BEPS Action 6 – Challenges for Existing Holding Structures?

The OECD’s final report on “BEPS Action 6: Preventing the Granting of Treaty Benefits in Appropriate Circumstances” identifies tax treaty abuse, in particular, tax treaty shopping as one of the most important sources of BEPS concerns.  This is where a taxpayer inappropriately uses a tax treaty (also known as a double tax agreement) to reduce their taxes.

To give some context, tax treaties are designed to divide up which countries can tax the income of individuals and businesses where the transaction involves the two countries.  Some tax treaties are more favourable to others, so, as an example, sometimes you can have a situation where if you go directly from Country A to Country B you are in worse shape tax-wise than if you go from Country A to Country B via Country C.

The final report is organised into three sections to cover the three areas identified by Action 6, being:

  1. Tax treaty provisions and domestic rules to prevent granting of benefits under tax treaties in inappropriate circumstances;
  2. Clarification that tax treaties are not intended to be used to generate double non-taxation; and
  3. Identification of tax policy considerations that countries should consider before deciding to enter into a tax treaty with another country.

In the final report, countries have committed to adopt a minimum standard in their tax treaties.  The minimum standard requires countries to include a clear statement in the title and preamble of their tax treaties that the countries enter into a tax treaty to eliminate double taxation without creating opportunities for non-taxation or reduced taxation through tax evasion or avoidance, including through treaty shopping arrangements.  In addition, countries will implement the minimum standard by including in their treaties either a Limitation on Benefits (LOB) clause plus anti-conduit rules, a Principal Purpose Test (PPT) or an LOB in combination with a PPT.

The implementation of such a minimum standard will mean that certain existing holding structures may no longer be eligible for treaty benefits.

BEPS Action 6


BEPS Action 6 Paragraph 1 – 6 of a new “Article 10 (Entitlement to Benefits)” contains the model treaty provisions of the LOB rule.

The LOB rule, as proposed in the final report, limits the availability of treaty benefits to persons that are “qualified persons”.  Whether or not a person is a “qualified person” is determined by objective tests that consider characteristics such as legal structure, ownership, or activities, ensuring a link between the person and resident country.

Under the proposed LOB rule, a “qualified person” would include a resident entity that is an individual; resident countries party to the tax treaty, its political subdivisions and entities that it wholly owns; certain publicly listed entities and affiliates; certain charities and pension funds; entities meeting certain ownership requirements and certain CIVs.  If an entity is not a “qualified person”, certain alternative tests apply as follows: (i) active conduct of a business test; (ii) derivative benefits test; and (iii) discretionary relief.

However, the final report notes that further work on the LOB rule is necessary and it refers to the proposed by the United States of America (US) to modify the LOB rule in the US Model Treaty.

On 17 February 2016, a new version of the US LOB rule was published. This new US LOB rule, which contains a headquarters provision, will be taken into consideration to finalise the LOB rule to be included in the OECD Model Treaty.


Paragraph 7 of the new Article 10 “Entitlement of Benefits” contains the PPT rule.  Under this provision, treaty benefits would be denied when it is reasonable to conclude, having regard to all relevant facts and circumstances, that obtaining treaty benefits 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 provisions of the relevant tax treaty.  Draft commentary in respect of paragraph 17, including examples on the application of PPT, has been included in the final report.  The commentary provides that to determine the principal purpose of an arrangement, it is necessary to undertake an objective analysis of the aims and objects of the persons involved in putting that arrangement or transaction in place.  It requires consideration, on a case by case basis, of all circumstances surrounding the arrangement or event.

Latest developments

The final report notes that further OECD work is required with respect to the treaty entitlement of non-collective investment vehicles (non-CIVs) and pension funds and indicates that such work would benefit from consultation with stakeholders.

On 29 February 2016, the OECD released a discussion draft on the treaty residence of pension funds.  Submissions closed on 1 April 2016.

On 24 March 2016, the OECD release a consultation document on the treaty entitlement of non-CIV funds.  Submissions closed on 22 April 2016.

BEPS Action 6- Implications and actions to consider

The final report reflects agreement that countries will commit to adopting a minimum standard in its tax treaties to prevent treaty abuse and in particular treaty shopping.

The anti-abuse rules included in the final report will be among the changes proposed for inclusion in a multilateral instrument.  The OECD is developing a multilateral instrument in order to allow countries to swiftly amend their tax treaties to implement the tax treaty-related BEPS recommendations.  The multilateral instrument is intended to be finalised and open for signing by the end of 2016.

Australia will act to incorporate the OECD’s recommendations into our treaty practice per the Australian Federal Budget 2015-16.

It is clear that these developments will impact commonly used holding structures.  It will be necessary for holding companies to consider various actions to mitigate the risk that the holding company will no longer be entitled to treaty benefits.  These actions may include potential restructuring of the group, monitoring of the latest developments with respect to Action 6, evaluating how any proposed changes may impact the holding structures, and staying informed about developments in the OECD and in the countries where the group operates or invests.

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