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International tax structures — double taxation treaties, BEPS, Pillar 1/2.
When to Activate
Structuring cross-border investments to minimize withholding taxes
Analyzing treaty eligibility and applying for treaty benefits
Assessing BEPS exposure and compliance with anti-avoidance rules
Evaluating Pillar 2 (global minimum tax) impact on group structures
Reviewing CFC rules and their interaction with holding structures
Advising on substance requirements for entities in low-tax jurisdictions
Planning repatriation of profits (dividends, royalties, interest, management fees)
Core Concepts
Double Taxation Relief
Double taxation arises when the same income is taxed in two jurisdictions — residence state and source state. Relief mechanisms:
Credit method: Residence state taxes worldwide income but allows a credit for tax paid in the source state, up to the domestic tax on that income. Excess credits may be carried forward
Exemption method: Residence state exempts foreign-source income entirely (full exemption) or includes it only for rate-setting purposes (exemption with progression)
Deduction method: Foreign tax treated as a deductible expense rather than a credit — less favorable, rarely used as primary method
Underlying tax credit: Credit for corporate tax paid by a foreign subsidiary on profits out of which dividends are paid — increasingly rare as countries adopt participation exemptions
Treaty Benefits
Tax treaties (bilateral agreements based on the OECD or UN Model) reduce source-state taxation:
Withholding tax (WHT) reduction: Treaties typically reduce WHT on dividends (often 5-15%), interest (often 0-10%), and royalties (often 0-10%) versus domestic rates
Business profits (Article 7): Taxable in the source state only if attributable to a permanent establishment
Capital gains (Article 13): Generally taxable only in the residence state, except for gains from immovable property or PE assets
Limitation on Benefits (LOB): Anti-treaty-shopping provisions requiring active trade/business, ownership tests, or derivative benefits
Principal Purpose Test (PPT): BEPS Multilateral Instrument introduced this — denies treaty benefits if one of the principal purposes of an arrangement was to obtain the benefit
BEPS Action Plans
The OECD/G20 BEPS project addresses tax planning strategies that exploit gaps and mismatches:
Action 1: Tax challenges of the digital economy (now subsumed into Pillar 1/2)
Reallocates a portion of residual profits of large multinationals to market jurisdictions:
Amount A: Applies to groups with global revenue above EUR 20 billion and profitability above 10%. Allocates 25% of residual profits (above 10% margin) to market jurisdictions based on revenue
Amount B: Standardized return for baseline marketing and distribution activities — simplifies transfer pricing for routine functions in market jurisdictions