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M&A Vocabulary – Explained by the experts: Treaty Shopping


In this ongoing series, a number of different M&A experts from the global offices of Rödl & Partner each present an important term from the English specialist language of the mergers and acquisitions world, combined with some comments on how it is used. We are not attempting to provide expert legal precision, review linguistic nuances or present an exhaustive definition, but rather to give a basic understanding or refresher of a term and some useful tips from our consultancy practice.


“Treaty Shopping”, or “Buying into” a double taxation agreement, refer to the use of tax-driven structures under which a taxpayer creates a corporation to take advantage of a favourable double taxation agreement (DTA) and so receives tax benefits.

Example: Investor “I” is resident in State A and intends setting up a corporation “X” in State B. However, State A and B have not signed a DTA. However, a DTA has been concluded between State A and State C, and also between State B and State C. In order to make use of the DTA benefits, e.g. for withholding tax on dividend payments, I therefore creates an intermediate company “Y”, in State C which becomes the parent company of X in State B. Dividends, interest or royalties can now be paid - and benefit from the DTA privileges - by company X in State B to I, via company Y in state C.

In the past, the Netherlands, Cyprus and Luxembourg have been popular countries for such intermediary corporations. Another variant of treaty shopping is directives shopping, where the tax benefits of EU directives (Parent-Subsidiary Directive, Interest and Licensing Fees Directive) are used.
In our example, I benefits from a DTA signed by State B, but without being resident in the relevant state (C). Since structures like this are not desired, many countries have introduced so-called “anti-treaty shopping” regulations.

The OECD/G20 countries have within the BEPS (“Base Erosion and Profit Shifting”) action plan provided for Minimum standards to combat the abuse of DTAs (BEPS Action 6).

In Germany anti-treaty shopping regulations have been in existence already for over 25 years. Under these, there is a check whether a shareholder (in our example: I) of a foreign company (in our example: Y) would be able to apply the DTA preferences if he were a direct shareholder. If – as in our example – that is not the case, we refuse to allow the DTA benefits, unless the intermediate company meets certain tests of substance. Since the current version of German law is not in line with European law, a new version is expected in the near future.

In Russia, anti-treaty shopping rules were introduced in 2015 and then tightened up in 2017. Under the Russian regulations, DTA benefits can only be applied if the recipient of the (dividend, interest, license fee) payment is actually the final beneficiary. As in our example, Y passes the dividends, interest or royalties straight through to I, so Y is not the real final beneficiary. In order to prove that a payment recipient is indeed the final beneficiary, since 2017 the payment recipient has to submit a confirmation to  the company making the payment, which confirms that it is the beneficiary of the income. Only after presentation of this proof and a certification of residency can the paying company apply DTA benefits.

Under present administrative and court practice in Russia, to be recognised as the final beneficiary company, it is necessary for this not merely to pass on the income, but to actively decide how it is used, to operate actively on the market and to have staff and premises. Pure holding companies are therefore normally refused the status of final beneficiary. It must be noted that these rules have also been applied to cases in which shares in a Russian company are held by a German foreign holding private company under corporate law, without any intention of illegally exploiting DTA regulations. As we can expect global tightening of anti-treaty shopping regulations with the implementation of the BEPS action plan, group structures should also be regularly reviewed with this in mind. 

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