October 9, 2025 — Treaty shopping is the practice of structuring an investment through an intermediate jurisdiction principally to obtain the benefit of that jurisdiction's bilateral tax treaty network. The classic case involves an investor in a non-treaty jurisdiction who establishes a holding company in a treaty jurisdiction to route an investment into a third state, capturing reduced withholding tax rates that the bilateral treaty between the treaty jurisdiction and the third state provides. The practice was widespread for most of the post-1970 history of bilateral tax treaties, was widely tolerated by source jurisdictions for most of that period, and was identified by the OECD's Base Erosion and Profit Shifting project as a principal target of reform.

The OECD's response was the Principal Purpose Test, a provision that denies treaty benefits where it is reasonable to conclude that obtaining the benefit was one of the principal purposes of any arrangement or transaction. The PPT was incorporated into the OECD Model Tax Convention in 2017, was added to existing bilateral treaties through the Multilateral Instrument from 2017 onward, and is included in the substantial majority of new bilateral treaties signed since 2017. By 2025, the PPT applies to investments routed through a significant proportion of the bilateral treaty network.

Five years into the widespread application of the PPT, a body of case law and administrative interpretation has accumulated. The cases reveal patterns that the OECD's drafters anticipated and patterns they did not. This article reads the principal cases and identifies the structural lessons that the practice has produced.

The architecture of the Principal Purpose Test

The PPT is structured as a denial-of-benefit provision. The text, in its OECD Model form, denies a benefit under the convention if it is reasonable to conclude, having regard to all relevant facts and circumstances, that obtaining the benefit was one of the principal purposes of any arrangement or transaction that resulted directly or indirectly in the benefit, unless it is established that granting the benefit would be in accordance with the object and purpose of the relevant provisions of the convention.

The provision has several distinctive features. First, it operates as an exception to treaty benefits rather than as a positive condition. The benefit applies under the treaty's substantive rules unless the PPT denies it. Second, the test is purpose-based: the question is whether obtaining the benefit was one of the principal purposes, not whether it was the only purpose or the dominant purpose. Third, the test contains an objective standard: it is reasonable to conclude. Fourth, the test contains a saving clause: even where one principal purpose was tax benefit, the benefit may still be granted if granting it is in accordance with the object and purpose of the relevant provisions.

The structure was deliberately permissive. The PPT was drafted to capture clearly abusive arrangements while preserving treaty benefits for legitimate cross-border investment. The practical question, in any specific application, is where the line falls between abusive and legitimate. The cases of the past five years have begun to define that line.

The early administrative cases: India

The Indian tax administration was among the earliest to apply the PPT in operational practice. India's bilateral treaty with Mauritius, in particular, was the subject of significant pre-PPT controversy involving holding structures established in Mauritius to access reduced Indian withholding tax rates on outbound payments to ultimate investors. The pre-PPT framework relied on Limitation on Benefits provisions and on the General Anti-Avoidance Rule that India introduced in 2012; the post-2017 framework added the PPT to the analytical tools available to the Indian administration.

The Indian administration has applied the PPT in cases involving Mauritian, Singaporean, Cypriot, and Dutch holding structures, with the principal targets being structures where the treaty jurisdiction served only as a routing vehicle without meaningful economic activity. The administrative practice has been to assess the PPT through a series of factors: the substance of the treaty jurisdiction entity, the timing of the structure's establishment relative to the underlying investment, the commercial rationale advanced for the structure beyond tax benefit, and the comparative tax treatment that would have applied without the structure.

The Indian Income Tax Appellate Tribunal and the Indian High Courts have, in the post-2020 period, produced decisions that interpret the PPT in the Indian context. The decisions have generally upheld administrative determinations to deny benefits in cases involving thin holding structures. The decisions have also clarified that the saving clause has limited operation in cases where the structure is plainly tax-motivated, but that the saving clause may apply in cases involving genuine economic activity that incidentally captures treaty benefit.

The European cases: Italy and the conduit doctrine

The Italian tax administration has applied the PPT alongside its long-standing esterovestizione doctrine and its general anti-abuse provisions. The Agenzia delle Entrate's principal applications of the PPT have been in cases involving European holding structures used to access reduced withholding tax rates on intra-EU dividends, interest, or royalties.

