point is the most relevant to date as it entails that the treaties of at least 71 countries (as of august 2017)5 will include a PPT provision.
The PPT rule can be divided in two elements or tests: subjective and objective.
1.1. Subjective test (intentions and how to find them)
The subjective test is related to the intention of the taxpayer and seeks to determine if one of the main purposes of a transaction or arrangement was to obtain a tax benefit under the treaty. As it is impossible to probe someone’s intentions, these must be inferred from the behavior of the taxpayer and the circumstances surrounding the operation.
4 Action 6 BEPs Plan, Paragraph 26.
5 Chand, Vikram. “The Principal Purpose Test in the Multilateral Convention: An in-depth analysis” in INTERTAX, Volume 46, Issue I, Page 19.
6 The exact formulation of the subjective element/test of the PPT rule is the following: “if it is reasonable to conclude, having regard to all relevant facts and circumstances, that obtaining that benefit was one of the principal purposes of any arrangement or transaction that resulted directly or indirectly in that benefit” (emphasis added). As it is obvious then, to infer the intention or purpose behind an arrangement the authorities must take into account the facts or circumstances surrounding it.
Expanding on the meaning of the provision, paragraph 178 of the commentary on article 29 of the 2017 MOCDE indicates that:
“To determine whether or not one of the principal purposes of an arrangement or transaction is to obtain benefits under the Convention, it is important to undertake an objective analysis of the aims and objects of all persons involved in putting that arrangement or transaction in place or being a party to it. What are the purposes of an arrangement
or transaction is a question of fact which can only be answered by considering all circumstances surrounding the arrangement or event on a case-by-case basis. It is not necessary to find conclusive proof of the
intent of a person concerned with an arrangement or transaction, but it must be reasonable to conclude, after an objective analysis of the relevant facts and circumstances, that one of the principal purposes of the arrangement or transaction was to obtain the benefits of the tax convention. It should not be lightly assumed, however, that obtaining
a benefit under a tax treaty was one of the principal purposes of an arrangement or transaction and merely reviewing the effects of an
arrangement will not usually enable a conclusion to be drawn about its purposes. Where, however, an arrangement can only be reasonably
explained by a benefit that arises under a treaty, it may be concluded that one of the principal purposes of that arrangement was to obtain the benefit” (emphasis added).
Having the aforementioned in mind, it is confirmed that the subjective element or test is not really an analysis of the intention of the taxpayer but instead of the circumstances surrounding an operation looking for hints that the transactions/arrangements make sense only or mostly if tax considerations are taken as paramount support for the operation.
This “objectification” of the subjective element (analyzing the subjective element through objective means), is what Weber calls reasonableness test6. According to this test and based on the commentary of the OECD “It is shown from this that the tax authorities may not assume that a tax benefit is the principal purpose of an arrangement to obtain a treaty benefit, but also that they may not only point out the
6 Weber, Dennis. “The reasonableness test of the Principal Purpose Test Rule in OECD BEPS Action 6 (tax treaty abuse) versus the EU Principle of Legal Certainty and the EU Abuse of Law Case Law”. In Erasmus Law Review, August 2017 N° 1. Page 49.
7 effects in their assessment to come to the conclusion that the principal purpose of an arrangement is to obtain a treaty benefit”7.
Weber’s reasonableness test is a way to reconcile the limits of the PPT rule with the principle of legal certainty and the EU case law on abuse of law, here however we are not concerned with that goal. We are going to focus instead in what the reasonableness test can tell us about the limits or standard of application (however one decides to call it) of the PPT rule.
Two obvious questions raised by the wording of the PPT rule as it stands right now are: 1) what should be considered a main purpose? and; 2) when there is more than one purpose, how should we assign precedence to determine which one is the main one?
At this point it is important to remember that the PPT rule Is a GAAR and “The main advantage of GAARs lies in their non-specific wording, due to which they have potential to catch the widest possible range of tax abusive arrangements. This includes even those schemes that were not specifically considered at the time of the enactment of the GAAR”8.
What that means in short is that there is no direct answer for the questions proposed. The most help the commentary provides are a series of examples based on which one needs to hope to be able to infer principles that serve as a foundation on which to establish if a tax planning has run afoul of the PPT rule or not.
As Weber indicates “It appears from the examples given in the commentary that many different facts and circumstances must be weighed against each other in order to reach the conclusion on whether there is or is not treaty abuse. It also appears from this that the PPT rule requires an in-depth study of the facts and circumstances, and that nothing may be based on assumptions”9 (emphasis added).
This point is reinforced by the commentary of the MOECD which explicitly indicates that “The examples below are therefore purely illustrative and should not be
interpreted as providing conditions or requirements that similar transactions must
meet in order to avoid the application of the provisions of paragraph 9 [PPT Rule]”10 (emphasis added).
In the absence of explicit principles and with an express call for case-by-case analysis, the focus of attention has to be moved then to the burden of proof, as that element will instruct who amongst the parties (taxpayer or tax authorities) and in what degree must be required to probe that an operation or arrangement is within the allowed boundaries or not.
7 Weber, Dennis. Ob. Cit. Page 50.
8 Koslov, Valentyn. “Guidance on the Application of the Principal Purpose Test in Tax Treaties” in Bulletin for International Taxation, 2017 (Volume 71), No. 3/4, February 2017.
9 Weber, Dennis. Ob. Cit. Page 50.
8 The matter of the burden of proof, though, is not a peaceful one either. For some authors the issue of the burden of proof in the PPT is unbalanced and unreasonable, skewed in the favor of the tax authorities. For them “even though the tax authorities will be required to undertake an objective analysis of the facts of the transaction they only have to ‘reasonably’ (and not convincingly) conclude that the subjective element is satisfied”11.
