Limits to Tax Planning

S. 381 1. Introduction

According to Art. 31 (1) Vienna Convention on the Law of Treaties, “a treaty shall be interpreted in good faith in accordance with the ordinary meaning to be given to the terms of the treaty in their context and in the light of its object and purpose.” Lawful tax planning and the unjustified claim to tax treaty benefits, usually achieved by setting up artificial structures, are countered by many anti-abuse treaty provisions such as the “limitation of benefits” (LOB) provisions, the “general bona fide” provision, the “beneficial ownership” concept, the ”amount of tax” provision, the “stock exchange” provision, “subject-to-tax” clauses, “alternative relief” provisions, etc. Each of them deals with treaty abuse from different perspectives and based on different criteria such as: the nature of the activity (activity clause); characterization of a taxpayer, a tax or income; a place; subjective criteria (taxpayer’s intention), etc. “Activity provisions“ or “activity clauses” are one of the anti-abuse tax treaty provisions which are based on certain objective criteria. The “activity test” aims to ensure that tax treaty benefits will be granted solely in the case of genuine ...