Andrés Báez Moreno

Irrelevant or Even Worse?

The Vicious Dilemma of the New
Tax Treaty Preamble

Max Planck Institute for Tax Law and

Public Finance Working Paper 2024–07

September 2024

Max Planck Institute for

Tax Law and Public Finance
Department of Business and Tax Law
Department of Public Economics

http://www.tax.mpg.de
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 Irrelevant or even worse?
The vicious dilemma of the new Tax Treaty Preamble
Andrés Báez Moreno *
Max Planck Institute for Tax Law and Public Finance

Summary

I. Introduction. ............................................................................................................................ 1
II. The alleged autonomous anti-abuse function attributed to the new Preamble. ............... 5
II.1 An anti-abuse principle with unknown boundaries. ........................................................... 6
II.2 An anti-abuse principle without a concept of abuse. ........................................................ 10
II.3 An anti-abuse teleological interpretation principle built upon an inexistent or
contradictive treaty purpose.................................................................................................... 11
II.4 An anti-abuse interpretation mechanism with unknown objectives.................................. 14
III. The alleged complementary function of the PPT attributed to the new Preamble. ..... 18
III.1 Linking the teleological prong of the PPT to the specific purpose of the abused tax treaty
provision.................................................................................................................................. 19
III.2 Saving the teleological prong of the PPT (and the PPT itself) by linking it to the general
object(s) and purpose(s) of the tax treaty................................................................................ 21
III.3 The shortcomings of linking the teleological prong of the principal purpose test to the
general objects and purposes of tax treaties: circularity, confusion between the prongs of the
rule and excessive reliance on economic substance. .............................................................. 24
IV. Conclusions. ......................................................................................................................... 30

Abstract

The central thesis of this article is that the new Preamble of the OECD Model Tax
Convention and the Tax Arrangements covered by the Multilateral Instrument should be
irrelevant to the interpretation of the latter. For the Preamble to be relevant, one would
need to assume a series of untenable postulates regarding the interpretation of Tax
Treaties and/or force an interpretation of the Principal Purpose Test with unpredictable
consequences.

I. Introduction.

The main focus of the BEPS Action Plan concerning tax treaties focused on integrating
a wide range of Special Anti-Avoidance Rules (SAARs) and the Principal Purpose Test

*
The author would like to thank Wolfgang Schön, Johanna Stark, Aitor Navarro and Daniel Philip
Deranco for valuable comments on an earlier version of this article. A prior version was also
presented in March 2024 at the Monday Workshops Series of the Max Planck Institute for Tax
Law and Public Finance and I would like to thank all researchers present for invaluable feedback.
1
within Double Tax Conventions. Maybe as an alternative to the OECD’s previous
practices— i.e. stretching the provisions of a petrified OECD Model Convention through
astute and increasingly frequent interpretations in the Model Commentaries— or more
likely, because a multitude of new rules reaps political benefits in response to public
opinion (allegedly) clamouring for changes in the structures of the ‘so-called’
International Tax Regime, the outcomes of the BEPS Plan undeniably yielded a lengthy
roster of hard-law anti-avoidance measures 1.