On the same line is Lang who indicates that “the requirements are not too demanding - it must be merely “reasonable”: but not, for instance, compelling. Therefore, the tax authority does not need to produce full evidence thereof”12.
On a somehow more neutral position is Weber who thinks that “the wording ‘reasonable to conclude’ does not mean the weight of the burden of proof on the tax authorities, but it means that the assessment of the tax authority must be obtained through an objective analysis based on facts and circumstances (and it has to weight all facts and circumstances; may thus not be based on an assumption; or only refer to the tax advantage as such)”13.
As we will discuss in the next chapters, this interpretation from Weber is really on point, especially if you consider the limits that the standards of the courts will impose on the PPT Rule. Yes, the PPT rule casts a wide net, but when determining the application or not of the benefits of a treaty the PPT rule is far from the only rule to take into account. Once again, in this work we are not going to deal with the ideal legal formulation of the PPT rule and the application expected thereof but instead with the foreseeable real application based on already established criteria that will impose legal restrictions on the PPT.
At this point it is established that what constitutes the intention of the tax payer will depend on an analysis of the facts and circumstances of each individual case (not much clarity there), but what is clear is that: a) A person cannot avoid the application of this rule by merely asserting that the arrangement/transaction was not undertaken or arranged to obtain the benefits of the Convention14; and, b) “Tax authorities cannot uphold the application of this element by comparing the actual transaction with an alternative transaction that might have resulted in higher taxes”15.
Another central element to be determined is what constitutes the main purpose of a transaction/arrangement when that transaction can be considered to have more than one purpose. In this regard the commentary on article 29 of the 2017 MOECD indicates that “The reference to ‘one of the principal purposes’ in paragraph 9 means that obtaining the benefit under a tax convention need not be the sole or dominant
11 Chand, Vikram. “The Principal Purpose Test in the Multilateral Convention: An in-depth analysis” in INTERTAX, Volume 46, Issue I, Page 21.
12 Lang, Michael. BEPS Action 6: Introducing an antiabuse rule in tax treaties, Tax Notes International, 655, at 658. Cited by Weber, Dennis in Ob. Cit. Page 51. Also referred by Chand, Vikram in Ob. Cit. Page 21. 13 Weber, Dennis. Ob. Cit. Page 51.
14 2017 OECD Model convention on Income and Capital. Commentary 179 to article 29. 15 Chand, Vikram. Oc. Cit. Page 22.
9
purpose of a particular arrangement or transaction. It is sufficient that at least one
of the principal purposes was to obtain the benefit”16 (emphasis added).
In what will become a trend, this somehow vague wording tries to be clarified by an example. Commentary 180 itself indicates “For example, a person may sell a property for various reasons, but if before the sale, that person becomes a resident of one of the Contracting States and one of the principal purposes for doing so is to obtain a benefit under a tax convention, paragraph 9 could apply notwithstanding the fact that there may also be other principal purposes for changing residence, such as facilitating the sale of the property or the re-investment of the proceeds of the alienation”17 (emphasis added).
Two things to highlight in this example. First, it clearly states that in the circumstances of the case the PPT rule “could apply”, that means that it not necessarily “will apply”, not exactly a phrasing that fills one with a lot of certainty. Second, this example is really interesting for the purposes of our work because from the facts of the case it is quite clear to us that there is no artificiality in the case, what is questioned is not if the person really changed his place of residence but only the purpose why he did it. The answer of the OECD to this case seems to be, at least as an initial answer, that the PPT would apply in this case. Therefore, perfectly aligned with the ECJ case law this is not.
Also regarding this point of determining the main purpose of a transaction that has several purposes, commentary 181 states that “A purpose will not be a principal purpose when it is reasonable to conclude, having regard to all relevant facts and circumstances, that obtaining the benefit was not a principal consideration and would
not have justified entering into any arrangement or transaction that has, alone or
together with other transactions, resulted in the benefit. In particular, where an
arrangement is inextricably linked to a core commercial activity, and its form has not been driven by considerations of obtaining a benefit, it is unlikely that its
principal purpose will be considered to be to obtain that benefit”18 (emphasis added). Once more in this point, we engage in this kind of two-step in which a hint of a principle is introduced just to be relativized some lines afterwards. As it is clear, the most useful part of this commentary, at least for purposes of general application, is the one that links the arrangement under analysis with the “core commercial activity”. If the commentary had ended there we would have had a guiding principle, alas that was not the case.
Commentary 181 explicitly indicates that “where an arrangement is inextricably
linked to a core commercial activity, and its form has not been driven by considerations of obtaining a benefit, it is unlikely that its principal purpose will be
considered to be to obtain that benefit” (emphasis added). This means that in order to determine that a transaction/arrangement does not have as his principal purpose
16 2017 OECD Model convention on Income and Capital. Commentary 180 to article 29. 17 2017 OECD Model convention on Income and Capital. Commentary 180 to article 29. 18 2017 OECD Model convention on Income and Capital. Commentary 181 to article 29.
10 to gain access to a benefit (and therefore, not apply the PPT rule) is not enough that the arrangement is linked directly, or even inextricably, to the core business activity but also it will be needed (by the taxpayer one presumes) to probe that the form has not been adopted because of tax considerations (access to the benefit). How should one probe this? That is a good question that has no direct answer in the commentary.
Even setting aside the tall order of probing that a structure was not chosen for tax reasons, this obligation has other serious problems. Chief amongst them is the fact that this part of the commentary does no refer to the goal of an arrangement (which is kind of the whole deal of the PPT, the goal of gaining access to the benefit) but to the form of the arrangement. This relates directly with the example given in commentary 180, when the result of a transaction or arrangement is the same but the form (with the added problem of determining what constitutes form) is different and that change in form changes the tax consequences, how can one probe that there were no tax considerations? Another difficult endeavor indeed.