A line of cases that has reached the Corte di Cassazione involves Italian operating subsidiaries paying dividends or interest to intermediate holding entities in Luxembourg, the Netherlands, or Cyprus, with the intermediate entities ultimately owned by investors in non-EU jurisdictions. The Italian administration has, in these cases, denied the application of reduced withholding rates under the relevant bilateral treaties on the basis that the intermediate holding entities were principally established to access the treaty benefit.

The Italian decisions have followed a consistent analytical pattern. The substance of the intermediate entity is examined for indications of genuine economic activity beyond the holding function. The commercial rationale advanced for the intermediate entity is tested against the actual operational reality. The historical timing of the structure's establishment is analysed for indications that it was created in response to the underlying investment opportunity rather than as part of a pre-existing operational architecture. Where the analysis indicates that the intermediate entity was principally a routing vehicle, the PPT has been applied to deny treaty benefits.

The European Court of Justice has, in parallel, developed a body of case law on European anti-abuse doctrine that interacts with the PPT. The Danish cases of 2019 — known collectively as the Cadbury Schweppes line in updated form — produced a framework for the application of EU anti-abuse principles to dividend, interest, and royalty payments flowing through holding structures. The framework has been applied at the level of Member State administrations and has informed the application of the PPT in EU contexts.

The French applications: substance and the conduit company

The French administration has applied the PPT in conjunction with the abus de droit doctrine and the substance requirements that the French regime imposes on conduit holding structures. The principal French applications have been in cases involving holding entities in the historical European treaty hubs that the French DGFiP has examined for substance deficiencies.

A representative case pattern involves a French operating subsidiary paying dividends to a Luxembourg holding entity, which is in turn owned by investors in a non-EU jurisdiction with which France has a less favourable bilateral treaty. The reduced withholding tax rate available under the France-Luxembourg treaty is denied under the PPT where the Luxembourg entity lacks substance and where the principal purpose of the structure is the access to the more favourable treaty.

The French administrative practice has been informed by the broader French substance jurisprudence. A Luxembourg holding entity with no employees, no premises beyond a registered address, and no decision-making activity in Luxembourg is, in current French practice, subject to the PPT in cases where its existence is principally explicable by the access to French withholding tax reduction. A Luxembourg entity with genuine substance — employees, premises, decision-making, and economic activity — is generally not subject to the PPT, even if its position would have been less attractive without the treaty benefit.

The French Conseil d'État has, in decisions of 2022 and 2024, addressed the application of the PPT and related anti-abuse provisions to holding structures. The decisions have generally upheld administrative determinations to deny benefits in cases involving substance-deficient structures, while preserving benefits for substance-sufficient structures.

The Latin American applications: Brazil and the source-state push

Brazil and several other Latin American jurisdictions have applied the PPT in conjunction with their broader push for source-state-favouring tax treaty interpretation. The Brazilian administration's principal applications have been in cases involving foreign investment routed through European or Caribbean holding structures.

The Brazilian administrative practice has been more aggressive in applying the PPT than the European practice in some respects. The Brazilian administration has applied the PPT to structures where the substance position would have been considered acceptable in some European jurisdictions, on the basis that the structures were principally motivated by the desire to access the more favourable Brazilian treaty network.

The Latin American push for stronger source-state allocation has produced bilateral treaties that contain PPT formulations stronger than the OECD Model. The Brazil-United Kingdom treaty signed in November 2022 contains a PPT formulation with an enhanced reasonable conclusion standard. The Brazil-Switzerland treaty, signed in May 2018 and effective for taxable years from January 2022, contains additional anti-abuse provisions including the PPT and a Limitation-on-Benefits style clause that operate together to police treaty access. The Brazil-Norway treaty signed in November 2022, which entered into force in December 2024, replaces the 1980 instrument and incorporates similar BEPS-aligned anti-abuse provisions. The bilateral variations are significant for practitioners who work in the Latin American treaty network.

The implications for cross-border structuring

The cumulative effect of the PPT applications has been to reshape cross-border structuring practice in several respects.

