Companies use loopholes in tax treaties of different countries to avoid high taxes, usually involving complex international tax planning and cross-border transaction arrangements. The following are some common situations and strategies, but it should be noted that these behaviors may involve legal and ethical risks, and may even be regarded as tax avoidance or tax evasion, resulting in serious legal consequences. The following content is for reference only. Companies should always comply with relevant laws and regulations and seek the advice of professional tax consultants. ### 1. **Use the definition of “permanent institution” in tax treaties** -Tax treaties usually stipulate that companies are only required to pay taxes in a certain country if they have a “permanent institution” in that country. An enterprise may avoid its tax obligations in a certain country by designing its business structure to avoid forming a permanent institution in that country. -For example, an enterprise may set up an agency or branch, but ensure that the activities of these agencies do not constitute the definition of a “permanent agency”. ### 2. **Use dual resident status** -Some companies may choose to pay taxes in countries with lower tax rates by setting up entities in different countries and using the definition of “resident” in tax treaties. For example, a company may use the resident status rules in tax treaties to transfer profits to low-tax countries by setting up holding companies in different countries. ### 3. **Use the “withholding tax deduction” in the tax treaty** -Tax treaties usually stipulate that the withholding tax rate for cross-border payments (such as dividends, interest, and royalties) can be reduced or waived. Companies may reduce or avoid withholding taxes in high-tax countries by establishing entities in low-tax countries and taking advantage of withholding tax relief clauses in tax treaties. ### 4. **Use "Hybrid Entities” and "hybrid tools”** -A mixed entity refers to an entity that is recognized as having different tax identities in different countries (for example, it is regarded as a company in one country and a partnership in another country). Hybrid instruments refer to financial instruments that are recognized as having different tax properties in different countries (for example, they are regarded as debt in one country and equity in another). Companies may take advantage of these differences to achieve tax optimization through cross-border transaction arrangements. ### 5. **Use “Conduit Company” or "Mailbox Company”** -Companies may use preferential clauses in tax treaties to transfer profits to these companies by setting up “conduit companies” or “mailbox companies” in low-tax or zero-tax countries, thereby avoiding their tax obligations in high-tax countries. ### 6. **Use the "transfer pricing" strategy** -Companies may transfer profits to low-tax countries by adjusting the transaction prices (such as goods, services, intellectual property rights, etc.) between affiliated companies. Although transfer pricing itself is not illegal, if abused, it may be regarded as tax avoidance. ### 7. **Use "inverted acquisition”** -Companies may transfer their headquarters or tax residency status to low-tax countries through “inversion”, that is, through acquisitions or mergers, thereby reducing their overall tax burden. ### 8. **Exploit the loopholes of "Digital Service Tax” and "Digital Economy"** -With the development of the digital economy, many countries have begun to impose a “digital service tax”. Companies may set up entities in different countries to take advantage of loopholes in tax treaties to avoid or reduce the burden of digital service tax. ### Legal and ethical risks -**Legal risks**: Many countries are strengthening anti-tax avoidance legislation, such as the "BEPS Action Plan" (Base Erosion and Profit Shifting) and the "Common Reporting Standard" (CRS), to prevent companies from using loopholes in tax treaties to avoid taxes. Abuse of tax treaties may be regarded as illegal tax avoidance or evasion, leading to fines, interest and criminal penalties. -**Moral hazard**: Corporate tax avoidance behavior may cause negative reactions from the public and investors and damage corporate reputation. ### Conclusion Enterprises should treat international tax planning with caution, ensure that their behavior complies with relevant laws and regulations, and follow the principles of international tax cooperation. It is recommended that companies seek the help of professional tax consultants when making cross-border tax arrangements to ensure compliance and sustainability.