Introduction

Base Erosion and Profit Shifting (BEPS) Action 6 also known as the Treaty Abuse Action represents one of the most significant global tax reforms in the last decade.
Its purpose is simple but far-reaching:

Stop multinationals from accessing treaty benefits when they are not entitled to them.

Before BEPS, many companies used treaty-shopping structures, conduit entities, shell companies, and artificial arrangements to benefit from reduced withholding tax (WHT) rates on royalties, dividends, services, and interest.
Action 6 changes this dramatically by requiring economic substance, purpose, and genuine business rationale before treaty benefits can be granted.

This article explains how Action 6 works, how it impacts treaty access, and what multinationals must do to comply.

1. What Is BEPS Action 6?

BEPS Action 6 is part of the OECD’s global initiative to combat tax avoidance.
It aims to ensure treaties are used only by taxpayers genuinely entitled to them.

Action 6 introduced:

• A new Preamble to treaties

• The Principal Purpose Test (PPT)

• The Limitation on Benefits (LOB) clause (in some treaties)

• Stricter Beneficial Ownership requirements

• Mandatory substance criteria

Together, these measures dramatically reduce access to treaty advantages for artificial structures.

2. The Preamble: The Foundation of Action 6

Since BEPS, most treaties include a new Preamble:

The purpose of the treaty is to avoid double taxation without creating opportunities for double non-taxation or treaty abuse.

This sets the tone for everything that follows.
If a taxpayer’s structure seeks tax reduction as the main purpose, treaty benefits may be denied.

3. Principal Purpose Test (PPT) The Core of Action 6

The PPT states:

Treaty benefits shall be denied if one of the principal purposes of any arrangement or transaction was to obtain treaty benefits,
unless granting the benefit aligns with the object and purpose of the treaty.

✔ What this means in practice:

• Tax authorities can deny benefits even without a strict LOB clause

• Business purpose must be documented

• Substance must match the claimed activity

• Holding companies or conduit structures without genuine activity are at high risk

✔ PPT covers:

• Royalties

• Services

• Dividends

• Interest

• Capital gains

4. Limitation on Benefits (LOB) Clause

Some treaties include an LOB clause, which is more rule-based than the PPT.

LOB requires the entity to meet specific criteria such as:

• Public listing

• Ownership by qualified residents

• Active business operations

• Substance requirements

• Non-conduit entity tests

If the entity fails the LOB test → treaty benefits are automatically denied.

5. Beneficial Ownership Under Action 6

Action 6 strengthens the concept of Beneficial Ownership, requiring the recipient of income to be:

• The true economic owner

• The entity that controls risks and functions

• The one that has substance (staff, premises, management)

• Not required to pass on payments to another entity

Shell and conduit companies fail this test immediately.

6. How Action 6 Impacts Access to Treaty Benefits (Practical Effects)

6.1 Treaty Shopping Risk Increases

Structures such as:

• Treaty-holding companies

• Pass-through entities

• Zero-tax conduits

• IP boxes without substance
  → are now under heavy scrutiny.

6.2 WHT Exemptions Now Require Proof

Companies must prove:

• Why they qualify for reduced WHT

• Their economic presence

• That transactions have real business logic

• That arrangements are not primarily tax-driven

Documents like TRCs alone are not enough.

6.3 More Documentation Required

Authorities now request:

• Substance evidence (employees, office, operations)

• Board minutes

• Organizational charts

• Financial statements

• Evidence of control & decision-making

• Detailed treaty-benefit memos

6.4 Refusal of Treaty Benefits Without Strong Justification

Tax authorities may deny benefits if they suspect:

• Conduit routing

• Aggressive tax structuring

• Artificial IP licensing

• Circular transactions

• Back-to-back financing

6.5 Increased Audit Activity

Since Action 6, many countries — including Egypt, UAE, KSA, Jordan — request:

• Beneficial Ownership proof

• Purpose of transaction

• Substance documentation

• Flow-of-funds tracing

7. Case Examples (Simplified)

Case A: Holding Company with No Employees

Purpose: Access 0% WHT on royalties.
Result: Treaty benefits denied under PPT + BO test.

Case B: Offshore Service Provider Performing Work Remotely

Purpose: Genuine service.
Result: Treaty benefits allowed if business purpose and substance is proven.

Case C: Back-to-Back IP Licensing

Middle entity passes royalties to another group company.
Result: High risk of denial under PPT & BO tests.

8. What Multinationals Must Do to Comply

✔ Build real substance

Staff — Office — Management — Decision-making.

✔ Document business purpose

Each transaction must have a non-tax commercial rationale.

✔ Maintain Beneficial Ownership evidence

Financials, org charts, internal governance.

✔ Avoid circular flows

Payments must reflect real activity, not artificial routing.

✔ Prepare treaty-benefit memos

Explain why PPT does not apply negatively.

✔ Update intercompany agreements

To reflect genuine roles and responsibilities.

Conclusion

BEPS Action 6 dramatically changed how countries grant treaty benefits.
Under the new global standard, substance, purpose, and economic reality determine eligibility not formal residency alone.
Companies must now demonstrate that their structures are not tax-driven and that they genuinely meet the conditions for treaty relief.

Understanding Action 6 is essential for avoiding denied treaty applications, unexpected WHT costs, and lengthy disputes with tax authorities.