Direct Tax Laws & International Taxation · Fundamentals of BEPS

Treaty Abuse, PE Status and Transfer Pricing Actions (BEPS Actions 6, 7, 8-10)

Updated 5 October 2026 · Fact-checked

These BEPS actions close gaps that let groups shift profit without real activity. Action 6 stops treaty shopping using a principal purpose test, limitation on benefits and specific anti-abuse rules. Action 7 widens PE definitions. Actions 8-10 tie transfer pricing to value creation. Solve by naming the action, applying its test to the facts, and concluding.

Understand Treaty Abuse, PE Status and Transfer Pricing Actions

BEPS means base erosion and profit shifting. Groups used gaps between countries' tax rules to move profit to low-tax places where little real activity happened. The OECD/G20 project produced 15 Action Plans. This page covers three clusters that attack misuse of treaties, of the PE concept and of transfer pricing.

Action 6 (treaty abuse). Treaty shopping means setting up a conduit entity in a treaty country only to get treaty benefits it would not otherwise have. The minimum standard requires countries to state in their treaties that they do not intend to create opportunities for non-taxation or reduced taxation, and to adopt one of three approaches: a principal purpose test (PPT) alone; PPT plus a simplified or detailed limitation on benefits (LOB) clause; or a detailed LOB plus a mechanism to deal with conduit arrangements. Under the PPT, a treaty benefit is denied if it is reasonable to conclude, having regard to all facts and circumstances, that obtaining the benefit was one of the principal purposes of the arrangement, unless granting it would be in line with the object and purpose of the treaty. The LOB is objective: only a qualified person, such as a listed company, a person meeting ownership and base erosion conditions, or one carrying on active business, gets benefits.

Action 7 (artificial avoidance of PE status). A PE creates source-country taxing rights over business profits. Groups avoided PE status in two main ways: commissionaire arrangements, where a local agent sells in its own name but for a foreign principal, and splitting contracts or activities into small pieces. The changes widen the agency PE so that a person who habitually concludes contracts, or habitually plays the principal role leading to contracts routinely concluded without material modification, creates a PE. The exceptions for specific activities, such as storage, delivery or purchasing, now apply only if the activity is preparatory or auxiliary. An anti-fragmentation rule stops a group from splitting cohesive operations among related entities.

Actions 8-10 (transfer pricing and value creation). The rule is that transfer pricing outcomes must match value creation. Action 8 covers intangibles: legal ownership alone does not entitle a group entity to the returns. Entities performing, controlling and funding development, enhancement, maintenance, protection and exploitation (DEMPE functions) earn the return. Action 9 covers risks and capital: a risk is allocated to the party that controls it and has the financial capacity to bear it. A funder that does not control the risk earns no more than a risk-free return. If it also lacks the financial capacity to bear the risk, the risk is allocated elsewhere. Action 10 covers other high-risk transactions: commodity transactions, low-value-adding intra-group services and recharacterising transactions that are not commercially rational.

In all three clusters, the question is the same: do tax results follow real activity, real people and real economic substance?

Key rules to remember

Action 6 minimum standard: Treaty preamble statement + (PPT alone, or PPT + simplified or detailed LOB, or detailed LOB + conduit rule); The three approaches are alternatives. Every country must at least meet the minimum standard.
Principal purpose test: Benefit denied if: obtaining the benefit was one of the principal purposes of the arrangement AND granting it is not in line with the treaty's object and purpose; Objective and fact based: it asks what is reasonable to conclude on all facts and circumstances. It need not be the sole or main purpose. The benefit is not denied only if the taxpayer establishes that granting it accords with the treaty's object and purpose.
Limitation on benefits: Benefit granted only if the resident is a 'qualified person' (listed, ownership/base erosion test, active business, etc.); Objective and entity based. It is rule-driven, unlike the PPT.
Agency PE (Action 7): Person acting on behalf of an enterprise habitually concludes contracts, or habitually plays the principal role leading to contracts concluded without material modification, and those contracts are (a) in the name of the enterprise, or (b) for transfer of ownership of, or grant of the right to use, property owned by the enterprise or which it has the right to use, or (c) for provision of services by the enterprise = PE; Covers commissionaire arrangements. An independent agent acting in the ordinary course of its business is excluded. The exclusion does not apply to a person acting exclusively or almost exclusively for one or more closely related enterprises.
Specific activity exemptions: Storage, display, delivery, purchasing, collecting information: exempt only if preparatory or auxiliary; Anti-fragmentation applies where related entities carry on complementary functions forming one cohesive business.
Value creation principle (Actions 8-10): Return follows function, asset and risk performed and controlled, not legal title or contract; For intangibles, DEMPE functions drive the return. For risk, control plus financial capacity drive allocation.