This is why it is so surprising that BEPS Action 6, the MLI, and the new OECD Model
Tax Convention (2017) devoted so much attention to such a seemingly ethereal change
as the addition of a Preamble (to the Model and, above all, to the Tax Treaties covered by
the MLI) and the modification of the Model’s title. Indeed, the pre-2017 versions of the
OECD Model 2 were called with the rather bland title “Convention between (State A) and
(State B) with respect to taxes on income and on capital”. Besides, a footnote indicated
that: “States wishing to do so may follow the widespread practice of including in the title
a reference to either the avoidance of double taxation or to both the avoidance of double
taxation and the prevention of fiscal evasion”. Furthermore, there was no Model Preamble
text and a second footnote merely stated that: “The Preamble of the Convention shall be
drafted in accordance with the constitutional procedure of both Contracting States”.
Given this regulatory situation, complying with the mandate contained in the BEPS
Action Plan of 2013 3, the Final Report on BEPS Action 6 indicated that a new title should
be given to the Model with the following wording: “Convention between (State A) and
(State B) for the elimination of double taxation with respect to taxes on income and on
capital and the prevention of tax evasion and avoidance” 4. In addition, the Final Report
also proposed a Preamble for the model:
“(State A) and (State B),
Desiring to further develop their economic relationship and to enhance their co-
operation in tax matters,
Intending to conclude a Convention for the elimination of double taxation with respect to
taxes on income and on capital without creating opportunities for non-taxation or
reduced taxation through tax evasion or avoidance (including through treaty-shopping
arrangements aimed at obtaining reliefs provided in this Convention for the indirect
benefit of residents of third States)
Have agreed as follows” 5: […]

1
Beyond the Parts relating to definitions, scope, and final operative provisions (Parts I and VII) and Parts
V and VI of the MULTILATERAL CONVENTION TO IMPLEMENT TAX TREATY RELATED
MEASURES TO PREVENT BASE EROSION AND PROFIT SHIFTING (devoted respectively to Dispute
Resolution and Arbitration), the remaining provisions of the MLI contain SAARs or GAARs which could
be potentially integrated into covered Tax Treaties. While some provisions of Part II of the MLI (HYBRID
MISMATCHES) may have a partially different focus, it is unequivocal that Part III (TREATY ABUSE)
stands as the central core of the Multilateral Instrument, both in terms of quantity and significance.
2
At least since the 1963 Draft Double Taxation Convention on Income and Capital.
3
Which commissioned work to be carried out to clarify that tax treaties are not intended to be used to
generate double non-taxation (OECD, Action Plan on Base Erosion and Profit Shifting. Paris: OECD
Publishing, 2013, p. 19).
4
OECD, Preventing the Granting of Treaty Benefits in Inappropriate Circumstances, Action 6 - 2015 Final
Report. Paris: OECD Publishing, 2015, par. 72.
5
Ibidem.

2
The conclusions of BEPS Action 6 ended up reflected in: i) A change of title of the 2017
OECD Model and the incorporation of the transcribed preamble, both with the same
language contained in the Final Report; and ii) The incorporation into Article 6 of the
MLI of the Preamble reproduced above.

What is striking is not just the contrast between these additions of “soft” content against
BEPS’ emphasis on concrete “hard law” Special Anti-avoidance Rules (hereinafter
SAARs) and General Anti-avoidance Rules (hereinafter GAARs). What is most
intriguing is that the new Preamble is the only content of the entire MLI that any covered
tax agreement 6 must incorporate. Thanks to its design as “reinforced” minimum standard,
the last part of the Preamble transcribed above (referring to the elimination of double
taxation with respect to taxes on income and on capital without creating opportunities
for non-taxation or reduced taxation through tax evasion or avoidance) will find its way
into all covered tax agreements 7.

As surprising as these contrasts may be, the drive to have the new Preamble (at all costs)
in the post-BEPS tax treaties is not accidental. Indeed, the architects of the BEPS Plan
envisioned the new Preamble to influence, in a comprehensive and transversal manner,
the interpretation of whatever provision within a covered tax agreement. This objective
was soon explicitly articulated in the Final Report of BEPS Action 6, whose words are
worth reproducing verbatim:

“The clear statement of the intention of the signatories to a tax treaty that appears
in the above preamble will be relevant to the interpretation and application of the
provisions of that treaty” 8.

