The True Impact of BEPS on International Business Structures

Dear Reader
In the last decade, OECD officials have recommended measures to combat tax avoidance, culminating first in the BEPS (Base Erosion and Profit Shifting) initiative in 2015 and then the MLI (Multilateral Convention to Implement Tax Treaty Related Measures to Prevent BEPS) effective from July 2018 – yet have all their efforts produced the desired changes anticipated? We all have experienced the abject incompetence of UK politicians attempting to implement the Brexit arrangements, so it is natural to be sceptical about how effective the OECD measures will be.

These measures have been introduced alongside anti-money laundering (AML) measures with full disclosures of beneficial ownership requirements, but tax planning must be seen in a different light to the legitimate fight against terrorism. Even aggressive tax planning should not be compared to terrorist plots, but having said that, aggressive tax planning should be considered a thing of the past. I and my IFS colleagues have always maintained that tax schemes are short lived and ultimately more costly to unwind than the tax potentially saved. It has always amazed me that the UK tax bar have created opportunities to avoid legitimate tax assessments through semantically interpreting tax law at the expense of its intention, something that our European counterparts would have laughed at with their general anti-abuse rules. At least BEPS and the MLI have addressed these issues, BEPS advising countries to address artificial hybrid schemes as an example and the MLI recommending that the preamble to all double tax treaties should be replaced with the wording “Intending to eliminate double taxation with respect to the taxes covered by this agreement without creating opportunities for non-taxation or reduced taxation through tax evasion or avoidance (including through treaty shopping arrangements aimed at obtaining reliefs provided in this agreement for the indirect benefit of residents of third jurisdictions)”.

Where does this leave the clients who also do not believe in aggressive tax planning but wish to minimise their overall tax costs, as they do for all their overhead and other costs? Have they any certainty as to how their planning will be viewed by various tax administrations, something surely to which they are entitled? Let me review the essential ingredients for acceptable and intelligent tax planning.


In the sixties and seventies, tax professionals would slot offshore companies into structural diagrams without regard to how they would be viewed by tax administrations. No longer. Not only offshore but also ‘onshore’ companies will be disregarded if they don’t have the acceptable level of substance to justify their existence.

Recently introduced Dutch rules demonstrate how this works in practice from the viewpoint of the Dutch tax administration. According to the new minimum substance requirements, a foreign qualifying company should have annual payroll costs at the minimal level of €100,000and adequate functional office space for the company’s activity for the period of at least a 24-month duration.

Countries such as Jersey, Guernsey and the BVI have proudly confirmed their substance related legislation to comply with the latest ECOFIN and EU requirements. Broadly, with effect from 1 January 2019, the EU has “blacklisted” jurisdictions which have not implemented substance requirements for the businesses which are registered in these jurisdictions and which have paid zero-rate corporate tax without any economic and substantial presence in that jurisdiction.

Thus on 23 April 2019, the BVI Government published the first draft of the Economic Substance Code outlining the corporate substance requirements for BVI registered companies.

Jersey has also implemented new rules determining specific substance requirements for its domestic companies. These include the requirement to conduct board meetings in Jersey, to have adequate composition and competence of board members in Jersey and for the company to conduct its Core Income Generating Activity (CIGA) in Jersey. The concept of CIGA encompasses certain activities which should be carried out in the island in order to generate income and to incur expenditure in Jersey which is relevant and proportional to its activity.

Another example is the Cayman Islands, which has passed the Economic Substance Law which now requires real presence in the islands. In order to satisfy the substance test, the following criteria should be met: Cayman-based relevantexpenditure; sufficient physical presence including office, property and equipment; and full time employees. The law introduced heavy penalties for non-compliance, including fines of between $10,000 and $100,000 and even the risk of the company being struck-off from the Registrar of Companies.

However, local legislative measures will not prevent countries where the ultimate beneficial owner resides, challenging the acceptability of relevant entities within international corporate structures. Case law only will determine whether such local entities have the required degree of substance for their activities.

Beneficial Ownership

Ascertaining who is behind a structure has always been one of the greatest challenges of tax administrations. No longer. The EU has recommended to change the local legislation of many offshore jurisdictions in order to comply with the EU criteria of Fair Tax Competition.

There is now a PSC register of Persons with Significant Control in many countries which may indicate who is behind a particular structure. Opening a bank account nowadays is one of the most difficult tasks in establishing a new business, and this of course discloses who is the ultimate beneficial owner of the relevant entity.

Information exchange has materially increased over the past few years, and with ultimate beneficial owners now having to verify the source of their wealth, transparency has overtaken confidentiality in the world of international business structuring.

