1. The ADGM and challenges to Global Financing
Preventing treaty abuse – BEPS Action 6
IFA GCC branch meeting, Abu Dhabi Global Markets
28 April 2016 – Jan Bart Schober

3. Content OECD BEPS Balancing impact and burden
OECD Action 6 Introduction
LOB / Simplified LOB / Anti-conduit
PPT / EU PSD MPT
EU MPT Examples
Discussion / questions

4. OECD BEPS Action Points
Action Plan OECD of 19 July 2013 – 15 Action Points
‘Final Reports’ published on 5 October 2015
International coherence of tax systems
Hybrids
Base erosion / interest deductibility
CFC
Economic substance
Avoidance of double taxation through tax treaties and transfer pricing guidelines
Anti-treaty shopping
Preventing artificial avoidance of p.e.
Transfer pricing (intangibles, value creation)
Transparency
Disclosing aggressive tax planning
Re-examining TP documentation via CbC reporting / Master file
Hard law: multilateral agreement

5. Balancing impact on abuse and burden for businesses
1. Leading role, take initiatives
Transfer pricing
Exchange of information / CbC
Developing countries;
Amend tax treaties
Increase capacity
Exchange of rulings
2. Prevent abuse, multilaterally, via hard law
Hybrids / Interest deduction
Treaty abuse
CFC rules
Preferential regimes (e.g.,R&D)
3. Domestic policy
Participation exemption / WHT
Advance tax rulings
Mutual agreement / arbitration
Risk of unnecessary burden for real businesses

6. OECD BEPS Action 6 – The core
To include in tax treaties a common minimum standard to raise the bar for tax treaty application to tackle abuse
In particular intended to end treaty shopping by non-residents  mainly affects foreign-owned companies

7. OECD BEPS Action 6 – Treaty shopping
TopCo
3rd State
TopCo
3rd State
Company
Tax treaties
between these
2 States
Sub
Sub

8. OECD BEPS Action 6 – Key aspects
Action 6 is aimed at:
Preventing the granting of treaty benefits in inappropriate circumstances
Clarifying that tax treaties are not intended to be used to generate double non-taxation, and
Identifying the tax policy considerations that countries should consider before entering into a tax treaty
The OECD proposes common minimum standard – 3 options:
combination of simplified limitation-on-benefits rule (“LOB Rule”) and principal purpose test (“PPT”), or
PPT, or
LOB Rule supplemented by anti-conduit arrangements rule
States are given the flexibility to choose between the alternative approaches as long as the approach adopted effectively addresses treaty abuse

9. OECD BEPS Action 6 – LOB rule (1)
Proposed LOB Rule seems to be based on the new draft of the US model treaty.
OECD follow-up work is scheduled for the first part of 2016, after the updated US Model Income Tax Convention is available
Relaxation for non-collective investment vehicles (i.e. non-CIVs) under discussion (public consultation closed on 22 April 2016)

10. OECD BEPS Action 6 – LOB rule (2)
No entitlement to tax treaty benefits under the LOB Rule unless one of the following tests is satisfied:
Qualified persons: Article X paragraph 2:
Active business test – Article X paragraph 3
Derivative benefits test – Article X paragraph 4
Discretionary relief via competent authority – Article X paragraph 5

11. OECD BEPS Action 6 – LOB rule (3)
Qualified persons: Article X paragraph 2:
Individuals Contracting States and subdivisions thereof
Entities meeting the direct or indirect stock exchange test
Certain non-profit organizations
Certain pension funds
Entities meeting the ownership and base erosion test
Certain CIVs as possibility

12. OECD BEPS Action 6 – LOB rule (3)
Public
OECD BEPS Action 6 – LOB rule (3)
Qualified persons
Direct stock exchange test – In this example can not be met, because NL HoldCo is not held directly by listed company (i.e. TopCo, Inc)
Indirect stock exchange test – Could be met in some instances; e.g. if:
> 50% of the stock (vote & value) of NL HoldCo is indirectly owned by a listed company (i.e. TopCo, Inc.)
The principal class of shares which is primarily and regularly traded on a recognized stock exchange
In the US (NYSE), or
Elsewhere, but the primary place of management of TopCo Inc. is in the US; and
Each entity in the chain (Intermediate Co.) is a resident of the US or the Netherlands (this last requirement has been included as optional in the OECD proposals)
TopCo,
Inc.
Intermediate
Co.
USCo
Dividends
NL HoldCo
Subs

