Double Taxation Agreements after BEPS: the impact of the MLI, the PPT clause and the beneficial owner
Historically, Double Taxation Agreements (DTAs) have constituted a key instrument for structuring and planning international transactions.
Thanks to the network of DTAs, entities and multinational groups are able to operate while minimising or eliminating instances of double taxation in cross-border transactions, such as payments of dividends, interest or royalties, among other items.
That said, it is clear that the landscape has changed significantly in recent years. Not everything is permissible anymore. International initiatives against aggressive tax planning, particularly the OECD’s BEPS (Base Erosion and Profit Shifting) actions, have introduced new measures aimed at preventing the abusive use of DTAs.
Ultimately, the primary objective of these measures is not so much to prevent double taxation, but rather to prevent double non-taxation through abusive practices.
In this context, we will address two fundamental concepts in international taxation:
- the Principal Purpose Test (PPT) clause
- and the concept of beneficial ownership.
The impact of the MLI on Double Taxation Agreements in the current international context
The Multilateral Instrument, or MLI (Multilateral Convention to Implement Tax Treaty Related Measures to Prevent BEPS), is an agreement promoted by the OECD that allows for the simultaneous modification of numerous DTAs by incorporating BEPS measures against abusive tax planning.
Spain ratified it in 2021, which has resulted in many of the DTAs signed by Spain incorporating new anti-abuse rules.
One of the most relevant provisions introduced by the MLI is the Principal Purpose Test (PPT), which operates as a general anti-abuse rule.
The PPT clause in Double Taxation Agreements: what is the “Principal Purpose Test”?
The PPT clause is set out in Article 7(1) of the MLI. This provision states as follows:
“Notwithstanding the provisions of a Covered Tax Agreement, a benefit under that Agreement 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 those circumstances would be in accordance with the object and purpose of the relevant provisions of the Covered Tax Agreement.”
In essence, this clause means that the benefits of a DTA may be denied where, taking into account all relevant facts and circumstances, it can be concluded that one of the principal purposes of a transaction or structure was to obtain a tax advantage.
Consider, for example, the interposition of companies in jurisdictions with particularly favourable tax regimes, with the sole purpose of shifting profits to that jurisdiction while avoiding or minimising taxation.
In such a case, the company may be required to demonstrate that the effective management and control of its activities are genuinely located in that jurisdiction.
This is a highly fact-specific and subjective matter, and in many cases it will be necessary to assess the overall functioning of the group and the allocation of functions across the different jurisdictions in which it operates, in order to determine whether there is genuine economic substance or merely “treaty shopping” (i.e. the abusive use of DTAs).
The concept of beneficial ownership in Double Taxation Agreements
Alongside the PPT clause, another key and complementary concept is that of the beneficial owner.
This concept refers to the person or entity that ultimately has the right to use and enjoy income, such as dividends, interest or royalties.
The underlying purpose of this concept, closely linked to the PPT clause, is to prevent intermediary entities from being used merely as conduits to channel payments to other countries with more favourable tax regimes.
Following the previous example, consider a company interposed in a jurisdiction that benefits from a favourable DTA but which in reality acts solely as an intermediary (commonly referred to as a “shell” company), immediately passing the funds on to another group entity through another arrangement or transaction.
In such cases, the tax authorities may take the view that the interposed entity is not the true beneficial owner of the income, which may result in the denial of treaty benefits.
In practice, the PPT clause and the concept of beneficial ownership are often analysed together.
How the PPT and beneficial ownership affect DTAs in international groups
These increasingly prevalent rules mean that international tax planning must go beyond a purely legal analysis.
As noted above, the PPT clause contains a significant subjective element, since it is sufficient that it be “reasonable to conclude” that one of the principal purposes is to benefit from the application of a DTA.
Accordingly, it is critical to assess factors such as:
- the genuine economic substance of group entities,
- the actual functions performed in each jurisdiction,
- the business rationale for the structure,
- and the consistency between the legal structure and the economic reality of the business.
Particular care should be taken with traditionally common practices such as:
- locating holding companies in intermediary jurisdictions,
- or relocating the legal ownership of certain intangible assets,
without proper supporting planning.
Such structures may be subject to scrutiny by the tax authorities, making it essential to be prepared to justify their economic reality.
For this reason, it is crucial to properly document the commercial rationale behind international structures.
Where a company can demonstrate that a given structure is driven by genuine business or strategic reasons, such as:
- centralising investments,
- facilitating group financing,
- or managing international assets,
the risk of tax challenge is generally lower.
Conversely, where a structure lacks real economic activity or business justification, or where this cannot be adequately evidenced, the risk of denial of DTA benefits increases significantly.
In this context, concepts such as economic substance, effective control and the actual functions performed by group entities are becoming increasingly important.
Tax risks associated with DTAs in international structures
Multinational groups with an international presence are one of the primary areas of focus for tax audits under the Annual Tax Control Plans (the plan for the 2026 financial year is still pending publication).
The Spanish Tax Administration, as well as tax authorities in other jurisdictions, pay particular attention to structures involving, among others:
- holding companies in third countries,
- intra-group financing arrangements,
- cross-border payments of dividends, royalties or interest,
- investment structures involving multiple jurisdictions.
For this reason, many business groups are currently reviewing their international structures to ensure compliance with the new standards of economic substance and business justification.
Conclusion: the new approach to DTAs after BEPS
The application of DTAs no longer depends solely on formal compliance with their requirements.
Following the introduction of the MLI and the BEPS measures, different jurisdictions now have greater discretion to analyse the real purpose of international structures.
It should not be overlooked that administrative cooperation mechanisms exist, under which the exchange of information between countries is increasing.
Accordingly, for companies with international operations, periodically reviewing their structures and ensuring that they reflect genuine economic logic has become an essential practice in order to avoid tax risks and inefficiencies.
In an increasingly coordinated global environment, effective international tax planning requires not only knowledge of the rules, but also the ability to anticipate how different tax authorities may interpret them.
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