Not surprisingly, the interpretative effect of the new Preamble has also been explicitly
incorporated into both the Commentaries to the 2017 version of the OECD Model Tax

6
The author deliberately uses the term contained in in subparagraph a) of paragraph 1 of Article 2 of the
MLI. In other contexts of this paper - less linked to the MLI - reference will be made to Double Tax
Conventions or, simply, Tax Treaties.
7
Pursuant to Articles 6(4) and 6(5) of the MLI, a signatory may only avoid incorporating the new text of
the Preamble into a covered tax agreement (technically reserving it) if the corresponding DTC already
contains the same text. According to articles 6(3) and 6(6) of the MLI, the first part of the above-transcribed
Preamble (referring to the desire to further develop their economic relations and to strengthen their
cooperation in tax matters), may or may not be incorporated into covered DTCs depending on whether both
parties to the relevant DTC so desire. In this context, the author refers to a reinforced minimum standard
as other contents that make up the minimum standard (notably the Principal Purpose Test) may not be
incorporated into covered tax agreements as signatories are offered other implementation options.
8
OECD, Preventing the Granting of Treaty Benefits…op. cit. par. 73.

3
Convention 9 (ComOECD 2017) and the Explanatory Statement to The Multilateral
Convention 10 (Explanatory Statement).

The statements above are as ambiguous as the text of the new Preamble itself. However,
they provide insight into the dual purpose that the proponents of the new Preamble aimed
to assign to it. On the one hand, it was intended to serve as a legal foundation to justify
addressing alleged abuses of tax treaty provisions through a straightforward interpretation
regardless of any general or special anti-abuse rules (hereinafter the autonomous anti-
abuse function). On the other hand, it was meant to function as an interpretative guide to
the general anti-abuse clause, known as the Principal Purpose Test, found in Article 29(9)
of the OECD Model Tax Convention and Article 7(1) of the MLI (hereinafter the
complementary function of the PPT) 11. This paper seeks to critically analyze the role of
the ultimate guarantor of tax treaty integrity (guarantee of non-abuse) seemingly
attributed to the new Preamble. This critique will be conducted independently of any tax
policy evaluation regarding treaty abuse, especially through treaty shopping strategies,
concerning which this article remains neutral.

9
ComOECD 2017, Introduction, par. 16.2 [Since the title and preamble form part of the context of the
Convention and constitute a general statement of the object and purpose of the Convention, they should
play an important role in the interpretation of the provisions of the Convention. According to the general
rule of treaty interpretation contained in Article 31(1) of the 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]. Many other passages in the
Commentaries refer to the interpretative consequences of the new Preamble: ComOECD 2017,
Introduction, par. 41 [The Committee on Fiscal Affairs will continue to monitor the application of tax
treaties in order to ensure that, as stated in the preamble of the Convention, the provisions of the
Convention are not used for the purposes of tax avoidance or evasion], Art. 1, paras. 59 [Other States prefer
to view some abuses as being abuses of the convention itself, as opposed to abuses of domestic law. These
States, however, then consider that a proper construction of tax conventions allows them to disregard
abusive transactions, such as those entered into with the view to obtaining unintended benefits under the
provisions of these conventions. This interpretation results from the object and purpose of tax conventions
as well as the obligation to interpret them in good faith (see Article 31 of the Vienna Convention on the
Law of Treaties)] and Art. 29, paras. 1 [As explained in the footnote to the Article, Article 29 reflects the
intention of the Contracting States, incorporated in the preamble of the Convention, to eliminate double
taxation without creating opportunities for non-taxation or reduced taxation through tax evasion or
avoidance, including through treaty shopping arrangements] and 173 [Paragraph 9 must be read in the
context of paragraphs 1 to 7 and of the rest of the Convention, including its preamble. This is particularly
important for the purposes of determining the object and purpose of the relevant provisions of the
Convention. (…) In that case, paragraph 9 would apply to deny that benefit because subparagraph c) of
paragraph 2, when read in the context of the rest of the Convention and, in particular, its preamble, cannot
be considered as having the purpose, shared by the two Contracting States, of authorising treaty-shopping
transactions entered into by public companies].
10
Explanatory Statement to the Multilateral Convention to Implement Tax Treaty Related Measures to
Prevent Base Erosion and Profit Shifting (ES), par. 23 [The inclusion of this statement in the preamble to
the Convention is intended to clarify the intent of the Parties to ensure that Covered Tax Agreements be
interpreted in line with the preamble language foreseen in Article 6(1)].
11
The dual impact of the new Preamble - on the interpretation of whatever provision and specifically on the
application of the Principal Purpose Test- has been generally recognized in a more or less emphatic manner
by the literature: Pistone, Pasquale & Čičin-Šain, Nevia, Chapter 1. The Implementation and Lasting Effects
of the Multilateral Instrument: General Report. /In/ The Implementation and Lasting Effects of the
Multilateral Instrument. Georg Kofler; Michael Lang; Jeffrey Owens; Pasquale Pistone; Alexander Rust;
Josef Schuch; Karonline Spies & Claus Staringer, eds. Amsterdam: IBFD, 2021, at 19-20 [not
emphatically]. Kennedy, Abigail. The Effect of Article 6 MLI on Covered Tax Agreements: Fata Morgana
or New Reality? /In/ 50, Intertax, 4, 2022, pp. 335-340.

