These three themes are: (i) a continued focus on the “beneficial ownership” requirement in dividend, interest and royalty articles; (ii) the principles outlined by the Court of Justice of the European Union (CJEU) in the “Danish cases” on abuse and their impact on the anti-abuse arguments used by tax authorities; and (iii) the United States’ reliance on limitation on benefits (LOB) provisions as its primary treaty anti-shopping tool. We explore the impact these trends are having in practice and points to consider when setting up or reviewing arrangements where treaty benefits are being sought.
What is the issue?
A double tax treaty is an agreement between two countries as to how they will allocate taxing rights between them. This is to ensure that if, for example, one country imposes tax based on residence and another imposes tax based on the source of the income, the taxpayer does not find themselves subject to double taxation.
One mischief that tax authorities are often trying to tackle is the use of conduits where they consider there to be an abusive use of tax treaties. For instance, take a situation involving arrangements between entities in two jurisdictions, where there is no tax treaty between those jurisdictions such that there would be withholding tax on payments made directly between the two entities. If, say, a conduit entity from a third jurisdiction were inserted into the structure with a view to relying on treaties with that third jurisdiction to enable the parties to benefit from relief from withholding tax under those treaties, the tax authority may well consider this to be abusive “treaty shopping”.
It is important to note that structuring to obtain tax benefits or to make the most of a tax treaty is not inherently abusive. However, where there is a premeditated effort to take advantage of the international tax treaty network, through careful selection of the most favourable treaty and inclusion of a conduit vehicle with minimal substance or economic activity to achieve no or reduced taxation, the tax authority may well see this as contrary to the intention of the contracting states to the treaty.
Since a double tax treaty affects the operation of domestic tax law, its interpretation is ultimately a matter for the domestic courts. It is, therefore, necessary to consider both the text of the particular treaty as well as the domestic law of the relevant jurisdictions.
Many treaties include a condition that, in order to benefit from treaty relief, the recipient of the payment must be the beneficial owner of such payment. It is this “beneficial ownership” requirement that tax authorities often seek to rely on to deny relief in cases of suspected abuse. In other cases, especially in the EU, tax authorities rely on more generic “abuse of law” doctrines, whereas in the U.S., it is more common to rely on the objective gateways set out in LOB provisions.
A further overlay is the OECD’s Multilateral Instrument (MLI), adopted in 2016 to implement BEPS Action 6 (“Preventing Treaty Abuse”). Amongst other things, the MLI incorporates a principal purpose test (PPT) and/or LOB provision into the relevant treaty, depending on which option the relevant signatories have selected. The PPT is the key anti-abuse rule developed under Action 6.
Where both states have opted in to the PPT, a benefit under the relevant double tax treaty shall not be granted 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 double tax treaty in question.
Others who have signed up to the MLI have opted to go down the approach preferred by the U.S., incorporating a version of the LOB provisions to provide for objective gateways to obtain treaty benefits.
In an EU context, the “Danish cases” have led to a renewed look at the “beneficial ownership” requirement and the development of a more generic “abuse of law” doctrine which is being applied in a treaty context, including by potentially taking into account the “abuse of law” doctrine developed by the Danish cases when applying the PPT.
Taxpayers may ultimately find themselves facing various combinations of these tests, with the treaty outcome highly dependent on the specific factual circumstances and the exact drafting of a particular treaty. We consider below some of the key issues that are coming up in practice.
Whilst this briefing explores some topical anti-abuse rules that are being used to address concerns around conduits, it is worth noting that there may also be other anti-abuse rules in the double tax treaty in question, such as special relationship rules and specific anti-conduit provisions which may be relevant to such structures.
Beneficial ownership: an international fiscal meaning
Relief from withholding tax on dividends, interest and royalties under many treaties requires the recipient to be the beneficial owner of such payments. This requirement has been developing since 2003 when the OECD Commentary on this point was expanded.
In particular, the OECD Commentary states that one of the purposes of the “beneficial ownership” requirement is to clarify that a source state is not obliged to give up taxing rights over certain income merely because that income was paid directly to a resident of the other contracting state. Therefore, the term is not to be used in a “narrow technical sense” that it might have under domestic law but should be understood in its context and in light of the object and purposes of the OECD Model Tax Convention “including avoiding double taxation and the prevention of fiscal evasion and avoidance”.
The OECD Commentary makes clear that an agent, nominee or conduit company acting as a fiduciary or administrator is not the beneficial owner because “that recipient’s right to use and enjoy the dividend is constrained by a contractual or legal obligation to pass on the payment received to another person”.
Domestic courts have taken into account the ever-evolving OECD Commentary and implemented this concept as an anti-abuse rule, and this is one area where divergence starts to emerge. Some jurisdictions have also developed practices to prevent these rules catching cases where there is no abuse.
