On 21 November 2014, the OECD published the discussion draft "Follow Up Work on BEPS Action 6: Preventing Treaty Abuse" (the "Discussion Draft"). In its Report on Action 6 of 16 September 2014, the OECD developed proposals for a set of stringent anti-treaty abuse tests that must be passed in order to have access to tax treaty benefits. It now recognizes that these tests may lead to genuine situations in which no tax treaty access is available. The Discussion Draft identifies various issues and includes specific questions, on which comments are invited. Interested parties (e.g. industry bodies) are invited to submit their comments and analyses to the OECD. The deadline for submitting such comments is 9 January 2015.
In the Report on Action 6, the OECD developed a proposal for a series of tests aimed at barring access to tax treaties in inappropriate cases. Reference is made to the Loyens & Loeff flash of 17 September 2014.
In the Report, the OECD aimed very high in fighting perceived treaty abuse, resulting in very strict conditions for companies to obtain tax treaty benefits. This approach attracted wide criticism, as it would bring about uncertainty in applying tax treaties. In particular, holding companies, intermediate companies and investment fund vehicles will face a high risk of not passing the proposed tests and, therefore, of losing tax treaty benefits, if countries would include the OECD proposals in their tax treaties.
The OECD now acknowledges in the Discussion Draft that certain elements of the limitation on benefits provision (the "LOB Rule") and the principal purpose test (the "PPT") are too restrictive, which can result in exclusion from treaty benefits in non-abusive situations. One of the main issues identified in the Discussion Draft is the application of the anti-treaty-shopping measures to different kinds of investment funds. Under the proposed LOB Rule, a substantial portion of investment funds that have an international investor base and that invest cross-border would be excluded from tax treaty benefits. The Discussion Draft further describes other imperfections and potential overkills that require follow-up work. These issues relate to various elements of the LOB Rule, the PPT and the anti-conduit rule.
Rather than to provide to-the-point suggestions and solutions, the OECD has invited interested parties (e.g. industry bodies) to submit comments and to come up with solutions to the objections raised against the OECD's initial proposals. We encourage that commentary on Action 6 will be submitted to the OECD. Deadline for submitting comments is 9 January 2015. Subsequently, a final version of the Report on Action 6 will be released by the OECD in the course of 2015.