Principal Purpose Test (PPT)

Many countries have tried to implement a PPT into their legislation, although the subjectivity of such a test means relatively few cases have come to court. The MLI has introduced a PPT which denies treaty benefits “if it is reasonable to conclude, having regard to all relevant facts and circumstances, that obtaining that benefit 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 relevant provisions of the Covered Tax Agreement (CTA)”. More about CTAs below, but it is clear that the intention behind a structure or transactions underlies this Article 7 of the MLI and whether treaty benefitsmay be enjoyed, and this intention is determined by the relevant tax administration (competent authority) which has the burden of proof to establish a subjective view.

The inclusion of this provision in the MLI may scare those who have created a structure with tax planning as one of the objectives (who doesn’t?) but otherwise have adhered to the requirements to disclose beneficial ownership and ensure each entity has the relevant level of substance to justify its existence. Surely it is a requirement that the structure must only have been created for tax purposes (after all that is what a Principal Purpose means), but the Article provides that tax planning per se would jeopardise the acceptability of any structure.

The MLI does have minimum requirements to adopt for all countries who have signed the MLI, but also allows certain provisions to be excluded or adopted in part. So, when countries sign up to the MLI, they can reserve the right to include or otherwise specific provisions. However, the PPT is a minimum standard, although countries have a right to choose a limitation of benefits model which I will not detail in this article.

Therefore, treaty shopping arrangements of the past will certainly be caught by the PPT, which I believe is the main intention of the Article 7. I do not believe that treaty denial will be made where companies have a legitimate purpose and are not seen as merely conduit companies.

Conduit companies

Typically, these are holding, financing and licensing companies interposed within a group structure for the purposes of obtaining tax treaty related benefits (generally lower withholding taxes on receipt of dividends, interest and royalties).

The ECJ have helpfully recently issued six judgments setting a new interpretation of what constitutes a conduit company which is not acceptable as the ‘beneficial owner of the income’. According to these judgments, the beneficial owner is a designated entity which actually benefits from the income that is paid to it and has the power to freely determine the use of such income. The ECJ has also confirmed that the concept of a ‘beneficial owner’ in the Interest & Royalty directive (IRD) has the same meaning as in tax treaties based on the OECD Model Tax Convention.

Apart from this the ECJ has broadened the definition of ‘tax avoidance’ from previously ‘wholly artificial structures’ to ‘artificial arrangements in which the principal objective or one of the principal objectives is to obtain a tax advantage’.

Also, the ECJ has provided the following indications of such artificial arrangements:

-formal nature of conduit companies without economic justification;
avoidance of dividend withholding tax due to intermediary holding company in the relevant jurisdiction;

– evidence of various contractual arrangements between companies which do not have any substance and are used exclusively for such contractual arrangements;

– the sole activity of an intermediary company is the receipt of dividends and their further payment together with the absence of economic activity, management costs, staff costs and other premises and equipment that the company should otherwise have.

Covered Tax Agreements

CTAs are double tax treaties where the relevant countries have signed up to the implementation of the MLI. To date 78 countries have done so, and have accepted the minimum standards of the MLI. One of these is that the required wording of a preamble of a treaty must reflect the intention of the parties to prevent treaties being used to reduce taxation through tax evasion or avoidance; another minimum standard is to include some form of the PPT.However, countries have been permitted to make reservations to the remaining articles of the MLI at the time of signing up to the MLI agreement, and most have done so (including countries such as the UK, Luxembourg and Cyprus). Therefore, besides the US not being party to the MLI at all, countries may have decided not to accept the hybrid instrument clause, the permanent establishment extension clause, and particularly the mandatory arbitration clause which I refer to below.

So in order to determine whether a CTA is relevant to a particular structure or transaction, one not only needs to know whether the two countries involved have signed up to the MLI, but also whether each one has accepted the relevant MLI provision or reserved its rights in respect of that provision. Only if one is able to mirror the relevant provisions would the MLI, and therefore the BEPS Action issue, be applicable.

Mandatory Arbitration clause

Action 14 of BEPS dealt with dispute resolution, and faced with subjective decisions taken by tax administrations, it was hoped that the MLI would introduce a mandatory arbitration clause. Unfortunately, although 78 countries signed the MLI, only 25 to date have agreed to be bound by a mandatory arbitration provision which is disappointing. It means that taxpayers in the remaining countries still need to go through the inadequate competent authority provisions of existing double tax agreements, which is yet another example of covered tax agreements falling short of what the MLI was intended to deal with.


As demonstrated above, BEPS has brought a sea change to the scope of international tax planning, at least according to the guidelines that have been published. In reality, with many countries having taken full benefit of the derogations permitted by the MLI, they have essentially reserved the right to maintain the status quo while formally demonstrating commitment to the anti-abuse agenda.

Having said this, aggressive tax planning should be very clearly unacceptable, not only to tax administrations but to professional advisers. Knowing the ultimate beneficial owner, his or her source of funds, and ensuring relevant entities within any international corporate structure have the right degree of substance for the activity involved, must be minimum standards for the international tax adviser who wishes to plan appropriately for the client’s business objectives.

With warm regards