In the UK, for instance, the concept of “beneficial ownership” is used outside the treaty context and links into trust concepts, where equitable rights can be separated from legal ownership. However, in the seminal Indofood case (Indofood International Finance Ltd v. JP Morgan Chase Bank NA [2006] EWCA Civ 158), the Court of Appeal, citing the OECD Commentary, held that in a treaty context the term beneficial ownership has an “international fiscal meaning” to be distinguished from the UK domestic meaning. The court went on to state that the concept of beneficial ownership, under its international fiscal meaning, is “incompatible with that of the formal owner who does not have the full privilege to directly benefit from the income”.
HMRC subsequently issued guidance defining beneficial ownership as “the sole and unfettered right to use enjoy or dispose of” the asset or income in question and setting out how the Indofood test will be applied in particular cases. HMRC’s approach, as set out in the guidance, focuses on the tax treaty’s object of preventing fiscal evasion and avoidance.
This means that there may be situations where an intermediate lender does not technically meet the international fiscal meaning of beneficial owner but which HMRC will not see as problematic, for instance where the ultimate lender could have received interest free from UK withholding tax, even if it had received interest directly from the borrower. This pragmatic approach has enabled taxpayers to achieve some certainty in some common situations.
For instance, one practical example where HMRC has indicated that it would not seek to invoke Indofood is in relation to securitisation SPVs resident outside the UK. Technically, the SPV would not have the “sole unfettered right” to benefit from the income from the underlying receivables, but where, for instance, the SPV issues listed notes, such that noteholders would benefit from the quoted Eurobond exemption from UK withholding tax in any case, since there would be no abuse of the treaty here, HMRC would not seek to deny the SPV treaty benefits in such a case.
Another situation the guidance helpfully addresses is in relation to syndication and LMA-style sub-participation where HMRC has confirmed it would not seek to apply Indofood where this arises in the ordinary course of banking business.
Danish cases and Nordcurrent: EU abuse doctrine and a widening lens
(i) What are the “Danish cases”?
The beneficial ownership concept is also being considered in the EU. In the, now infamous, Danish cases (Joined Cases C-116/16 and C-117/16 and Joined Cases C-115/16, C-118/16, C-119/16, C-299/16), the CJEU looked at the application of the Interest and Royalties Directive (IRD), which contains a beneficial ownership requirement in the text of the directive, and the Parent Subsidiary Directive (PSD), which does not.
The CJEU held that, when looking at the meaning of beneficial ownership in the context of the IRD, the OECD Commentary is relevant to the assessment. It also held that the beneficial owner is the person who economically benefits from the income and can freely decide how to use the income it receives.
Perhaps more interestingly, the court also applied similar principles to the PSD, notwithstanding that the PSD has no express requirement of beneficial ownership. The context of the case was that a private equity firm acquired shares in a Danish group through intermediate Luxembourg holding companies. The Danish tax authorities considered that the Luxembourg entities had been artificially interposed and therefore tried to deny the benefit of the withholding tax exemption in the PSD. There was no anti-abuse provision under Danish law, nor was there an anti-abuse provision under the PSD, however, the CJEU held that there was an overarching EU anti-abuse doctrine that nonetheless applies whenever a taxpayer relies on tax relief based on an EU directive and is not limited to “conduit company” structures.
When applying this EU anti-abuse rule, relevant indicators of such abuse include, amongst other things, a person eligible to tax relief under the IRD or PSD either rapidly paying on income to someone that would not benefit from the EU directive or being contractually bound to pass on the income to another person.
In practice, the indicator we often see being relied on by tax authorities is that the recipient of the income does not have sufficient relevant substance, i.e. it does not have a genuine function or relevant economic activities. The onus is on tax authorities to provide evidence of abuse, so taxpayers must have the opportunity to rebut the arguments brought forward by the tax authorities.
(ii) The Nordcurrent decision
The more recent 2025 decision of the CJEU in Nordcurrent (C-228/24) also adds an important dimension. This case involved a Lithuanian company with a UK subsidiary that had genuine economic activities, where the UK company later became dormant, such that when the UK company distributed a dividend to the Lithuanian parent, the claim for relief under the PSD was challenged by the Lithuanian tax authority as it argued that the UK company was covered by the concept of a “non-genuine arrangement”.
The CJEU decision confirms that the anti-abuse provision in the PSD applies to any abusive structures and is not confined to conduit company situations. A subsidiary may constitute a non-genuine arrangement even where it is not a mere intermediary and profits are generated in its name.