4
The remainder of this article is organized as follows: Section II delineates the potential
autonomous anti-abuse function ascribed to the new Preamble and scrutinizes its
challenging coexistence with other anti-abuse provisions, notably the Principal Purpose
Test. It highlights its lack of delineated boundaries, its grounding in a non-existent natural
concept of abuse, and a questionable and frequently contradictory alleged purpose of tax
treaties. Section III outlines the prospective complementary function of the PPT
associated with the new Preamble, criticizing the potential polarization it could introduce
when applying a GAAR, which, like the PPT, already exhibits significant technical
deficiencies. Section IV concludes.

II. The alleged autonomous anti-abuse function attributed to the new Preamble

The notion of addressing abuses of tax treaties through interpreting the relevant (treaty)
provisions is neither novel nor a consequence of introducing the new Preamble. In fact,
the passage in the Commentaries that most clearly reflects this approach was incorporated
into the Commentaries in 2003 when stating that some States “… consider that a proper
construction of tax conventions allows them to disregard abusive transactions, such as
those entered into with the view to obtaining unintended benefits under the provisions of
these conventions”. 12

Further, this approach aligns with a relevant school of thought in German-speaking

academia, according to which the abuse of (tax) provisions can be addressed through their
precise teleological interpretation 13, rendering General Anti-Avoidance Rules redundant
or, at most, serving merely as a reminder for interpreters that tax treaty abuse must be
tackled 14. In essence, the new Preamble's addition to the longstanding debate between
proponents and critics of the Innentheorie is the inclusion within the normative
framework in which the potentially abused provisions are inserted (i.e., the tax treaty) of
an explicit statement that this normative instrument is not intended to create opportunities
for tax avoidance. As the author tries to demonstrate in this section, the new Preamble
has added new complications to the already abundant misconceptions surrounding the
Innentheorie. The author analytically develops four essential criticisms of the alleged
anti-abuse function of the new Preamble; however, all of them boil down to one basic
idea: if one starts from a solid methodological construction, particularly concerning the
limits to interpretation, the new Preamble should be practically irrelevant in the fight
against the abuse of tax treaties. Conversely, it is necessary to assume a whole set of

