10 June 2026
Introduction
The growing complexity of cross-border multilayered tax arrangements involving countries like Mauritius and Singapore, along with the evolving landscape, reflects a broader global shift toward substance-based taxation, driven by the introduction and application of the General Anti-Avoidance Rules (“GAAR”). These rules aim to distinguish legitimate tax planning from impermissible avoidance arrangements and reinforce the principle that tax benefits must align with economic reality.
Reassessing the role of Tax Residency Certificate (“TRC”)
Traditionally, a Tax Residency Certificate (“TRC”) was considered sufficient to claim benefits under Double Taxation Avoidance Agreements (“DTAAs”). However, in the post-GAAR regime, this position has significantly changed. Courts and tax authorities now treat the TRC as only a preliminary requirement rather than conclusive proof of eligibility.
Authorities are empowered to go beyond documentation and examine whether the entity claiming treaty benefits has real economic substance or is just an arrangement to avoid the taxation. This includes evaluating its operational activities, management structure and commercial purpose. The shift reflects a move away from formal compliance toward a deeper, substance-oriented analysis and a more powerful examination.
Substance over form and the “Head and Brain” test
A central principle guiding this transformation is the doctrine of “substance over form.” Under this approach, the legal structure of a transaction is not decisive; instead, its actual commercial intent and economic effect are assessed. Entities that function merely as conduit companies, without genuine business operations, risk being denied treaty benefits, as they are nothing but an arrangement to avoid taxation.
Closely linked to this doctrine is the “head and brain” test, which determines the true residence of an entity by identifying where key management and commercial decisions are made, and not where the entity is situated. Factors such as who authorises major transactions, controls bank accounts and directs investment strategies are critical. If effective control lies outside the jurisdiction of incorporation, the claim of residency and consequently treaty benefits may be rejected.
Scope and application of GAAR
GAAR empowers tax authorities to deny tax benefits arising from “impermissible avoidance arrangements.” Such arrangements are those primarily designed to obtain tax advantages and lacking commercial substance. Authorities may disregard or recharacterise these arrangements to reflect their true nature, and to make the taxability clear.
Importantly, GAAR operates alongside Judicial Anti-Avoidance Rules (“JAAR”). This ensures that even if a structure does not fall squarely within statutory provisions, it may still be challenged under established judicial doctrines such as lifting the corporate veil. Together, GAAR and JAAR create a robust framework to counter aggressive tax planning.
Grandfathering Provisions: Protection with limits
To safeguard investor confidence, GAAR includes grandfathering provisions for investments made before 1 April 2017. These provisions were intended to protect investments structured under the earlier legal framework. However, their scope is subject to interpretation.
A key distinction has emerged between “investments” and “arrangements”. While genuine investments are generally protected, arrangements designed primarily to obtain on-going tax benefits may still attract scrutiny. Courts have clarified that grandfathering is not absolute - if the tax benefit arises after the specified date, GAAR may still apply.
Subsequent regulatory amendments have provided some clarity by ensuring that income arising from the transfer of pre-2017 investments remains protected. However, this protection does not extend to structures lacking commercial substance or when there is any arrangement of tax evasion.
Indirect transfers and treaty eligibility
In multi-layered investment structures, shares of foreign entities may derive value from assets located in another jurisdiction. In such cases, treaty benefits are not automatically available for indirect transfers. Taxpayers must demonstrate direct ownership, genuine residency and compliance with treaty conditions.
If the required conditions aren’t met, particularly when the entity doesn’t have genuine business substance, then income from indirect transfers may still be taxed under local laws. This indicates a tougher stance by authorities on companies using complex offshore setups to claim treaty benefits.
Interplay between treaties and domestic law
DTAAs are designed to prevent double taxation, not to facilitate tax avoidance. Accordingly, domestic anti-avoidance provisions such as GAAR can override treaty benefits in cases of abuse or arrangements. Courts have increasingly emphasised that treaty interpretation must align with the purpose and spirit of such agreements.
This marks a departure from earlier judicial approaches that allowed treaty shopping based on formal compliance. The current trend focuses on ensuring that treaty benefits are granted only where there is genuine economic activity and no arrangement for tax evasion.
Conclusion
The interplay between GAAR and treaty provisions highlights a decisive shift toward substance-based taxation. The emphasis is now on economic reality rather than legal form. Taxpayers must ensure that their cross-border structures are supported by genuine commercial substance, effective management and a clear business purpose.
As regulatory scrutiny intensifies, purely documentation-driven tax planning is no longer sufficient. Robust governance, transparency, and alignment with the intent of the law are essential to sustain treaty benefits and avoid challenges under GAAR.
Contributor:
Atul Puri
Managing Partner & Co-Founder
SW India
E: atul.puri@sw-india.com