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CS Professional · Goods and Services Tax (GST) and Corporate Tax Planning · Tax Planning and Location of Business

Kapoor Industries Ltd sets up a subsidiary in a low-tax jurisdiction and books its sales there. The subsidiary has no staff, premises or business activity, and the location was chosen only to obtain a tax benefit. Which limb of the deemed lack of commercial substance test is most directly attracted?

The location limb applies. An arrangement is deemed to lack commercial substance if it involves the location of an asset, a transaction or a party's residence without any substantial commercial purpose other than obtaining a tax benefit, which matches the staffless subsidiary in the low-tax jurisdiction.

  1. ALocation of an asset, transaction or residence of a party without substantial commercial purpose other than a tax benefitCorrect
  2. BElements that offset or cancel each other
  3. CExistence of an exit route in the arrangement
  4. DPayment of taxes under the arrangement

Explanation

The facts concern the location of a transaction and the residence of a party chosen solely for tax benefit, which is the location limb. No offsetting elements are described, and exit route and tax payment are only non-sufficient factors.

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