CA Final · Direct Tax Laws & International Taxation · Fundamentals of BEPS
A Cayman company with no employees and no office holds the shares of an Indian company. Shortly before a large dividend was declared, the Cayman company was interposed by a group whose residents of a third country are not entitled to treaty benefits. The group routes the dividend through a country whose treaty with India has been modified by the Multilateral Instrument (MLI) containing the principal purpose test (PPT) from BEPS Action 6. How will the treaty benefit be treated under the PPT?
The benefit is denied if it is reasonable to conclude that obtaining it was one of the principal purposes of the arrangement, unless granting it accords with the object and purpose of the treaty. The PPT is a general facts-and-circumstances anti-abuse test, not a mechanical ownership test.
- AGranted in full, because the PPT only applies to royalty and interest income
- BDenied automatically, because the PPT is a pure limitation-on-benefits test based on legal ownership
- CDenied if it is reasonable to conclude that obtaining the benefit was one of the principal purposes of the arrangement, unless granting it would be in accordance with the object and purpose of the treaty provisionsCorrect
- DGranted, provided the company is incorporated under the laws of a treaty partner State
Explanation
The PPT denies a treaty benefit where, having regard to all facts and circumstances, it is reasonable to conclude that obtaining the benefit was one of the principal purposes of the arrangement, unless granting it is in accordance with the object and purpose of the relevant provisions. It is a general anti-abuse rule, not mechanical ownership testing, so the second option is wrong. It is not limited to particular income types, and mere incorporation does not guarantee relief.
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