Chand, interpreting these commentaries in accordance with some of the examples concludes that “it is reasonable to state that when a proper factual inquiry leads to the conclusion that the transaction/arrangement is undertaken for bona fide reasons i.e. it pursues genuine commercial/economic objectives/motives, then the subjective element should not be satisfied as ‘it is unlikely that its principal purpose will be considered to be to obtain that benefit’… Therefore, the subjective element shall be interpreted in a ‘restrictive manner’ in the sense that if the transaction or arrangement at stake has economic or commercial justifications that out-weight the tax advantage obtained, then this element is not fulfilled”19.
We strongly agree with the author in the point that the restrictive interpretation is the one that makes the most sense and also in his interpretation that if there are bona fide commercial or economic reasons for a transaction/arrangement the subjective element should be considered not fulfilled and, therefore, the PPT rule should not be applied to the case. Unfortunately, in our opinion at least, that conclusion does not corresponds to the text of either the PPT rule itself or commentaries 180 and 181.
The reasons for our conclusion are that, first, the example given in commentary 180 clearly stipulates that the PPT could be applicable in the case of a real change in the place of residence even if that change had additional purposes “such as facilitating the sale of the property”, this means that even when there are bona fide commercial reasons, at least in principle, the PPT can in effect be applied, this means that the subjective element is considered fulfilled and negates the “exception” for sound commercial reasons (hard to imagine a more pertinent commercial reason on a sale than facilitating the sale itself).
On second place, the wording of commentary 181 clearly states that the fact that the form of the transaction has not been driven by tax considerations is additional to it been “inextricably linked to a core commercial activity”, as we had said before, a tall order indeed. Additionally, it is necessary to highlight that this commentary (181) is
11 directed to explain in more detail the conditions of the example given in the immediately precedent commentary (180) and therefore the conclusions about the limits of the subjective element based on the joint interpretation of this two commentaries should take precedence over the interpretation based on the examples given in commentary 182 because, as we will see in the next point, those examples seem to be directed more to the application of the PPT rule in general (ergo the interpretation of 180 and 181 together is more specific to the subjective element).
Once again, we would like to point out that this analysis is limited to understand what the PPT rule really says and what we should understand about it to complement it based on the examples. As the own commentaries take care to point out, the cases in paragraphs 182 and 187 are only examples and not requirements, therefore those examples cannot contradict the text of the PPT rule (or to be more precise, the examples cannot be interpreted as contradicting the text itself of the PPT rule).
Once established what the PPT rule says, determining if what it says results logical or applicable in a coherent way with the rest of the legal frame at large is a whole different history.
More to the point, as long as the taxpayer of the example of paragraph 180 effectively moves his residence to the country making the benefit available, why should the tax administration be authorized to question his motives? Isn’t moving one’s residence a right as long as all procedures are followed? The answer, in our humble opinion is yes. We (also humbly) think that the ECJ would agree. As we will see in detail in the next chapter, for the ECJ as long as there is a real change of residence in the case, there would be no abuse (therefore the operation should not be disregarded or the benefit denied).
1.2. Objective element (the all-important consequences)
Fortunately, we believe this element/test to be a lot more peaceful (if not necessarily entirely so). The objective element establishes that if the subjective element is fulfilled, the PPT rule should apply “unless it is established that granting that benefit in these circumstances would be in accordance with the object and purpose of the relevant provisions of this Convention”20.
Basically what the objective element entails is that to apply the PPT rule (even if the subjective element is fulfilled) granting the benefits of the treaty must be contrary to the object and purpose of the provisions that grant the benefit.
Some literature indicates that at this point one could wonder if the reference to the object or purpose of the “relevant provisions” means that those relevant provisions need to be interpreted in isolation (only those directly applicable to the case) or if the
12 provisions immediately applicable and its object and purpose need to be read in the context of the object and purpose of the tax treaty as a whole21.
In our opinion there is not much controversy here. As Chand indicates, most treaty provisions limit themselves to establish limits or thresholds, therefore you cannot really interpret them in isolation, as the object or purpose would only be to establish the limit or threshold22.
More importantly, the Vienna Convention establishes that “A treaty shall be interpreted in good faith in accordance with the ordinary meaning to be given to the terms of the treaty in their context and in the light of its object and purpose”23. Context is defined by the same convention as “in addition to the text, including its preamble and annexes: (a) any agreement relating to the treaty which was made between all the parties in connexion with the conclusion of the treaty; (b) any instrument which was made by one or more parties in connexion with the conclusion of the treaty and accepted by the other parties as an instrument related to the treaty”24.
The convention goes even further and stablishes that “There shall be taken into account, together with the context: (a) any subsequent agreement between the parties regarding the interpretation of the treaty or the application of its provisions; (b) any subsequent practice in the application of the treaty which establishes the agreement of the parties regarding its interpretation; (c) any relevant rules of international law applicable in the relations between the parties”25.
In accordance with article 6.1 of the MLI, which includes in the preamble of the tax treaties covered the text “Intending to eliminate double taxation with respect to the taxes covered by this agreement without creating opportunities for non-taxation or reduced taxation through tax evasion or avoidance (including through treaty-shopping arrangements aimed at obtaining reliefs provided in this agreement for the indirect benefit of residents of third jurisdictions),”, the object and purpose of a tax treaty is no longer only to avoid double taxation but also (reasonably enough) to avoid creating opportunities for non-taxation or reduced taxation through abuse.
Therefore, the provisions of the tax treaties should not be interpreted as granting, for example, double non-taxation (no tax burden in either country) unless it is clearly stated by the tax treaty that such a consequence is the desired effect or logical conclusion of the application of the treaty. Let’s take for example the Netherlands, its internal policy is to apply a participation exemption26, so if the Netherlands negotiates a tax convention in which dividends should not be subject to WHT at the source if they originate in an investment that implies control, it is quite clear that the intent and purpose of the treaty is that a shareholder receiving dividends from a company over
21 Chand, Vikram. Oc. Cit. Pages 23-27. 22 Chand, Vikram. Oc. Cit. Pages 24. 23 Vienna Convention. Article 31.1. 24 Vienna Convention. Article 31.2. 25 Vienna Convention. Article 31.3.