13. OECD BEPS Action 6 – LOB rule (4)
Active business test
Entity seeking to qualify for treaty benefits under LOB provision must be engaged in an active conduct of a business
Income derived in connection with or incidental to that business
This entails that line of business in source state must form a part of or is complementary to the recipient’s business
Volume of business is substantial in relation to the business in the source state (taking into account size of economy)
Activities conducted by entities connected to an entity (50% threshold) shall be deemed to be conducted by such entity
Follow-up OECD work is expected in first part of 2016 – In proposed US Model Income Tax Convention of 20 May 2015, it was proposed that attribution is possible only to the extent both persons are engaged in the same or complementary lines of business
Could be problematic for holding companies which do not have a business of their own

14. OECD BEPS Action 6 – LOB rule (5)
Derivative benefits test
Tax treaty benefits for entity owned by certain residents of other states (equivalent beneficiaries), if the latter would have obtained the benefits in case of a direct investment
At least 95 per cent of aggregate voting power and value of the entity’s shares (and at least 50 per cent of any disproportionate class of shares) is owned, directly or indirectly, by seven or fewer persons that are equivalent beneficiaries; and
Less than 50% of the entity’s gross income is paid or accrued, as deductible for the taxable period, directly or indirectly to persons who are not equivalent beneficiaries (base erosion test)
In the event of indirect ownership, each entity in the chain must be an equivalent beneficiary
Derivative benefits test is subject to further review. Follow-up work is scheduled for first part of 2016

15. OECD BEPS Action 6 – LOB rule (6)
Discretionary relief via competent authority
Upon request, competent authorities can treat a resident as being entitled to treaty benefits under the LOB Rule despite not meeting the mechanical LOB tests
Treaty benefits are not one of the principal purposes for establishment, acquisition or maintenance of resident and its operations
Depending on facts and circumstances
Attribution of substance and activities of group entities may make a difference
Can be time-consuming
Generally a measure of last resort
Final Report clarifies that the competent authorities have broad discretion and provides some guidance as to the factors that should be taken into account when considering a request for discretionary relief

16. OECD BEPS Action 6 – Simplified LOB rule
Basic version of the most common LOB tests
It comprises qualified persons as: including individuals, governments, publicly traded entities, entities more than 50% owned by qualified persons
It also includes an activity test based on which non-qualified persons may still benefit from treaty application for an item of income derived in connection with, or which is incidental to, the active conduct of a business of that person
In addition, it includes a derivative benefits test for residents which are for more than 75% owned by the equivalent beneficiaries
Comparatively, the proposed Simplified LOB Rule:
Does not provide rules to qualify pension funds, charities, and collective investment vehicles
Does not contain many of the specific anti-abuse rules seen in the comprehensive LOB Rule notably, there are no restrictions on intermediate owners, base erosion, substantial presence or disproportionate share rules

17. OECD BEPS Action 6 – Anti-conduit rule
In the final Report, the OECD focuses on the general principles and provides examples of transactions that an anti-conduit rule should address
Generally aimed at residents which pay (substantially) all treaty income to non-residents that are not entitled to equivalent treaty benefits, as part of a (series of) transaction(s) and one of the principal purposes of the transaction(s) is obtaining treaty benefits
May be applied to all or some treaty benefits
Active group financing function may not be an issue if treaty income is not on paid to non-residents that are not entitled to equivalent treaty benefits and the payment is not part of a transaction of which one of the principal purposes is obtaining treaty benefits

18. OECD BEPS Action 6 – Principal purpose test (1)
OECD: access to tax treaty benefits denied:
“Notwithstanding the other provisions of this Convention, a benefit under this Convention shall not be granted in respect of an item of income or capital 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 this Convention.”
Not mechanical, but subjective
Business Rationale

