PPT – Principal Purpose Test

The Principal Purpose Test (PPT) is the central anti-abuse clause of the Multilateral Instrument (MLI) and the BEPS final report on Action Point 6 (preventing treaty abuse). It is codified in Article 7 of the MLI and constitutes one of the mandatory BEPS minimum standards.

The PPT denies treaty benefits for a structure or transaction if one of the principal purposes of the arrangement is to obtain a tax benefit under the treaty, unless granting the benefit would be in accordance with the object and purpose of the relevant treaty provisions.

The PPT is a subjective test that focuses on the intentions and motives of the parties involved and grants tax authorities considerable discretion.

Over 100 jurisdictions have signed the MLI, and the vast majority have chosen the PPT (Article 7) as the anti-abuse clause.

The PPT was developed as a practical and flexible solution to treaty abuse that is less complex and rigid than the Limitation on Benefits (LOB) clause of American origin:

• 2013: BEPS Action Point 6 mandates the development of measures against treaty abuse
• 2014: OECD discussion drafts on the PPT; international consultation
• 2015: Final report on AP 6; PPT and LOB defined as equivalent options for the BEPS minimum standard; PPT alone is sufficient
• 2017: PPT incorporated in Article 7 MLI; jurisdictions choose between PPT (alone), LOB (with or without PPT) or LOB with source rule
• 2018 onwards: PPT clause enters into force in an increasing number of tax treaties through the MLI
• 2019 onwards: First judicial and administrative decisions on the application of the PPT
• 2019–2024: Regular peer review reports by the OECD Inclusive Framework assess the implementation of the PPT minimum standard by member jurisdictions

The PPT applies to all treaty benefits granted under a modified tax treaty (CTA):

• Covered benefits: All benefits to which the treaty applies (withholding tax reductions, exemptions, credits, source rules, etc.)
• Test subject: Any transaction, arrangement or structure through which treaty benefits are claimed
• Burden of proof: In principle on the tax authority to demonstrate that a principal purpose was directed at obtaining treaty benefits; then on the taxpayer to demonstrate that the benefit corresponds to the treaty purpose
• Exception: Treaty benefit is granted despite abusive purpose if it corresponds to the object and purpose of the treaty
• Not covered: Purely domestic arrangements without reference to a tax treaty

• Minimum standard: PPT or LOB is mandatory as a BEPS minimum standard for all MLI signatory states (Article 7 MLI)
• 'One of the principal purposes': It is sufficient that the treaty benefit is one of the (not necessarily the sole) principal purposes
• No safe harbours: Unlike the LOB, the PPT contains no exhaustive safe harbours; it grants tax authorities broad discretion
• Documentation and substance: Taxpayers should document economic substance and commercial reasons for their structures
• Interaction with LOB: Jurisdictions may apply PPT and LOB cumulatively; the PPT then acts as a backstop for cases that satisfy the LOB tests but still appear abusive

1 correction:
- Official URL returns HTTP 403
3 updates:
- No mention of MLI signatory count
- Missing key_dates entry for OECD PPT Guidance 2020
- Missing information on Peer Review process (BEPS Action 6)
2 clarifications.