The CJEU also held that the assessment must be based on an overall examination of all facts and circumstances and abuse is to be assessed over time, and not only at the time the structure is first established. A company that was once genuine can become artificial if its activities are wound down.
In addition, when assessing whether there is a tax advantage, the CJEU’s decision makes it clear that it is not a matter of looking at the payment for which exemption is sought in isolation; rather the overall tax burden of the structure must be considered. In the Nordcurrent case it was relevant that Lithuania had a lower statutory corporation tax rate than the UK (15% as opposed to 24%).
Even though the distribution to the Lithuanian parent would not be subject to corporation tax in Lithuania, the UK subsidiary’s profits would have been subject to a lower rate of corporation tax if it had been set up as a Lithuanian subsidiary, which made tax abuse less likely.
(iii) Implications for the interpretation of double tax treaties in the EU
Whilst the Danish cases considered beneficial ownership in the context of two EU Directives, the principles from those cases are also starting to be applied by domestic courts in the EU when considering the application of double tax treaties, as has already been seen, for example, in Belgium.
The Spanish Supreme Court in the 2026 Velcro case (ruling no. 20/2026) went further and relied on the primacy of EU law, holding that where the IRD withholding tax exemption does not apply as a consequence of the “beneficial ownership” requirement (as developed by the Danish cases) not being met, a double tax treaty between the relevant EU member states that regulates the same matter will not apply.
Whilst there are technical questions around the use of the EU law primacy argument in the Velcro case, one concern is that an extension of the same argument could potentially be used by a domestic court in a member state to deny relief from dividend withholding tax under an intra-EU double tax treaty where the exemption under the PSD (which does not contain a beneficial ownership requirement) is denied because of the Danish cases abuse doctrine.
Even aside from primacy of EU law arguments, domestic courts in EU member states may apply the PPT in a treaty (which, as mentioned above, is itself a general anti-abuse rule) in light of their own domestic anti-abuse rules, as well as domestic and EU caselaw, including the Danish cases. This means that if a payment would not qualify for tax relief under the PSD as a result of the application of the EU anti-abuse rule enumerated in the Danish cases, it would potentially also mean that the court could deny treaty benefits by virtue of its application of the PPT.
This could mean that taxpayers potentially face applying multiple sets of anti-abuse rules in parallel. However, we can see some convergence between the PPT and the anti-abuse rule established by the Danish cases.
In particular, the OECD Commentary and the CJEU have both set out some limits to prevent the PPT or the EU general abuse rule from applying to non-abusive structures.
The OECD Commentary on Article 29, paragraph 9 (which governs and shapes the PPT), includes some helpful examples of conduit structures which are not considered to be abusive and therefore which would not generally be considered to be against the object and purpose of tax treaties. For instance, the OECD Commentary provides an example involving an SPV in a vanilla securitisation (i.e. Example L) where investors’ decisions to invest in the SPV are not driven by any particular investments made by the SPV. In these circumstances, in the absence of other facts or circumstances showing that the investment was undertaken for a principal purpose of obtaining treaty benefits, it would not be reasonable to deny the benefit of the relevant tax treaty.
It is hoped that courts in EU member states will take a similar helpful and commercial approach as that taken in the OECD Commentary when applying the Danish cases jurisprudence in the future. The Nordcurrent decision accepts that there are limits to the anti-abuse rule, in that benefits should not be automatically denied based on a perceived lack of substance at a specific point in time, and it is necessary to consider the structure as a whole. But it remains to be seen how domestic courts will ultimately define those limits.
In practice, taxpayers should expect heightened scrutiny by tax authorities in the EU following these CJEU rulings, even where the relevant applicable domestic laws do not contain anti-abuse or beneficial ownership provisions.
As a result, it is important to document the rationale behind payments and decisions being made by the group and maintain evidence of the genuineness of the payments made and the structure that is being put in place. The story does not end once a structure is implemented, as it will also be helpful to evidence the rationale for keeping it in place.
U.S. limitation of benefits: objective gateways and common traps
Rather than broad and subjective principal purpose tests, U.S. treaties usually contain detailed LOB provisions that set objective gateways for treaty eligibility. These tests are intended to act as indicators of sufficient economic nexus with the country of residence such that claiming treaty benefits aligns with the objectives of the treaty.
It is possible for the U.S. competent authority to provide relief on a discretionary basis even if the objective tests are failed, but the bar for this is extremely high and there are strict procedural requirements. A small number of older U.S. treaties lack an LOB article, and these relationships are outliers shaped by older treaty networks and historical negotiation contexts.
Below we set out a brief summary of the LOB tests that are commonly found in U.S. treaties. A treaty claimant is required to satisfy at least one of these LOB tests to qualify for the benefits of the relevant U.S. treaty. However, even if one of these LOB tests is satisfied, this alone is not necessarily sufficient for treaty relief to apply.