26 Not taxing dividends originated in a company over which the shareholder that receives the dividends has a controlling position (a percentage holding define in the law).
13 which it has control should not be taxed neither in the residence country (the Netherlands) nor in the country of source.
In this example both intend and object and purpose meet. If the threshold put in place by the treaty were 25% shareholding (to avoid taxation at the source) clearly the idea is that: a) any shareholder with that percentage is not to be taxed at source; and, b) that anyone that increments its shareholding to 25% is not to be taxed at source from the moment it gets to that participation onwards. If someone increments its participation from 15% to 25% with full intention of not been taxed anymore, the subjective element is fulfilled, but it is irrelevant, as one of the purpose of the provision is exactly not taxing him when and where he reaches that participation level.
Tax treaties try to establish situations and assign consequences to them. In a point that we will see in detail when we talk about the European case law on the matter, in principle and to have certainty and coherence, the problem should not be why someone decides to put himself in certain situation (which is more or less the PPT approach) but if one has really put himself in that situation or not (which is the approach of the EU case law). As always in life though, this situation is a choice between imperfect options, as one can be too uncertain to be legal and the other one too restrictive to be effective, in any case we will go into details on this point in chapter 3.
The points explained in the preceding paragraphs are made clear in example E of paragraph 182 of the commentary to article 29, in which such an increase of participation in order to gain access to the reduction of tax burden is put to the test. In that example, the conclusion is that the PPT rule would not apply “to a taxpayer who genuinely increases its participation in a company to satisfy this requirement [the threshold]” (emphasis added). This phrase is extremely interesting in the context of the PPT rule and we should keep it in mind as we move to the European case law. But first, the examples of the commentary.
2. Guide for the application of the PPT rule (going from the paper to reality)
As we have already mentioned, the most help provided by the commentary of the 2017 MOECD in regards to the application of the PPT rule are the examples included in commentaries 182 and 187 to article 29.
Based on those examples, one can identify what Chand calls “fact patterns”. Basically, facts patterns are groupings of the example provided, based on the similarity of the circumstances and the consequences assigned to those circumstances. The idea is that, based on those groupings of examples, we can infer rules to apply akin of general rules (we continue, it seems, looking for some kind of certainty). In simple, one would compare a specific case to each group of examples (the fact patterns) and when one finds the most similar group, one should be able to apply the consequences set for in the examples.
The idea is brilliantly simple and an indispensable exercise if one wants to really understand the PPT rule, application in reality though can probe a bit tricky. For example, as anyone that studies the case law established by the ECJ can attest, determining when the circumstances
14 of two specific cases are “similar” is a rather difficult endeavor and never a safe bet. Moreover, it is necessary to add that if a member country of the European Union were to apply the PPT rule and that application were to be questioned before the ECJ, the analysis would not be limited to determine if the facts of the case are similar to the examples but also if the consequence established therein are in line with EU Law and, more importantly still, if the examples provided are even relevant in an analysis based on EU law.
In this point we will use the classification used by Chand27 but not the same denominations nor his conclusions. We will follow his classification because of convenience and also because that author follows the most logical manner to organize the examples.
Basically the classification just organizes the cases in two main “families”, those examples to whom the PPT rule would apply and those to whom the rule does not apply. Once divided in said families by application of the rule, each of this families are divided in groups based on the kind of tax structure/operation (i.e. treaty shopping arrangements or investment by intermediaries).
The classification is as follows:
Examples in which the PPT rule is applied
2.1. Treaty shopping arrangements
This group includes examples A and B of paragraph 182 and examples A and C of paragraph 187.
Example A of paragraph 182 is referred to Tco28, a company resident in state T, who is a shareholder of Sco, a company resident in state S. There is no tax treaty between T and S, so dividends paid by Sco to Tco are subject to a WHT of 25% in S.
27 Chand, Vikram. Oc. Cit. Pages 27-38.
28 For brevity’s sake, unless otherwise indicated, Sco will always be a company resident in state S, Tco will always be a company resident in state T, Rco will always be a company resident in state R.
PPT Rule
Applies (Treaty benefits denied) 1. Treaty shopping arrangements 2. Contract splitting
Doesn not apply (Treaty benefits granted) 1. Direct investment scenarios 2. Investment by intermediaries
15 S does have a tax treaty with R state, according to which there is no WHT for payments of dividends to a resident of R and beneficially owned by said resident. Tco enters in an agreement with Rco an independent financial company resident in R and assigns the rights of payment of the dividends to Rco.
The commentary concludes that “it would be reasonable to conclude that one of the principal purposes for the arrangement under which TCO assigned the right to the payment of dividends to RCO was for RCO to obtain the benefit of the exemption from source taxation of dividends provided for by the State R-State S tax convention and it would be contrary to the object and purpose of the tax convention to grant the benefit of that exemption under this treaty-shopping arrangement”.
Example B of paragraph 182 relates to Sco, which a subsidiary of Tco. States T and S do not have a tax treaty between them, therefore dividends paid to Tco by Sco are subject to a 25% WHT in S. S has a treaty with R under which dividends paid to residents of R are subject to a 5% WHT. Tco enters into an agreement with Rco, a financial institution that has the condition of qualified person under paragraph 2 of article 29 of the R – S treaty.
Pursuant to the agreement, Rco acquires the usufruct of newly issued non-voting preferred shares of Sco for three years. Tco is the bare owner of the shares but Rco can collect the dividends. The amount paid by Rco for the usufruct is the present value of the dividends to be paid over the duration of the usufruct discounted at the rate at which Tco could borrow from Rco.
