A holding company in a treaty jurisdiction can legitimately reduce withholding on dividends, interest and royalties. What has changed is that the reduction now depends on substance, purpose and beneficial ownership — and each of those has to be evidenced, not asserted.
Who this guide is for
- Groups with an intermediate holding company between an operating business and its ultimate owners.
- Founders and family offices designing a structure for the first time.
- Anyone whose existing structure was designed before the current anti-abuse rules and has not been revisited.
What a holding company is actually for
The legitimate reasons are real and unremarkable: pooling investments from several jurisdictions, separating an operating business from the assets it does not need to own, providing a single counterparty for co-investors, ring-fencing liability, and creating a clean vehicle for a future sale. Treaty access is a consequence of where the company is resident, not a purpose in itself.
The distinction matters because the modern rules test purpose. A structure whose only discernible reason for existing is to obtain a treaty benefit is precisely the structure the anti-abuse rules were written for. A structure with a commercial rationale that also happens to sit in a treaty jurisdiction is a different animal, and the difference is documented at the time rather than argued later.
Three separate hurdles, and they are cumulative
The first is beneficial ownership. A recipient that is contractually obliged to pass income straight on, or that has no discretion over what it receives, may not be the beneficial owner of that income for treaty purposes — and the treaty rate then belongs to nobody in the chain. Back-to-back arrangements are the classic example.
The second is the treaty's own limitation provisions. Many treaties, and the multilateral instrument that overlays a large number of them, contain a test that denies a benefit where obtaining it was a principal purpose of an arrangement. Some treaties instead contain detailed eligibility tests requiring an active business, ownership by residents, or a substantial connection to the treaty state.
The third is domestic anti-avoidance in the source country, which can apply even where the treaty analysis is satisfied. In practice a structure has to survive all three, and a review that only tests one is not a review. Our page on treaty shopping and beneficial ownership covers the first two.
What substance means in practice
Substance is not a brass plate and it is not a resident director signing documents prepared elsewhere. What tax authorities look for is whether the decisions attributed to the company are actually taken there: board meetings held where the company is resident, directors with the competence and information to decide, minutes that record real deliberation, and a level of local cost consistent with the functions claimed.
Several jurisdictions now legislate this directly through economic substance requirements, with defined core activities that must be performed locally, adequate local expenditure and employees, and annual reporting on whether the test was met. Gulf jurisdictions in particular have developed regimes of this kind. Our page on economic substance in the Gulf covers that pattern.
The evidence file a holding company should keep
Board minutes recording where the meeting was held and what was actually decided, not written resolutions circulated for signature.
A record of the commercial reason for the structure, written when the structure was created.
Local costs: office, staff, professional support, and how each relates to the functions the company performs.
Bank mandates and evidence that treasury decisions are taken by the company rather than for it.
Current tax residency certificates, renewed annually rather than at the point they are demanded.
Hybrid mismatches and the mechanics of getting paid
A structure can satisfy every anti-abuse test and still fail commercially because the two countries characterise an entity or an instrument differently. An instrument treated as debt in one country and equity in the other, or an entity treated as transparent in one and opaque in the other, produces mismatches that anti-hybrid rules now specifically target. The result is often a deduction denied or an inclusion imposed that no one modelled.
The operational side matters too: withholding relief is claimed by giving the payer the right declaration before payment, refunds of over-withheld tax are slow, and a residency certificate takes time to obtain. A well-designed structure with poor administration still delivers cash late.
Reviewing or designing a structure
Purpose first, jurisdiction last. Doing it the other way round is what produces structures that fail a purpose test.
- Write down the commercial purposeWhat the structure is for, in the words of the people who want it, before any jurisdiction is chosen. This becomes the contemporaneous record that a purpose test asks for.
- Map the income flowsDividends, interest, royalties, service fees and eventual sale proceeds, with the rate each would attract with and without the intermediate company.
- Test all three hurdlesBeneficial ownership, the treaty's own limitation provisions, and source-country domestic anti-avoidance. A structure has to clear each one.
- Cost the substance honestlyLocal directors, premises, staff and professional support at the level the claimed functions require, and whether the benefit still justifies it once that is priced.
- Check for hybrid mismatchesHow each country characterises each entity and instrument in the chain, and whether anti-hybrid rules deny a deduction or force an inclusion.
- Build the annual maintenance routineBoard calendar in the right place, minutes, residency certificates renewed, substance reporting filed, and the payer declarations refreshed.
What to gather
What a structure review is built from:
- Current group structure chart with ownership percentages, residence and entity types.
- Constitutional documents for each entity in the chain.
- Board minutes for the last two years, and a note of where meetings were held.
- All intercompany agreements: loans, licences, service contracts and shareholder agreements.
- Dividend, interest and royalty flows for the last two years with withholding actually suffered.
- Tax residency certificates held, and their dates.
- Local cost and headcount for each holding entity.
- Any substance reporting already filed, and any correspondence from a tax authority about the structure.
Where this goes wrong
Choosing the jurisdiction before writing down the reason
A purpose test asks what the arrangement was for. If the only contemporaneous record is a rate comparison, that is the answer the file gives.
Confusing formal residence with substance
A registered office and a local director who signs what is sent are not decision-making. What is looked for is whether the decisions were actually taken there, and minutes are the primary evidence.
Never revisiting a structure that still works on paper
The anti-abuse landscape changed materially, and many structures that were fine when built have not been tested against the current tests. A review is far cheaper than a denied benefit plus interest.
What to do next
If the structure exists, ask for a second opinion that tests it against all three hurdles and prices the substance it would need. If it does not exist yet, start with the purpose memorandum — it costs nothing and it is the document that matters most later.
We run structure reviews and second opinions as fixed-fee engagements agreed in writing before work starts. See holding companies across borders and a second opinion on an existing structure.
Reviewed for accuracy for the 2025 and 2026 filing seasons by Udit Gupta, Cross-Border Tax Expert, Legal Quotient Consultants. General guidance only. Your own facts decide the answer, so bring them to a call before relying on this.
This guide states mechanisms and names forms rather than quoting rates, thresholds or day counts, because those change annually and the guide does not. The current figure for your own tax year is confirmed against the authority that publishes it before anything is filed.