Additional conditions, outside the LOB provisions, may also need to be satisfied before treaty relief is available, including other anti-abuse provisions. For instance, article-specific conditions can apply to achieve zero-rate dividends and structures that involve hybrid entities in the chain (transparent in one jurisdiction but opaque in another) are subject to specific treaty and U.S. rules. In addition, U.S. anti-conduit rules can deny benefits that would otherwise apply under the treaty to financing arrangements that lack economic substance or interpose short-term conduits.
The typical U.S. LOB tests are as follows, although the specific eligibility criteria, defined terms, and carve‑outs vary by treaty; a taxpayer that qualifies under one treaty’s LOB article may not qualify under another:
Publicly traded test and markets
This requires the principal class of shares of the company to be listed on a recognised stock exchange and regularly traded. Mere listing is not enough, such that some level of liquidity over the taxable period is also required. Some treaties add a substantial presence overlay, looking to where trading predominantly occurs or where senior management is based, which may be relevant for dual-listed topcos.
Subsidiary of a publicly traded company
A company may qualify under this test if 50% or more of its shares by vote and value is owned directly or indirectly by five or fewer publicly traded companies that themselves satisfy the publicly traded company test. Generally, every intermediate owner counted for control must be a resident of one of the two treaty states. Chains often fail where a third-country intermediate breaks the chain. The U.S. tax classification of a third-country intermediate entity may be relevant to this analysis, but such analysis would be treaty-specific and require careful analysis.
Derivative benefits
This test is often pivotal in EU/EEA structures. The ownership prong generally requires that at least 95% of the shares are owned by seven or fewer equivalent beneficiaries and the base-erosion prong requires that less than 50% of gross income is paid out as deductible amounts to non-equivalent beneficiaries. Both tests must be satisfied.
Equivalent beneficiaries typically means residents of third countries in the EU, EEA or USMCA (formerly NAFTA) that would be entitled to treaty benefits under their own treaty with the U.S. (although the definition varies depending on the treaty). Post-Brexit, UK residents generally cease to be equivalent beneficiaries for most U.S. treaties, except under the U.S.-UK competent authority agreement, which treats the UK as part of the EU solely for the purposes of the U.S.-UK treaty.
Where a treaty still refers to NAFTA, it is important to confirm whether that reference may be read as USMCA for derivative‑benefits purposes, as practices vary by treaty.
Ownership-base erosion
The ownership prong of this test requires sustained qualifying ownership on at least half the days of the taxable period, measured by both vote and value across each class, while the base erosion prong generally uses a 50% gross income threshold, limiting deductible payments to disqualified recipients relative to gross income.
Generally, the ownership prong uses a 50% ownership threshold, and some formulations also require that qualifying owners are residents of the same country as the claimant, making careful tracking of ownership and the precise language of the relevant treaty critical.
For base erosion, arm’s-length payments for goods and services are excluded; depreciation and amortisation are disregarded; timing is based on paid or accrued amounts; some formulations narrow who counts as a good recipient and treat payments benefiting from special tax regimes as base eroding.
Active trade or business
A foreign corporation must be engaged in the active conduct of a trade or business in its country of residence, the U.S. income must be derived in connection with or be incidental to that business, and if the income derives from a related person, the trade or business in the residence country must be substantial in relation to the U.S. activities generating the income. The 2016 U.S. Model Treaty contemplates tighter parameters, and some newer or updated treaties have narrowed this test, and it is therefore important to read the provisions of the specific treaty carefully.
Headquarter company test
Present in a smaller set of U.S. treaties, this test allows a resident entity that functions as a recognised headquarters company for a qualifying multinational group to access treaty benefits, provided that it meets certain criteria. Qualification typically requires active group operations in at least five countries with balanced income contributions, a cap on source‑state receipts, “primary management and control” in the residence state, and limits on group financing, making this test restrictive in practice.
Dealing with these issues in practice
These mechanisms all ultimately aim to ensure treaty relief aligns with genuine commercial activity rather than artificial treaty-shopping structures. In practice, taxpayers may find themselves having to navigate multiple paradigms, which are still being developed by domestic courts in diverging ways and the application of a particular treaty under relevant domestic rules can be highly fact-sensitive.
Building and evidencing substance and maintaining robust documentation of commercial drivers will be more important than ever as tax authorities increase their scrutiny in these areas.
Recent case law and administrative practice underscore that authorities view abuse through an economic reality lens and that arrangements may be viewed differently over time. Careful planning and meticulous reading of the applicable treaty language will be decisive in securing and sustaining treaty benefits.