How to solve Treaty Abuse, PE Status and Transfer Pricing Actions questions

Use this order for any scenario question on these actions. It keeps the answer in provision, facts, conclusion form.

1Identify the action being tested from the facts: a conduit holding company points to Action 6, a local agent or small office points to Action 7, and a group IP or funding entity points to Actions 8-10.
2State the rule in one or two lines, with its conditions.
3For Action 6, check LOB conditions first if the question mentions ownership or listing. Then apply the PPT with facts on substance, timing and commercial reasons.
4For Action 7, check who concludes contracts, whether the agent is independent, whether activities are preparatory or auxiliary, and whether related entities split a single business.
5For Actions 8-10, list who performs and controls DEMPE functions, who controls and can bear the risk, and who only provides funding.
6Conclude on who gets the treaty benefit, whether a PE exists, or which entity earns the residual return.
7Mention the practical result: benefit denied, profits attributed to the PE, or profit reallocated. Add that India implements these through the MLI and its domestic provisions where the question asks.

Quickest way: Three-question shortcut

When to use it: Use it for MCQs and for short-note answers where time is tight.

Ask: is there a conduit or a tax-motivated structure? If yes, it is Action 6, so think PPT or LOB.
Ask: does someone in the source country work for the foreign enterprise in a way that leads to contracts? If yes, it is Action 7 and a PE is likely.
Ask: does the legal owner or funder lack people who do the real work? If yes, it is Actions 8-10 and profit moves to the entity with control and substance.

Common mistakes in Treaty Abuse, PE Status and Transfer Pricing Actions

Saying the PPT applies only when tax avoidance is the sole purpose.
Students remember 'principal purpose' as 'main purpose'.
Fix: Write that it is enough if obtaining the benefit was one of the principal purposes. Then add the object and purpose escape.
Treating LOB and PPT as the same test.
Both stop treaty shopping, so the notes blur together.
Fix: Say LOB is objective and entity based, and PPT is a fact based, transaction based test using a 'reasonable to conclude' standard. State that the minimum standard allows PPT alone or with LOB.
Assuming a commissionaire arrangement never creates a PE because the agent sells in its own name.
Old rules focused on contracts concluded in the principal's name.
Fix: Under the widened rule, habitually playing the principal role leading to contracts routinely concluded can create a PE, even if the contract is in the agent's name.
Treating every storage or purchasing activity as exempt from PE status.
Students recall the list of exemptions but not the condition.
Fix: Write that exemption applies only if the activity is preparatory or auxiliary, and check for fragmentation among related entities.
Giving the IP return to the entity that legally owns the intangible.
Legal title looks like the obvious answer.
Fix: Allocate the return to entities performing and controlling DEMPE functions. A legal owner without those functions gets only a limited return.
Allocating all risk-related profit to the entity that funds the project.
Funding feels like bearing risk.
Fix: Check control over the risk and financial capacity. Funding without control earns no more than a risk-free return.

Worked examples

Example 1

Alpha Holdings is incorporated in a treaty country, with no employees and a rented address. It is wholly owned by a parent in a third country that has no treaty with India. Two months after Alpha was set up, the parent funded it to acquire a 30% stake in an Indian company. Assume the treaty gives a reduced dividend rate only if the recipient holds at least 25% of the Indian company's capital. Alpha then claimed the reduced rate. Advise whether the benefit can be denied under Action 6.

