# GAAR and Principal Purpose Test > How GAAR and principal purpose test work after BEPS: ATAD Art.6, MLI Action 6, substance over form principle and real substance requirements. Author: Мария Плотникова — юрист, Family Office (https://wiki.private.law/authors/plotnikova) Last modified: 2026-07-16T14:48:00.000Z Canonical: https://wiki.private.law/en/gaar-ppt Topics: investments Jurisdictions: global Semantic tags: wealth-planning --- ## Where GAAR and PPT Came From The idea of general anti-avoidance rules predates BEPS itself. Continental systems have long known the doctrine of abuse of rights, and English courts—the Ramsay line, which allowed looking at a transaction as a whole, beyond individual formal steps. Over time, many states enshrined this logic in law as a statutory GAAR. In parallel, the problem of treaty shopping grew: a company would be established in a country with a favorable tax treaty solely to channel dividends, interest, or royalties through it and obtain a reduced withholding rate at source. The response came in the form of the BEPS project of 2013–2015. Its [Action 6](https://www.oecd.org/en/topics/sub-issues/preventing-tax-treaty-abuse.html) declared the prevention of treaty abuse one of four minimum standards, mandatory for all participants in the Inclusive Framework. The rule was delivered through the MLI—a multilateral instrument that amends multiple bilateral treaties with a single document; it opened for signature in 2017 and entered into force on July 1, 2018. This created a two-tier structure: domestic GAAR operates above national law, treaty-based PPT—above tax treaties. The mechanics of the treaties themselves and LOB are examined in the article on [MLI and treaty shopping](https://wiki.private.law/en/mli-treaty-shopping). ## Concept After the BEPS reform, international tax planning changed its logic. If previously it was sufficient to formally fit into a preferential provision or treaty, now tax authorities look at the substance of the transaction and the presence of real activity behind it. Two main instruments are used to combat artificial structures: domestic general anti-avoidance rules (GAAR) and the treaty-based principal purpose test (PPT). ## GAAR: General Rule GAAR (general anti-avoidance rule) is a general provision of national law that allows the tax authority to deny the benefit of a transaction whose main purpose was tax reduction in the absence of reasonable commercial sense. In the EU, such a rule is mandatory: Article 6 of the ATAD directive introduced a uniform GAAR in all Union countries from 2019. The United Kingdom has its own version (GAAR since 2013), as do dozens of other countries. GAAR operates above specific provisions: even if everything formally aligns, an artificial scheme can be unwound. ## PPT: Treaty Test PPT (principal purpose test) plays the same role at the level of tax treaties. It emerged as a minimum standard of BEPS (Action 6) and is embedded in the MLI—a multilateral instrument in force since July 1, 2018. The test is two-part: the tax authority must reasonably conclude that obtaining a treaty benefit was one of the principal purposes of the transaction, after which the taxpayer must prove that granting the benefit is consistent with the purposes of the treaty itself. If the argument does not hold, the benefit—for example, a reduced WHT rate on dividends—is denied. ## Substance Over Form Both instruments rely on the principle of substance over form. In practice, this means a requirement for real economic presence: people making decisions, an office, functions, and risks in the jurisdiction where the structure is registered. An empty holding company created solely for treaty purposes passes neither GAAR nor PPT. > ⚙️ The main question tax authorities ask today is why the structure exists beyond the tax benefit. When a company has a clear business reason and real activity, the benefit is sustainable; when the sole function is to redirect flows through a convenient jurisdiction, it will be removed. ## Application > 🔗 **Related** > [Economic substance](https://wiki.private.law/en/economic-substance) · [Holding structures](https://wiki.private.law/en/holding-structures) · [Luxembourg SOPARFI](https://wiki.private.law/en/company-luxembourg) · [Holding in the Netherlands](https://wiki.private.law/en/company-netherlands) · [DAC6: hallmarks](https://wiki.private.law/en/dac6-hallmarks) · [CFC — overview](/en/kik) A typical conflict involves a conduit holding company that claims a reduced withholding tax under a treaty but has neither employees nor independent decision-making. Under PPT, such a structure is denied the benefit; under GAAR, the transaction is recharacterized. A defensible structure is built on the opposite: real business logic, documented board decisions, local personnel, and compliance with substance requirements. The same conflict arises not only with dividends. A classic example from holding practice is a financing or licensing link: a loan or IP rights are placed in a company in a convenient jurisdiction, which