The conclusion of the commentary is that “it would be reasonable to conclude that one of the principal purposes for the arrangement under which RCO acquired the usufruct of the preferred shares issued by SCO was to obtain the benefit of the 5 per cent limitation applicable to the source taxation of dividends provided for by the State R-State S tax convention and it would be contrary to the object and purpose of the tax convention to grant the benefit of that limitation under this treaty-shopping arrangement”.
Example A of paragraph 187 deals with Rco a publicly traded company who owns all the shares of Sco. Tco wants to purchase a minority interest in Sco, but believes that given the fact that T has no tax treaty with S the WHT on the dividends from S would make the investment uneconomic. Rco proposes instead that Sco issues in its favor preferred shares paying a fixed return of 4% plus a contingent return of 20% of Sco nets profits. The shares mature in 20 years. Tco will enter into a separate contract with Rco pursuant to which it will pay to Rco an amount equal to the issue price of the preferred shares and will receive from Rco the redemption price after the maturity of the shares. During the 20 years Rco will pay to Tco an amount equal to 3.75% of the issue price plus 20% of Sco’s net profits.
The conclusion of the commentary is that this arrangement is a conduit arrangement and the PPT rule applies because “one of the principal purposes for RCO participating in the transaction was to achieve a reduction of the withholding tax for TCO”.
16 Example C of paragraph 187 is about Tco which loans 1 million to Sco, a wholly owned subsidiary of Tco, in exchange of a note. There is no T–S tax treaty. Tco then notice that it can avoid the WHT on the interests by assigning the note to Rco, another wholly owned subsidiary, because the R–S treaty does not allow WHT on interests’ payments. Tco assigns the note to Rco in exchange for note issued by Rco to Tco. The note issued by Sco pays interest at 7 % and the note issued by Rco pays interest at 6%.
The conclusion of the commentary is that “The transaction through which RCO acquired the note issued by SCO constitutes a conduit arrangement because it was structured to eliminate the withholding tax that TCO would otherwise have paid to State S”.
Clearly this are four cases of treaty shopping because in all cases a third party is inserted in the operation merely because that third party will grant access to treaty benefits because of its place of residence.
In these cases, the elements or tests of the PPT rule are clearly met. The subjective element is fulfilled given that the main reason why the structures are established in the form that they are is because of the tax benefits granted by the structures.
This pass-through or conduit arrangements examples also allow us to notice a detail that can seem minor but is necessary to keep in mind to analyze more complex structures. As we have already explained, the PPT rule only applies if the granting of the benefits is contrary to the object and purpose of the treaty (objective element/test), therefore these examples confirm that the object and purpose of treaties is to grant benefits only to residents of one or two of the treaty partners29.
The problem with these examples (from a PPT rule perspective) is that the intermediary who has access to the benefits is not really a part of the operation (not the real owner of the shares and beneficiary of the dividends, not the real creditor and beneficiary of the interests) it is only used by a third party because that third party does not have access to the treaty. Sometimes it is argued that part of the reasons a state enters into a tax treaty is to promote not only direct investment (from one treaty partner to the other) but to be use as a conduit of indirect investments (coming from third states, that have no treaty with the other treaty partner), that was for example the case of India and the Mauritus. This interpretation though has a little problem: the text of the treaties and the commentaries of the MOECD never allude to that goal, they restrict themselves to the bilateral nature of the treaty and, therefore, direct investments. This is also confirmed by provisions like the beneficial ownership clause.
Following article 4 of the MOECD, “resident” is a concept that is defined by the local law of the tax treaty partners. In the examples is clear that the conduit companies are residents in the pass-through jurisdiction (otherwise there would be no access to the treaty benefits) but the problem is that although formally part of the operation, there is no real substantial economic activity from that resident conduit to the jurisdiction
17 of the treaty partner, so the object and purpose of the treaty, to promote direct investment without double taxation and without non-taxation or undue low taxation is not fulfilled.
The main principle that can be inferred from this examples is artificiality. As we have already indicated, the problem here is that the conduits lack substance, they are in the operation only to obtain access to the treaty and the benefits, they are never really receiving the dividends or the interests, so in reality the situations that the treaty regulates never manifest themselves but only a formal appearance of them.
One last point on this matter. It is quite clear than when a structure is artificial chances are it is abusive and should be subject to the PPT rule30, but that does not mean that under the PPT rule a structure needs to be artificial to be considered abusive. The wording of the PPT rule does not requires artificiality and therefore the “principle” extracted from these examples cannot be considered necessary for the application of the rule, this will be important to analyze the rule in comparison with the EU case law.
2.2. Contract splitting: circumvention of the twelve-month threshold
This group includes example J of paragraph 182. This example is about Rco, which successfully bids to construct a power plant for Sco (an independent company). The project will last 22 months, but during the negotiations it is split in two contracts, one awarded to Rco and the other to SUBCO, a newly wholly-owned subsidiary of Rco in state R. Even with the split of the contracts Rco will be jointly and severally liable with SUBCO for the performance of this subsidiary obligations under its contract with Sco.
The conclusion of the commentary is that “it would be reasonable to conclude that one of the principal purposes for the conclusion of the separate contract under which SUBCO agreed to perform part of the construction project was for RCO and SUBCO to each obtain the benefit of the rule in paragraph 3 of Article 5 of the State R-State S tax convention. Granting the benefit of that rule in these circumstances would be contrary to the object and purpose of that paragraph as the time limitation of that paragraph would otherwise be meaningless”.
Once again, in this case the main element is artificiality. From the facts of the case it is clear that Rco is the company carrying out the contract and SUBCO is put in the middle just to avoid the threshold.
