The principal purpose test: will your structure keep its treaty rates?
A treaty benefit is denied if obtaining it was one of the principal purposes of an arrangement, unless granting it fits the purpose of the treaty. The PPT now sits in most treaties worldwide. Run the stress test below and see where your structure stands.
Two minutes. Free first consultation.
Would a tax office accept your treaty claim?
Tick what is true for the company that claims the benefit. The result updates as you go.
1. Which benefit does the company claim?
2. What speaks for it?
3. What speaks against it?
An orientation, not a legal opinion. Tax offices look at all facts and circumstances. We review your structure and its documents on a call.
A benefit under the treaty shall not be granted if it is reasonable to conclude that obtaining that benefit was one of the principal purposes of any arrangement or transaction, unless granting it would be in accordance with the object and purpose of the relevant provisions of the treaty.
One of the principal purposes
The benefit need not be the only or main purpose. Being one of the principal ones is enough, which is a deliberately low bar.
Object and purpose
Even then, the benefit stands if granting it fits why the treaty provision exists. Real businesses with real substance are meant to land here.
Four steps from arrangement to conclusion
Identify the benefit
The specific treaty benefit claimed: a lower withholding rate, an exemption, relief.
Examine the purpose
All facts and circumstances, judged objectively.
Apply the threshold
Was the benefit one of the principal purposes? A reasonable-conclusion standard.
Test the carve-out
If so, does granting it still fit the purpose of the provision?
The same relief, decided by what sits behind it
A real regional holding
A group sets up a holding in an EU country to manage its European subsidiaries. It has local directors, an office and staff, and makes real decisions.
Why: the treaty benefit is incidental to a genuine business purpose.
A conduit inserted for the rate
An investor routes one dividend through a new company in a treaty-friendly country. It has no staff, no premises and no role beyond receiving the payment.
Why: the lower rate looks like a principal purpose, and there is no substance to reach the safe harbour.
US–EU structures often face both
Passing the PPT tells you nothing about the US limitation-on-benefits test, and the other way round.
Read: LOB vs PPT →We build structures that pass, and document why
- Local directors who decide, with an office and staff that fit the role
- A business reason beyond tax, written down when the structure is set up
- Beneficial ownership of the income, not just legal title
- Records for every step, made at the time, not after an audit
Does the benefit have to be the main purpose?+
No. It is enough that obtaining the benefit was one of the principal purposes. It does not need to be the only or the dominant one.
Can a genuine business still be caught?+
A benefit that was a principal purpose is still granted if that fits the object and purpose of the treaty. Real businesses with real substance are meant to qualify.
Where does the PPT apply?+
In the many treaties changed by the Multilateral Instrument and in treaties that follow the OECD Model. Most EU countries, including the Netherlands and Luxembourg, apply it.
How is it different from LOB?+
LOB is objective and category-based; the PPT is purpose-based. The US relies on LOB, the EU on the PPT, and some treaties use both.
Can you review an existing structure?+
Yes. We check each flow against the PPT, beneficial ownership and substance, and tell you in writing what to fix.