Under certain circumstances, companies may use loopholes in tax treaties between different countries to reduce their tax burden, but these behaviors are often in a gray area between legal tax planning and abuse of agreements. The following are some typical scenarios and strategies： --- ### **1. Take advantage of the preferential withholding tax rate in the agreement** -**Scenario**: The tax treaty between the two countries may provide for a lower withholding tax rate on dividends, interest or royalties (such as a reduction from 30% to 5% or 0%). -**Mode of operation**: An enterprise transfers funds or intellectual property rights to another country by setting up an intermediary company (such as a holding company or a financing center) in a contracting State of the agreement, and then enjoys a low tax rate when paying fees to another country. -**Case **: A company in Country A pays royalties to Country C through a conduit company in country B, taking advantage of the low tax rate in the B-C agreement to avoid high withholding taxes when directly paid. --- ### **2. Abuse of the rules for the determination of ”resident status"** -**Loopholes**: Some agreements have a looser definition of ”tax resident", allowing companies to obtain resident status through shell companies. -**Mode of operation**: Establish a shell company (such as a mailbox company) that has no substantial operation in the contracting state of the agreement, use its resident status to enjoy the preferential treatment of the agreement, and the actual business takes place in other high-tax countries. -**Case **: A company registered a shell company in Country D (a low-tax country) as the “nominal headquarters” of its global business, and transferred profits through preferential agreements between country D and other countries. --- ### **3. Circumvent the certification of permanent institutions (PE)** -**Loopholes**: The definition of institutions commonly established in the agreement may exclude short-term activities or specific business models (such as digital services). -**Mode of operation**: Avoid forming permanent institutions in high-tax countries through remote services, independent agents or short-term projects, thereby avoiding local corporate income tax. -**Case **: A technology company provides services in Country E through an online platform. Because it has not established a physical place in the local area, it is not regarded as a permanent institution, and its profits remain in low-tax countries. --- ### **4. Hybrid Entities and Tools (Hybrid Mismatches)** -**Loopholes**: Certain entities or financial instruments are regarded as taxable entities in one country and tax transparent entities in another country. -**Mode of operation**: Through a mixed structure (such as a dual-resident entity or a mixed loan), interest is deducted in one country and exempted from tax in another country, resulting in double non-taxation. -**Case **: A subsidiary of Country F pays interest to the parent company of country G. Country F allows the deduction of interest expenses, but country G regards the parent company as a transparent entity and does not tax interest. --- ### **5. Treaty Shopping (Treaty Shopping)** -**Loopholes**: Enterprises indirectly enjoy tax treaty benefits that could not be directly obtained through third-country entities. -**Operation method**: Set up an intermediate holding company in countries with extensive preferential agreements (such as the Netherlands and Singapore) as a transit point for funds or intellectual property rights. -**Case **: A company in Country H invests in Country I through a Dutch company, taking advantage of the preferential agreement between the Netherlands and Country I to reduce withholding tax, rather than directly using the higher tax rate that may exist in H-I. --- ### **6. Transfer pricing and profit segmentation** -**Loopholes**: Take advantage of the lack of strict constraints on transfer pricing in the agreement to transfer profits through related-party transactions. -**Mode of operation**: Subsidiaries in high-tax countries pay high fees (such as management fees and patent fees) to affiliated companies in low-tax countries to artificially reduce profits in high-tax countries. -**Case **: A multinational group concentrates its intellectual property rights in Country J (a low-tax place), and other subsidiaries pay high royalties to transfer profits to Country J. --- ### **7. Tax arbitrage in the Digital Economy** -**Loopholes**: Traditional tax treaties do not fully cover digital services (such as cloud computing and online advertising), resulting in profits staying in low-tax countries. -**Operation method**: Distribute digital income to low-tax countries through ambiguities such as server location and user data attribution. -**Case **: A social media company declared global advertising revenue in country K (a low-tax country), although its users and markets are mainly located in high-tax countries. --- ###**International anti-tax avoidance measures and restrictions** In recent years, countries and international organizations (such as the OECD) have gradually patched loopholes through the following measures： -**BEPS Action Plan**: Requires the agreement to include a "main purpose test” (PPT) to prevent abuse of the agreement. -**MLI (Multilateral Convention)**: Allows countries to quickly update existing agreements and add anti-abuse clauses. -**Digital tax and the global minimum tax**: For example, the 15% global minimum corporate tax (Pillar 2) implemented by the G7 restricts tax rate competition. --- ###**Summary** The key conditions for companies to take advantage of loopholes in tax treaties include： 1. **Tax rate differences**: There are significant differences in tax rates and preferential agreements between countries. 2. **Ambiguity of the terms**: The agreement does not clearly define the status of residents, permanent institutions, or income types. 3. **Lack of supervision**: Lack of anti-abuse clauses (such as PPT) or weak enforcement. 4. **Structural complexity**: Circumvent supervision through multi-layer architecture, hybrid tools, or digital models. Although some strategies may be legal under current laws, with the strengthening of international anti-tax avoidance efforts (such as BEPS and the global minimum tax), such loopholes are gradually being filled. Companies need to weigh compliance risks and tax benefits