Taking into consideration the four examples explained in the preceding point and the example of this one, is clear that artificiality triggers the application of the PPT rule (as long as the objective element is fulfilled), what remains to be determined is what constitutes artificiality.
18 Examples in which the PPT rule is not applied
2.3. Direct investment scenarios: two states situations
This group includes examples C, D and E of paragraph 182.
Example C relates to Rco, a company that produces electronic devices and is expanding. For this purpose, it is planning to open a plant in a developing country to lower its manufacturing costs. Given that state S is the only country with which R has a tax treaty, Rco decides to build the factory there.
Here the commentary establishes that the PPT would not apply for two reasons: 1) “it is clear that the principal purposes for making that investment and building the plant are related to the expansion of RCO’s business and the lower manufacturing costs of that country… it cannot reasonably be considered that one of the principal purposes for building the plant is to obtain treaty benefits”; 2) “given that a general objective of tax conventions is to encourage cross-border investment, obtaining the benefits of the State R-State S convention for the investment in the plant built in State S is in accordance with the object and purpose of the provisions of that convention”. In example D, Rco, a collective investment vehicle, manages a diversified portfolio of investments in the international financial market. Rco holds 15% in shares of companies resident in S from which it receives annual dividends. The R–S tax treaty reduces the WHT in S from 30% to 10%, this reduction is taken into account by Rco in its investment decisions. Most of Rco investors are R residents but some of them are residents of states with which S does not have a tax treaty.
The facts of the example state that the investor’s decisions to invest in Rco are no driven by any particular investment made by Rco, and Rco investment strategy is not influenced by the tax positions of its investors.
In this example, the commentary indicates that the mere fact that Rco takes into account the tax benefits under the R–S treaty is not enough to trigger the application of the PPT rule, for that purpose “it is necessary to consider the context in which the investment was made. In this example, unless RCO’s investment is part of an arrangement or relates to another transaction undertaken for a principal purpose of obtaining the benefit of the Convention, it would not be reasonable to deny the benefit of the State R-State S tax treaty to RCO”.
2.4. Investments by intermediaries: three (or more) states situations
The examples in this point are contained mostly but not exclusively in paragraph 187, which is related to conduit companies. All the conduit companies in the examples have cleared the Limitation of Benefits (LOB) clause but they must still clear either the PPT rule (a GAAR) or SAARs31 against conduit companies. For the purposes of this work we will limit ourselves to the PPT rule, but it is necessary to state that our conclusions
19 should also be able to be used for SAARs, as we are discussing limits in practice for anti-abuse rules, so in the end SAARs would have to clear similar case law hurdles.
2.4.1. Investment by an operating company that satisfies the LOB Active Conduct Test
This group includes example B of paragraph 187.
This example is about Sco, a company that has issued only one class of shares 100% owned by Rco, at the same time the shares of Rco are wholly owned by Tco. State S and State R have a tax treaty but there is no tax treaty between state S and state T. Rco manufactures electronics and Sco acts as its exclusive distributor in S. Rco is entitled to benefits in accordance with the LOB clause even if its sole shareholder is resident of a third country.
Here the commentary concludes that “In the absence of evidence showing that one of the principal purposes for setting up that structure was to flow-through dividends from SCO to TCO, this structure would not constitute a conduit arrangement”. There must be said that the commentary is careful to also indicate that “This example refers to a normal commercial structure where RCO and SCO carry on real economic activities in States R and S. The payment of dividends by subsidiaries such as SCO is a normal business transaction”.
As good intentioned as it may be, the help provided by this example is in our opinion really limited in what regards to the PPT rule. Basically what it says is that if everything is well (normal commercial structure and normal business transaction) then everything is well (no application of PPT rule). The perennial question is when a structure/transaction should be considered normal from a commercial perspective but here, it seems, we will not find any answers.
2.4.2. Conducting international businesses through the creation of an operating and holding company
This group includes example H of paragraph 182.
In this example Tco is a company listed in state T stock exchange and it is the parent company of a multinational enterprise with several businesses internationally. Different circumstances related to the business (transportation, time differences, lack of enough multilingual workers, etc) make it difficult to manage the business from T, therefore Tco establishes Rco, a subsidiary resident in R where there are developed financial and trade markets and an abundance of highly qualified workers. Rco becomes the base of operations for Tco businesses. As part of the development of new businesses, Rco provides equity and loans to Sco a subsidiary. States R and S have a tax treaty.
Here the commentary indicates that “RCO has been established for business efficiency reasons and its financing of SCO through equity and loans is part of RCO’s active conduct of a business in State R. Based on these facts and in the absence of other facts that would indicate that one of the principal purposes for
20 the establishment of RCO or the financing of SCO was the obtaining of the benefits of the treaty between States R and S”, therefore the PPT would not apply in this case.
From this example two things are made clear: 1) conduits arrangements are not per se abusive; 2) not every acquisition of treaty benefits through a conduit is considered treaty shopping (or at least a forbidden one).
2.4.3. Acquisition of a holding company that owns shares and patents
This group includes example F of paragraph 182.
This example is about Tco a publicly traded company dedicated to the Information Technology (IT) business that has grown considerably in the last years through a merger and acquisitions policy. Another company, Rco, is the family owned holding of a group also active in the IT business. Most of the shareholders of Rco are residents in R and the company’s main assets are patents developed in R and shares of its subsidiaries in several countries, including Sco. State R has many tax treaties that provide lower or no taxation for dividends and royalties (including one with state S). Tco has long been interest in acquiring Rco business so it makes an offer to buy all the shares of Rco.
