CA Final · Direct Tax Laws & International Taxation · Fundamentals of BEPS

Orchid Holdings, a company set up in a treaty partner country a few weeks before a planned share sale, has no employees, no office and no business activity. It was inserted by an unrelated-country group solely to hold shares in an Indian company and claim a reduced capital gains tax rate under the India–partner treaty. The treaty includes the BEPS Action 6 principal purpose test (PPT). What is the correct treatment?

The benefit can be denied under the principal purpose test. If it is reasonable to conclude that obtaining the treaty benefit was one of the principal purposes of the arrangement, the benefit is refused unless granting it is in line with the treaty's object and purpose. A shell with no substance fails this.

1. AThe treaty benefit is granted automatically because Orchid is a legal resident of the partner country
2. BThe treaty 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 treatyCorrect
3. CThe treaty benefit is denied only if the tax authority proves that obtaining the benefit was the sole purpose of the arrangement
4. DThe treaty benefit is granted if Orchid pays any amount of tax in the partner country, however small