OECD Report on Action 6 – Treaty Abuse

Axel Smits 26 September 2014


The OECD published a discussion draft in March 2014 on proposals for addressing perceived abuse of tax treaties. The draft recommended extensive changes to the OECD Model Treaty together with suggested domestic law provisions targeted at treaty abuse or abuse of domestic law where the abuse involves application of treaty benefits. It also proposed a change to the preamble of tax treaties to clarify that tax treaties are not designed to create double non-taxation and included potential tax policy issues that countries might consider in deciding whether to enter into a tax treaty.

A focal point of the discussion draft was the proposal for a US-style limitation on benefits article (LoB) to provide an objective basis for entitlement to treaty benefits for companies with a nexus in the resident country as well as a subjective main purpose / anti-abuse rule within the LOB article.

In lieu of this singular combined LoB/Main Purpose Test approach, the OECD report on Action 6 now proposes a “minimum level of protection” to prevent treaty abuse, suggesting two alternatives to the combined approach that treaty partners may consider. Significantly, the LoB now includes a “derivative benefits test” provision allowing certain entities owned by residents of other States to obtain treaty benefits if these residents would have obtained the same benefits had they invested directly.

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