Here the commentary indicates that “in the absence of other facts and circumstances showing otherwise, it would be reasonable to conclude that the principal purposes for the acquisition of RCO are related to the expansion of the business of the TCO group and do not include the obtaining of benefits under the treaty between States R and S. The fact that RCO acts primarily as a holding company does not change that result. It might well be that, after the acquisition of the shares of RCO, TCO’s management will consider the benefits of the tax treaty concluded between State R and State S before deciding to keep in RCO the shares of SCO and the patents licensed to SCO. This, however, would not be a purpose related to the relevant transaction, which is the acquisition of the shares of RCO”.
Basically, what this example indicates is that if as part of a real business transaction a company acquires a structure that has tax treaty benefits in place, which are in accordance with the corresponding treaties, then keeping those structures in place is not abusive even if said structure is not aligned with its usual business structures (in this case, for Tco the usual would be centralize the patents in T). At its core this means that a company is not forced to take a less tax efficient route, when it has entered into it by legitimated commercial reasons.
It is interesting to wonder though if the PPT rule would still be considered not applicable if after the acquiring Rco, Tco decides to centralize the totality of its patents in R to take advantage of the treaty network of that state. We believe that the result should be the same that in the example.
21
2.4.4. Intra group services company
This group includes example G of paragraph 182.
This example is about Tco a publicly traded company that owns directly or indirectly several subsidiaries in different countries. One region has five of such companies and Tco decides to establish Rco in one of those countries in order to provide services (management and accounting, legal advice, human resources, etc) through that company to the others in the region. The decision to establish Rco is based in the skilled labor, reliable legal system and comprehensive tax treaty network of state R.
The commentary concludes that “Assuming that the intra-group services to be provided by RCO, including the making of decisions necessary for the conduct of its business, constitute a real business through which RCO exercises substantive
economic functions, using real assets and assuming real risks, and that business
is carried on by RCO through its own personnel located in State R, it would not be reasonable to deny the benefits of the treaties concluded between State R and the five States where the subsidiaries operate unless other facts would indicate that RCO has been established for other tax purposes or unless RCO enters into specific transactions to which paragraph 9 would otherwise apply” (emphasis added).
This example is really interesting because it seems to add some elements to the analysis of abusive structures. It mentions the “real businesses” and then it refers to “substantive economic functions, using real assets and assuming real risks”.
This first seems to allude to lack of artificiality, hence real businesses. On second place, referencing functions, assets and risk seems a clear nod to transfer pricing rules. It also mentions personnel (people) and their locations, also elements of transfer pricing rules. For transfer pricing purposes, profits follow risk because risk is understood as the main element of business activity, that logic is embraced in the conclusion to this example.
The principle that we can formulate from this example is that real economic activity means the coordinated use of people and assets, carrying out functions and assuming a risk in a proportion (substantive) appropriate to the business. The locations of said business (an element of the upmost importance to determine abuse of a treaty) will be the place where those people and assets are located. This is particularly helpful because it goes to the core of what should be considered legitimate or bona fide economic reasons and what a business related conduit means.
2.4.5. Intra group financing company
22 In this example, Tco is a publicly traded company that is parent of a worldwide group of companies including Rco and Sco. T has no treaty with S, it is not stated but it should be assumed that R does have a tax treaty with S.
Sco conducts the business of Tco in S while Rco coordinates the financing of all subsidiaries and maintains the centralized cash management accounting for the whole group. Rco also takes care of the treasury and currency risk management functions. These activities reduce transactions costs and overhead and other fixed costs for the group. Rco has 50 employees which, by the stated facts of the case, reflects the size of its business activities.
Tco lends to Rco 15 million in currency A (worth 10 million in currency B) in exchange for a 10 year note at 5% interest annually. On the same day Rco lends 10 million in currency B to Sco in exchange for a 10 year note at 5% interest annually. Rco manages the currency risk by entering into forward currency contracts.
The commentary concludes that “In this example, RCO appears to be carrying on a real business performing substantive economic functions, using real assets
and assuming real risks; it is also performing significant activities with respect
to the transactions with TCO and SCO, which appear to be typical of RCO’s
normal treasury business. RCO also appears to be bearing the interest rate and currency risk. Based on these facts and in the absence of other facts that would
indicate that one of the principal purposes for these loans was the avoidance of withholding tax in State S, the loan from TCO to RCO and the loan from RCO to SCO do not constitute a conduit arrangement” (emphasis added).
The conclusion to this example adds new elements to the analysis of example G of paragraph 182. The first one is the references to typical activities and the second one is the reference to (economic) capacity to bear the risk.
The commentary concludes that in this case the PPT rule would not apply and Chand agrees, because the subjective element of the rule would not have been satisfied (basically because Rco was established with a valid business purpose and is a real business)32.
We humbly disagree and think that limiting the analysis to the economic reality of Rco misses the point. This example is not about the establishment of Rco or its real existence, it is about a specific transaction, a loan of 10 million B currency. If the loan is made directly by Tco it would not be covered by a treaty but if made by Rco it will, therefore on the same day back to back operations are made in which the money is lend (is importance to notice that the example specifically indicates that the money is lend to Rco, no contributed or otherwise send there as part of its function centralizing the cash) by Tco to Rco and by Rco to Sco, applying exactly the same interest rate.
23 The reference to transfer pricing concepts in this example also seems somehow ironic. The whole point of transfer pricing rules is to establish a market price for related companies’ transactions, in that regard the analysis would ask if an independent company would borrow money in one currency at a cost of 5% annually to exchange that money to another currency and lend the whole amount exchanged to another company for a remuneration of 5% annually, all that while assuming the exchange rate risk. We think that, the most likely answer would be no, because that operation does not make economic sense, as it involves assuming a risk (or the cost of managing it) without a remuneration (as both 5% interest –incoming and outgoing– should more or less cancel each other).
In this sense, analyzing the operation as a whole (which is the point of the PPT rule and the anti-conduit rules) it is clear that it is reasonable to assume that the main purpose for the form that the operation took was to gain a tax advantage otherwise unavailable and therefore the PPT should apply.