receives interest or royalties with almost no withholding tax at source and immediately passes them on to the parent structure. If this link has no functions, no personnel, and no independent control over the income, it passes neither the beneficial owner test nor PPT. Sustainability comes from the opposite filling: real functions, decisions actually made on-site, and income that the company has the right to dispose of. How such holding chains are structured is explained in the article on [holding structures](https://wiki.private.law/en/holding-structures). ## Regulation: Lines of Defense Against Abuse In the European Union, general GAAR ceased to be optional. Article 6 of the ATAD directive—[Council Directive (EU) 2016/1164](https://eur-lex.europa.eu/legal-content/EN/TXT/?uri=CELEX%3A32016L1164), adopted on July 12, 2016—obliged all member states to introduce a uniform rule by January 1, 2019. It covers corporate tax and allows ignoring "non-genuine" transactions whose main or one of the main purposes was to obtain a tax advantage contrary to the meaning of applicable provisions. The Parent-Subsidiary Directive also has its own anti-avoidance clause. More details on the ATAD package of measures and CFC can be found in the article on [EU ATAD and CFC](https://wiki.private.law/en/eu-atad-cfc). National versions are stricter on procedure. The British [GAAR (Finance Act 2013)](https://www.legislation.gov.uk/ukpga/2013/29/part/5/enacted) has been in force since July 17, 2013; its core is the double reasonableness test: the tax authority must show that the transaction cannot reasonably be considered a reasonable course of action. Before making an assessment under GAAR, HMRC is required to refer the case to the GAAR Advisory Panel, and the court in a dispute takes into account the Panel's opinion. Similar statutory GAARs now exist in dozens of countries—from the EU to Australia and India. > 💡 The lines of defense back each other up. A specific anti-avoidance rule (SAAR) targets a particular scheme, GAAR unwinds an artificial transaction as a whole, treaty-based PPT removes the benefit from a tax treaty. PPT is part of the BEPS minimum standard, so it appears in almost all modern treaties. ## Beneficial Owner and the Danish Cases How far the substance principle extends was shown by the EU Court in the Danish cases of 2019—concerning dividends and interest leaving the EU through transit companies. The Court for the first time explicitly recognized the prohibition of abuse as a general principle of EU law: a benefit under the directives must be denied in the case of an artificial structure, even when there is no specific provision in national law, and a transit link that does not control the received income is not recognized as its beneficial owner. A detailed analysis of the requirements and conclusions of these cases can be found in the article on [MLI and treaty shopping](https://wiki.private.law/en/mli-treaty-shopping); how the chain of ownership is built and who is recognized as the beneficial owner is explained in the article on [beneficial ownership and nominee](https://wiki.private.law/en/beneficial-ownership-nominee). ## Where This Is Heading The substance logic continues to expand. Pillar Two added the subject-to-tax rule (STTR)—a treaty rule that allows the source country to impose an additional tax on intra-group interest, royalties, and certain other payments if the recipient is taxed at a nominal rate below 9 percent. The multilateral convention on STTR opened for signature on September 19, 2024, and is aimed primarily at protecting the tax base of developing countries. In parallel, PPT practice is growing, and administrations increasingly demand documented business reasons and real presence—what is described through substance and CIGA. The minimum tax is explained in the article on [Pillar Two](https://wiki.private.law/en/hong-kong-pillar-two-15), and proving presence—in the article on [economic substance](https://wiki.private.law/en/economic-substance). > 🧭 The practical guideline is simple: a structure must be explained by something beyond tax. Documented board decisions, local functions and personnel, the right to dispose of income—this is what GAAR and PPT check first and foremost. > 🍓 GAAR and PPT closed the era of purely paper structures. Domestic GAAR unwinds artificial transactions, treaty-based PPT removes treaty benefits, and both require one thing—real meaning and presence behind the structure. *This material is an expert overview and does not constitute individual tax advice.* --- --- ## Factual claims - The response came in the form of the BEPS project of 2013–2015. - GAAR (general anti-avoidance rule) is a general provision of national law that allows the tax authority to deny the benefit of a transaction whose main purpose was tax reduction in the absence of reasonable commercial sense. - How far the substance principle extends was shown by the EU Court in the Danish cases of 2019—concerning dividends and interest leaving the EU through transit companies.