Show the solution

Rule: under the PPT, a treaty benefit is denied if it is reasonable to conclude, having regard to all facts and circumstances, that obtaining it was one of the principal purposes of the arrangement, unless granting it would be in line with the treaty's object and purpose.
Facts: Alpha meets the assumed 25% shareholding condition on paper, since it holds 30%. But it has no staff, no premises of substance and no business function. It was set up just before the investment and is owned and funded by its parent in a country with no treaty with India.
Inference: the timing, the absence of substance and the fact that the parent could not claim any treaty benefit directly make it reasonable to conclude that obtaining the treaty benefit was one of the principal purposes of the arrangement.
Object and purpose: treaties aim to promote real cross-border investment between the two countries. They do not aim to give benefits to a third-country investor through a conduit.
If the treaty also has an LOB clause, Alpha would likely fail as a qualified person, since it is not listed, has no active business and is owned by a resident of a third country, so the ownership and base erosion tests are unlikely to be met. This depends on the actual clause.

Answer: On these facts, the treaty benefit can reasonably be denied under the PPT. Alpha is a conduit with no substance, and granting the benefit would not be in line with the treaty's object and purpose. The PPT is fact based, so the conclusion rests on these facts.

Example 2

BetaCo, a foreign company, sells computer hardware in India through IndiaSell Pvt Ltd. IndiaSell's staff negotiate with customers, finalise all key terms, and BetaCo signs the contracts without any change. IndiaSell works only for BetaCo, is controlled by BetaCo on how it sells, and is paid a commission. BetaCo says it has no PE because IndiaSell does not sign contracts in BetaCo's name. Examine.

Show the solution

Rule (Action 7): a person acting on behalf of an enterprise who habitually concludes contracts, or habitually plays the principal role leading to contracts routinely concluded without material modification, creates an agency PE. The contracts must be in the enterprise's name, or for transfer of property the enterprise owns or has the right to use, or for services by the enterprise.
Facts: IndiaSell negotiates and finalises the key terms. BetaCo signs without change. This is the principal role leading to contracts concluded without material modification. The contracts are BetaCo's own contracts for sale of hardware that BetaCo supplies.
Independence: the independent agent exclusion needs an agent that is legally and economically independent and acts in the ordinary course of its business. It is denied to a person acting exclusively or almost exclusively for one or more closely related enterprises. BetaCo controls IndiaSell, so they are closely related. IndiaSell works exclusively for BetaCo, so the independent agent exclusion is unavailable. In any case, IndiaSell is not legally and economically independent, because BetaCo controls how it sells and it depends on BetaCo for its business.
The point that IndiaSell does not sign in BetaCo's name does not help, because the widened rule looks at the role played, not who signs.
Consequence: BetaCo has a PE in India, subject to the actual treaty wording. Profits attributable to IndiaSell's activities are taxable in India.

Answer: BetaCo has an agency PE in India under the Action 7 approach, because IndiaSell is a dependent agent playing the principal role in concluding BetaCo's contracts. The profits attributable to the PE's functions are taxable in India. This is subject to India's treaty with the relevant country containing the widened wording, for example through the MLI.

Exam tips

Write the rule with its conditions before the facts. Examiners give marks for the provision, the application and the conclusion separately.
Learn the three Action 6 approaches by name. A short note often asks for them directly.
In PE cases, always test independence of the agent and the preparatory or auxiliary condition before concluding.
For Actions 8-10, use the words DEMPE, control over risk and financial capacity. These are the keywords in model answers.
In case-scenario MCQs, look for hints of substance such as staff, premises and decision makers. They decide the answer.

Practice questions from Fundamentals of BEPS

Treaty Abuse, PE Status and Transfer Pricing Actions: frequently asked questions

What is the difference between limitation on benefits and the principal purpose test?

LOB is an objective test. It gives treaty benefits only to qualified persons, based on features such as listing, ownership and active business. PPT is a fact based test using a 'reasonable to conclude' standard. It denies the benefit if getting it was one of the principal purposes of an arrangement, unless the taxpayer establishes that granting it accords with the treaty's object and purpose.

Is the PPT enough to meet the Action 6 minimum standard?

Yes. A country can adopt the PPT alone. It can also use PPT with a simplified or detailed LOB, or a detailed LOB with a mechanism to deal with conduit arrangements.

How does Action 7 change the PE rules?

It widens the agency PE, narrows the specific activity exemptions to preparatory or auxiliary activities, and adds an anti-fragmentation rule. These changes stop groups from avoiding PE status through commissionaire arrangements or by splitting activities.

What do Actions 8-10 aim to achieve?

They aim to align transfer pricing outcomes with value creation. Intangible returns follow DEMPE functions, risk follows control and financial capacity, and other high-risk or commercially irrational transactions can be recharacterised.