12
The author refers here to ComOECD 2017, Art. 1, paras. 59.
13
This approach, often referred to as Innentheorie, holds that the abuse of tax rules is resolved from within
the rules, resorting to a teleological interpretation of the very abused rules. For a succinct presentation of
this thesis and its contrasting approach (the Auβentheorie): Drüen, Klaus-Dieter in Tipke/Kruse, § 42 AO
(FGO/FVG/VwZG) Rz. 9-11 [With a clear (not terminological) but conceptual inclination towards the
Auβentheorie]. Fischer, Peter in Hübschmann/Hepp/Spitaler, § 42 AO Rz. 196-202 [With a clear inclination
towards the Innentheorie].
14
Concerning tax treaties, this viewpoint has been consistently advocated by Professor Michael Lang, who,
more than any other scholar, has scrutinized and attempted to elucidate the Principal Purpose Test through
the principles of Innentheorie: Lang, Michael. Die Überlegungen der OECD zur Aufnahme einer
Missbrauchvorschrift in Doppelbesteurungsabkommen. /In/ Privatstiftung und Umgründungen.
Gedenkschrift für Franz Helbich (Elisabeth König; Eberhard Wallentin & Werner Wiesner (Hrsg). Wien:
Lexis Nexis, 2014, pp. 17-18. Lang, Michael. BEPS Action 6: Introducing an Antiabuse Rule in Tax
Treaties. /In/ Tax Notes International, 2014, pp. 663-664. And particularly: Lang, Michael. The Signalling
Function of Article 29(9) of the OECD Model – The “Principal Purpose Test”. /In/ Bulletin for
International Taxation, 2020, pp. 264-268.

5
untenable postulates in order for interpretation to become an effective anti-abuse
mechanism.

II.1 An anti-abuse principle with unknown boundaries

The language of a provision serves as both the starting point and the boundary for its
interpretation. The interpreter is constrained by the conceivable meaning(s) attributed to
those words, unable to surpass the confines set by the actual text 15. The attribution of a
meaning to a legal text no longer reconcilable with that very legal text can be no longer
considered “interpretation of the law” but rather “development of tax law beyond
interpretation" 16. In legal domains like tax law, where adherence to the Rule of Law is
notably stringent, development of tax law beyond interpretation should be prohibited or
at least severely limited. In instances deemed potentially abusive, a correcting decision
should only be reached beyond the conceivable meaning(s) ascribed to a legal text if,
within the framework of a General Anti-Avoidance Rule, the transactions executed by
the taxpayer are deemed abusive according to the particular concept of abuse expressly
codified by the law 17.

While there have been notable critics of this methodological approach, particularly among
proponents of the Innentheorie, it is challenging to be disputed when it comes to the
application of tax treaties. Derived from Article 31(1) of the VCLT, general
commentators have inferred that treaty rules should not be construed beyond the
conceivable meaning(s) inherent in the treaty's terms. This implies that national courts
and administrative authorities should refrain, when applying the treaty, from substituting
these potential meaning(s) with the (purported) intentions of the contracting parties or the
(objective) object and purpose of the treaty 18. Tax lawyers have also endorsed this

15
Meier-Hayoz, Arthur. Der Richter als Gesetzgeber. Eine Besinnung auf die von den Gerichten befolgten
Verfahrensgrundsätze im Bereiche der freien richterlichen Rechtsfindung gemäss Art. 1 Abs. 2 d.
schweizerischen Zivilgesetzbuches. Zürich: Juriss Verlag, 1951, p. 42. This insightful formulation relies on
Larenz's differentiation between the literal wording of the law (Wortlaut) and the potential meaning(s)
inherent in that wording (Wortsinn) (Larenz, Karl. Methodenlehre der Rechtswissenschaft. Dritte, neu
bearbeitete Auflage. Berlin-Heildelberg-New York: Springer, 1995, pp. 141-145).
16
In the view of the author, this the best translation of the German concept Rechtsfortbildung. Other legal
traditions use different terms in order to refer to this phenomenon, such as Integración in the Spanish-
speaking legal tradition.
17
This approach recently in relation to the PPT and the abuse of tax treaties in: Schön, Wolfgang. Chapter
12: The Role of “Commercial Reasons” and “Economic Reality” in the Principal Purpose Test under
Article 29(9) of the 2017 OECD Model. /In/ Building Global International Tax Law: Essays in Honour of
Guglielmo Maisto (P. Pistone ed.). Amsterdam: IBFD, 2022, at 12.2.1. This has been the traditional position
in Germany since Hensel succinctly but very illustratively formulated it: "Tax Avoidance arises exactly
where the art of interpretation begins to fail." (Hensel, Albert. Zur Dogmatik des Begriffs
“Steuerumgehung”. /In/ Bonner Festgabe für Ernst Zitelmann zum fünfzigjährigen Doktorjubiläum.
München-Berlin: Duncker & Humblot, 1923, p. 224) This initial formulation was later refined, primarily
by incorporating Larenz's fundamental findings.
18
Engelen, Frank. Interpretation of Tax Treaties under International Law. Amsterdam: International
Bureau of Fiscal Documentation, 2004, p. 172 [although confusing the concept and limits of purposive
interpretation, in the author's opinion]. Linderfalk, Ulf. On the Interpretation of Treaties. The Modern
International Law as Expressed in the 1969 Vienna Convention on the Law of Treaties. Dordrecht:
Springer, 2007, p. 203. Villiger, Mark E. Commentary on the 1969 Vienna Convention on the Law of
Treaties. Leiden-Boston: Martinus Nijhoff Publishers, 2009, Art. 31 Mn. 14. Villiger Mark E. The Rules
on Interpretation: Misgivings, Misunderstandings, Miscarriage? The ‘Crucible’ Intended by the
International Law Commission. /In/ The Law of Treaties Beyond the Vienna Convention (Enzo Cannizzaro
(ed.)). Oxford: Oxford University Press, 2011, p. 110. Gardiner, Richard K. Treaty Interpretation. Second
Edition. Oxford: Oxford University Press, 2015, pp. 218-219. Dörr, Oliver. Article 31. General Rule of