19. OECD BEPS Action 6 – Principal purpose test (2)
Specific treaty benefits may be denied
If obtaining that benefit was one of the principal purposes of an arrangement or transaction
Unless granting that benefit would be in accordance with object and purpose of the treaty
Subjective and transactional anti-abuse rule
Substance might not be sufficient if obtaining a benefit was one of the principal purposes
Holding company with headquarter function / active group financing function may not be able to apply treaty benefit if obtaining the benefit was one of the principal purposes

20. EU PSD Main purpose test (1)
General-anti abuse rules (GAAR) in EU PS Directive to limit tax exemption for dividend income paid by companies tax resident in EU member states to other companies tax resident in EU member states
“2. Member States shall not grant the benefits of this Directive to an arrangement or a series of arrangements that, having been put into place for the main purpose or one of the main purposes of obtaining a tax advantage which defeats the object or purpose of this Directive, are not genuine having regard to all relevant facts and circumstances.
An arrangement may comprise more than one step or part.
3. For the purposes of paragraph 2, an arrangement or a series of arrangements shall be regarded as not genuine to the extent that they are not put into place for valid commercial reasons which reflect economic reality.”

21. EU PSD Main purpose test (2)
GAAR adopted for EU PS Directive:
Subjective and objective elements
No clear guidance on the terms used in the GAAR
To be implemented by EU jurisdictions on 31 December 2015 at the latest
Similar amendments expected for EU Interest & Royalty Directive
Problem is that tax is always one of the principal purposes in deciding where to locate a company, especially if non-EU investor look at Europe as a single market
The question is therefore whether the structure is:
genuine, i.e. has been put in place for valid commercial reasons, which reflect economic reality
and(/or?) defeats the object or purpose of the Directive

22. Example 1 – Holding company to enter the EU
Investors looking for ‘hub’ to invest in Europe
Ability to reinvest dividends from A into B and vice versa
May also distribute dividends to investors
USE or ABUSE of EU PS Directive?
What conditions can local GAAR impose within freedom of movement of capital or establishment?
Does Cadbury Schweppes still apply?
Non EU investors
EU HoldCo
EU country A
EU country B

23. Example 2 – JV company between third party investors
Investors want ‘neutral’ jurisdiction for Joint Venture
Ability to reinvest dividends from A into B and vice versa
May also distribute dividends to investors
Is this structure genuine?
USE or ABUSE of EU PS Directive?
Non EU investors
EU investors
EU HoldCo
EU country A
EU country B

24. Example 3 – Financing company
Non EU investors
BV raises money from third parties to fund EU business
Bank / bondholders desire security package and bankruptcy remote SPV
Any withholding tax will be burden for borrowing group (gross up clause)
USE or ABUSE of EU I&R Directive?
What conditions can local GAAR impose within freedom of movement of capital or establishment?
Bank loan
or bonds
EU HoldCo
EU FinCo
(country C)
Loan
Loan
EU country A
EU country B

25. Discussion / questions
4 statements: correct or incorrect, and why?
1. LOB, PPT, who cares, in practice it’s all the same anyway
2. Tax treaties will be amended by a multi-lateral agreement shortly
3. No need for companies to take action until treaties have been amended
4. The UAE should continue its treaty policy aiming for LOB instead of PPT

26. Jan Bart Schober International tax partner Head of Dubai office
Jan Bart Schober (1975) is a member of the International Tax practice group and heads the Dubai office. He advises multinational companies, financial institutions and funds on cross-border transactions. Jan Bart has extensive experience in structuring investments in E&P assets by oil and gas companies, as well as on acquisitions, joint ventures and corporate restructurings in the energy industry. Furthermore, he has a strong focus on financing transactions, such as securitisations and repackagings. Previously, he has worked in the Amsterdam and London offices of Loyens & Loeff.
Jan Bart frequently lectures on tax law on various occasions. He is a board member of the IFA GCC branch and a member of the Dutch Association of Tax advisers (NOB) and the Dutch Association for Tax Research.