The first is the increased emphasis on substance in conduit holding structures. A holding entity in a treaty jurisdiction that exists principally to access treaty benefits is now substantially exposed to PPT challenge. The defensive response has been the development of substance in such entities, including hiring of personnel, leasing of premises, establishment of governance, and the placement of genuine economic activity. The substance investment is non-trivial in cost but is necessary for structures that depend on treaty benefit.

The second is the increased importance of commercial rationale documentation. The PPT examines whether the principal purpose of the structure was tax benefit. A defensible position requires the demonstration of commercial rationale beyond tax benefit — operational reasons for the structure, regulatory reasons, governance reasons, financing reasons, or other considerations that justify the structure independent of the tax benefit. The documentation of these reasons, contemporaneous with the structure's establishment, has become a standard practice.

The third is the reduction in the use of pure conduit structures. Holding entities established in treaty jurisdictions purely to access treaty benefits, without substance and without commercial rationale, have largely disappeared from practice as forward-looking structuring options. The structures that remain are either those where the substance position is genuinely defensible or those where the commercial rationale is sufficiently strong to support the position.

The fourth is the migration toward direct investment in some cases. Where the substance and commercial rationale requirements for an intermediate structure cannot be satisfied at acceptable cost, some investors have moved to direct investment without an intermediate structure, accepting the higher withholding tax that may apply but avoiding the PPT exposure. The migration has been particularly visible in cases involving smaller cross-border investments where the cost of substance is high relative to the tax benefit.

The fifth is the increased complexity of cross-border investment planning. The interaction of the PPT with bilateral tax treaties, with EU anti-abuse principles, with national anti-abuse provisions, and with the broader BEPS framework requires careful analysis in any specific case. The advisory function on cross-border structuring has expanded to include the PPT analysis as a routine component.

The cases that have been decided in favour of the taxpayer

The application of the PPT has not produced uniform denial of treaty benefits. Several cases in the recent jurisprudence have been decided in favour of the taxpayer, and these cases are instructive.

The principal pattern of taxpayer-favourable cases involves structures with genuine substance and clear commercial rationale beyond tax benefit. A holding entity with employees, premises, decision-making, and economic activity that pre-existed the underlying investment, that serves a recognisable function in the broader corporate group, and whose tax benefit is incidental to its commercial purpose has been generally upheld under the PPT analysis.

A second pattern involves structures where the investor's position would have been substantively similar without the structure. Where the foregone treaty benefit would not have produced a materially different economic outcome, courts and administrations have generally found that the principal purpose of the structure was not the treaty benefit. This pattern has been important in cases where the underlying investment was structured for non-tax reasons that had tax consequences as a side effect.

A third pattern involves structures that satisfy specific safe-harbour-type conditions in the relevant bilateral treaty. Some treaties contain provisions that protect specified categories of structure from PPT challenge — for example, listed company holdings, regulated investment funds, and pension funds. Structures that fall within these categories are generally not subject to PPT denial.

The trajectory through the second half of the 2020s

The trajectory of PPT application through the second half of the 2020s is reasonably well-defined. The provision will continue to be applied by the major tax administrations, with increasing analytical sophistication and increasing cooperation across jurisdictions. The body of case law will continue to develop, providing more granular guidance on the application of the test in specific contexts. The structures that have been substantially eliminated — pure conduit holdings without substance or commercial rationale — are unlikely to return.

The structures that have replaced them — substance-supported holdings with documented commercial rationale — will continue to operate. The compliance burden on these structures will continue to grow as administrations develop more demanding documentation requirements and as the body of case law produces more specific guidance on what substance and rationale require.

The cumulative effect on cross-border investment is significant but not catastrophic. Treaty shopping in its historical form has substantially ended; treaty access for genuine cross-border investment continues. The line between the two is now defined by the PPT and the body of case law that has developed around it. The practitioner working in cross-border investment must understand this line and must structure investments to fall on the appropriate side of it.

The architecture of cross-border investment structuring, like the architecture of multinational tax planning more broadly, is being rebuilt around substance and around the active engagement of national tax authorities. The PPT has been a principal instrument of this rebuilding. The rebuilding is well underway, and the patterns of the new architecture continue to clarify with each successive year of case law.