6
conclusion when articulating the significance of Article 31(1) of the Vienna Convention
on the Law of Treaties in interpreting Double Taxation Conventions 19. This
methodological approach carries significant implications. This does not mean that the
object and purpose of a tax treaty (or any of its provisions), now clarified in the new
Preamble, should be entirely irrelevant when addressing taxpayer strategies that involve
treaty abuse. The provisions of tax treaties are occasionally articulated in significantly
expansive terms or with limited connections to established concepts in (private) law,
leading thereby to many possible interpretations. In such cases, specific meanings may
prove more suitable than others in effectively addressing the taxpayer's endeavors to
engage in abuse. An interpretation of such a term that prevents abuse aligns with the
intended purpose of the tax treaty or the specific provision in question. This interpretation
remains within the boundaries established by Article 31(1) VCLT by not going beyond
the possible meanings of the term 20. However, if none of the conceivable interpretations
effectively addresses the abuse, the recourse lies in applying a GAAR. The GAAR
functions to (exceptionally) lift the prohibition of expanding tax law beyond
interpretation, as mandated by the principles of the rule of law and the specific demands
of legal certainty within tax law 21.

These theoretical discussions can be exemplified through two straightforward instances.

Taking the term beneficial owner as found in Articles 10, 11, and 12 of the OECD Model
Convention, its complete absence of definition and the absence of connections with
concepts in the domestic laws of the Contracting States (whether private or tax-related)
initially suggest the potential to select an interpretation of the term that effectively
restrains specific treaty shopping strategies devised by taxpayers 22. Of course, the correct