In any case, having expressed our opinion on the matter, it is clear that the rule that one can extract of this example is that as long as the conduit company is a proper real company and the transaction involved is part of its natural or typical business activity, structuring the activities through said company does not constitute abuse for the purposes of the PPT rule.
If this is true about related companies, we fail to see why this wouldn’t apply to third companies like banks33. Although it is quite obvious that then the operation is less attractive, as a third party conduit would certainly charge a fee for its participation, unlike Rco in the example.
2.4.6. Intra group intellectual property licensing
This group includes example E of paragraph 187.
The example is about Rco, the holding company of a manufacturing group in the technology business. Research is conducted by the subsidiaries and when a patent is developed it is licensed to Rco who in time licenses it the subsidiaries that need it. For these operations Rco keeps a small spread and most of the profits go to the subsidiary that developed the IP. Tco has developed a process that will increase substantially the profitability of all Rco subsidiaries, including Sco. State S has no treaty with T, and it is not indicated but it should be assumed that state R does. Following its usual practice Rco licenses the technology from Tco and sublicenses it to its subsidiaries, including Sco who pays a royalty to Rco, who in time passes most of it to Tco.
The commentary establishes that “there is no indication that RCO established its licensing business in order to reduce the withholding tax payable in State S.
24 Because RCO is conforming to the standard commercial organization and
behavior of the group in the way that it structures its licensing and sub-licensing
activities and assuming the same structure is employed with respect to other
subsidiaries carrying out similar activities in countries which have treaties which offer similar or more favorable benefits, the arrangement between SCO,
RCO and TCO does not constitute a conduit arrangement” (emphasis added). There are two central elements to this conclusion. First is the reference to “standard” commercial organization and behavior, second the comparison with other transactions or arrangements similar in nature. The commentary makes reference to situations with “similar or more favorable benefits”, which should make clear then that there were more beneficial tax situations not taken. The question arise then what should be the conclusion if there are several arrangements of which only one has a more favorable tax treatment, in that case there would be no “similar or more favorable” situations, we believe that in that case the conclusion should be the same, given preponderance to the fact that the practice is coherent with the standard commercial practice of the company.
The principle to extract here would be then that bona fide commercial reasons can be determined based on a usual or standard practice, as long as this can be compared to similar situations where the practice or structure are the same and the result more tax efficient. This would probe then that the structure is not put in place for tax purposes, not fulfilling therefore the subjective element.
2.4.7. Funding by an unrelated bank in light of a bank deposit
This group includes example D of paragraph 187.
The example concerns Tco who owns all of the shares of Sco. T has no treaty with S. As the banking system in T is unsophisticated Tco does all its banking with Rco, a bank unrelated to Tco and Sco. Given this situation Tco usually maintains large deposits with Rco. When Sco needs a loan, Tco suggests to take up the loan with Rco given its knowledge of the inner workings of group. Sco discusses the loan with several banks which all offer similar conditions to those proposed by Rco. In the end Sco takes the loan from Rco in part because the treaty between S and R would have a lower tax burden on the interests than a loan taken from a bank in T.
The example indicates “The fact that benefits of the treaty between States R and S are available if SCO borrows from RCO, and that similar benefits might not be available if it borrowed elsewhere, is clearly a factor in SCO’s decision (which may be influenced by advice given to it by TCO, its 100 per cent shareholder). It may even be a decisive factor, in the sense that, all else being equal, the availability of treaty benefits may swing the balance in favor of borrowing from RCO rather than from another lender” (emphasis added).
25 This would mean that the subjective element is in fact fulfilled, although the example takes care to indicate that “However, whether the obtaining of treaty benefits was one of the principal purposes of the transaction would have to be determined by reference to the particular facts and circumstances”.
The conclusion of the commentary set two situations, on the first one indicates that “In the facts presented above, RCO is unrelated to TCO and SCO and there
is no indication that the interest paid by SCO flows through to TCO one way or another. The fact that TCO has historically maintained large deposits with RCO is also a factor that indicates that the loan to SCO is not matched by a specific deposit from TCO. On the specific facts as presented, the transaction would
therefore likely not constitute a conduit arrangement” (emphasis added). On the other side, the “If, however, RCO’s decision to lend to SCO was dependent on TCO providing a matching collateral deposit to secure the loan so that RCO would not have entered into the transaction on substantially the same terms in the absence of that deposit, the facts would indicate that TCO was indirectly
lending to SCO by routing the loan through a bank of State R and, in that case,
the transaction would constitute a conduit arrangement” (emphasis added). The main element that determines what should be considered a conduit agreement in these kind of situations is, or at least seems to be, if there is a matching deposit. This even though making loans is clearly the usual business activity of Rco (a bank in the example). Basically what the example seems to indicate is that if Rco uses the funds of Tco already and habitually at his disposition to make the loan to Sco, initially there would be no conduit arrangement, but if there is a specific matching deposit then there would be.
At this point, we fail to see any major difference between this second scenario and the example dealt with in point 2.4.534. In that example there are corresponding “mirror” loans channeled through a related treasury company, but the conclusion in that case is that the PPT rule would not apply. Once again, we fail to see any significant different that would warrant the different conclusion. What is more, establishing that the intermediary can be a related company but not an independent party seems at the very list counterintuitive.
If the idea is to combat avoidance through a rule that incorporates a subjective element, the way more readily (at least initially) to discard the avoidance intention or tax purposes would be the presence of an independent party. We don’t mean that the presence of a third party means automatically that there is no abuse, but we fail to see how the requirements seem to be stricter when a third party is involved than when the operation is carried out by related parties.
Given this dichotomy, the principle that can be extracted from this example requires a comparison (or to be pondered in some kind of way) with the example of 2.4.5 which we will do in chapter 3.