Interpretation. /In/ Vienna Convention on the Law of Treaties. A Commentary. (Oliver Dörr, Kirsten
Schmalenbach eds.). 2nd edition. Berlin: Springer, 2018, pp. 586-587.
19
Vogel, Klaus; Prokisch, Rainer G. General Report. /In/ IFA (ed.) Interpretation of Double tax
Conventions, Cahiers de droit fiscal international, Vol. 78a (The Hague: Kluwer, 1993), p. 73. Kuźniacki,
Błażej. The Principal Purpose Test (PPT) in BEPS Action 6 and the MLI: Exploring Challenges Arising
from Its Legal Implementation and Practical Application. /In/ World Tax Journal, 2018, p. 240. Haslehner,
Werner, Introduction. /In/ Klaus Vogel on Double Taxation Conventions (Reimer, Eckerhart; Rust,
Alexander eds.) 5th edition. Aalphen and den Rijn: Kluwer, 2021, at m. no. 99. Gooijer, Jan. Tax Treaty
Residence of Entities. Aalphen and den Rijn, 2019, pp. 75-77 (concerning the very relevant interpretation
of article 4 of the OECD MC). Van Weeghel, Stef. A Deconstruction of the Principal Purposes Test. /In/
World Tax Journal, 2019, p. 16. Danon, Robert. The PPT in Post-BEPS Tax Treaty Law: It is a GAAR but
Just a GAAR! /In/ Bulletin for International Taxation, 2020, pp. 252-253 (regarding precisely the limits to
the purposive interpretation arising from the application of the new Preamble). Dziurdź, Kasper. The
Concept of the “Object and Purpose” in Tax Treaty Law Based on the Vienna Convention (1969) and the
Principal Purposes Test Rule. /In/ 78 Bulletin for International Taxation, Issue 3, 2024, at 2.3.
20
This stance was articulated a century ago in Hensel's scholarship, which differentiated between
"attempted avoidance" (bloβer Umgehungsversuch) addressable through the accurate interpretation of the
abused rule, and genuine avoidance (echter Umgehungsfall), necessitating the application of General Anti-
Avoidance Rules (GAARs) (see Hensel, Albert. Zur Dogmatik des Begriffs…op. cit, pp. 245-247; Hensel,
Albert. Steuerrecht. 3rd edition. Berlin: Julis Springer, 1933, p. 99).
21
Osterloh-Konrad, Christine. Die Steuerumgehung. Eine rechtsvergleichende und rechtsteoretische
Analyse. Tübingen: Mohr Siebeck, 2019, pp. 649-655. Schön, Wolfgang. Chapter 12: The Role of
“Commercial Reasons”…op. cit. at 12.2.2. (recently applying this fundamental starting point to the role of
the PPT and its relation to tax treaty interpretation).
22
In the same vein: Danon, Robert. The PPT in Post-BEPS Tax Treaty Law…op. cit. p. 253. Danon, Robert.
Chapter 15; The Beneficial Ownership Limitation in Articles 10,11 and 12 OECD Model and Conduit
Companies in Pre- and Post-BEPS Tax Treaty Policy: Do We (Still) Need It? /In/ Current Tax Treaty Issues
(Maisto, Guglielmo ed.). Amsterdam: IBFD, 2020, at 15.3.1.2. (admitting such a possible interpretation in
hypothetical terms). De Broe, Luc, Role of the Preamble for the Interpretation of Old and New Tax Treaties
and on Policy of the Prevention of Treaty Abuse. /In/ Bulletin for International Taxation, 2020, p. 171, fn

7
interpretation of this term will depend on many other variables that may eventually lead
to the rejection of its use as a broad-spectrum GAAR 23. At this juncture, the author
intended to merely emphasize that the specific wording of the beneficial ownership clause
does not permit to categorically dismiss an interpretation of the term that, in alignment
with the Preamble, effectively dismantles specific abusive treaty shopping structures.
An opposing illustration may arise when considering the interpretation of the residence
concept within the framework of tax treaties. According to the prevailing view 24, resident
status under a Convention is primarily contingent on satisfying the legal criteria outlined
in the domestic laws of the Contracting States, under the condition that the taxpayer
seeking treaty benefits is liable to tax in the respective state. This conclusion would
follow, without further ado, from the wording of Article 4(1) of the MCOECD and OECD
patterned bilateral conventions 25. Weak domestic residence criteria allow companies with
very little substance and few material links to a given jurisdiction to gain residence for
tax treaty purposes. Despite the ambiguity surrounding the notion of treaty shopping,
deriving treaty benefits in the scenario above may contradict the intended purpose of tax
treaties, as outlined in the new Preamble. Nonetheless, attempting to limit the concept of
residence to disallow the application of treaty benefits to these companies using simple
interpretation seems unfeasible, given that Article 4(1) of the Conventions does not
appear to mandate a substantial connection of the taxpayer with its State of residence 26.
If deemed necessary, any such restriction must be implemented through the application
of the PPT.

73 (more hesitant). Dziurdź, Kasper. The Concept of the “Object and Purpose”…op. cit. at 3.4 (In similar
terms to those set out here about the possible meanings of the term beneficial owner yet diverging in the
context of the correlation between a purposive interpretation and the application of the PPT).
23
The latest comprehensive examination of the concept of beneficial ownership concludes that its scope is
significantly more confined than that of the Principal Purpose Test (PPT). It is specifically limited to
particular instances of treaty shopping, such as those functionally equivalent to agents or nominees. The
study further notes that the Commentary on Article 29(9) drafters perceive beneficial ownership as playing
a considerably more restricted role than the PPT (or anti-conduit regulations), rendering it almost irrelevant
(Martín Jiménez, Adolfo. Beneficial Ownership. /In/ IBFD Global Tax Treaty Commentaries, 2022, at 3.3.
24
Couzin, Robert. Corporate Residence and International Taxation. Amsterdam: International Bureau of
Fiscal Documentation, 2002, p. 143. Danon, Robert. The PPT in Post-BEPS Tax Treaty Law…op. cit. p.
247. Assef Lavez, Raphael. The Implications of the Supreme Court of Canada´s Decision in Alta Energy
Luxembourg (2021) for the OECD Principal Purpose Test. /In/ Bulletin for International Taxation, 2022,
p. 312. This stance is likewise clearly articulated in the Commentary to the OECD Model: ComOECD
2017, Art 4, par. 4.
25
The author is not unaware that a small (albeit relevant) group of academic authors propose a possibly
different meaning for Article 4(1) of the OECD Model, according to which the reference to residence by
reason of his domicile, residence, place of management or any other criterion of a similar nature requires
a material link of the taxpayer to the jurisdiction in which it claims to be resident. This proposed
interpretation would, in turn, exclude companies from the subjective scope of Double Taxation Conventions
(DTCs) if their residency is determined solely by formal criteria in the domestic laws of the Contracting
States. Advocating this position recently as an (interpretative) way of dealing with treaty shopping:
Escribano, Eva. Alternative Approaches to Adress the (Yet to Be Defined) Treaty Shopping Phenomenon.
/In/ 47, Intertax, Issue 11, 2019, pp. 946-947 (quoting the classic works that require domestic residence
tests to ensure a material connection between the taxpayer and its residence jurisdiction in order to fulfill
the "similar nature" requisite as formulated in article 4(1) of the OECD Model Tax Convention). The author
holds a dissenting view on this interpretation, the thorough exploration of which exceeds the scope of this
paper. Nevertheless, the primary objective here is to explain the limits of interpretation when assuming a
concept of (treaty) residence that necessarily corresponds (without any additional substantive requirements)
to domestic law.
26
Gooijer, Jan. Tax Treaty Residence of Entities…op. cit. p. 77. Danon, Robert. The PPT in Post-BEPS Tax
Treaty Law…op. cit. p. 253.

8
From this perspective, it becomes apparent that the anti-abuse interpretation advocated
by the new Preamble should encounter its boundary precisely where interpretative efforts
reach their limit – namely, in the potential meaning of the normative expressions within
the purportedly abused provisions. The Commentaries to the OECD Model do not
explicitly address the constraints of the anti-abuse interpretation but simply refer to
Article 31(1) of the VCLT 27. This reference might be construed as an implicit
acknowledgement of the limits mentioned earlier, which align with deductions drawn by
internationalist and tax doctrine from that provision.

However, it should not be forgotten that both the new Preamble and its Commentary are
inserted into the pre-existing Commentaries on the Model, which, as we shall see below,
appear to take a different position on the limits of interpretation. Indeed, at least two
passages in the OECD Model Commentary indicate that the benefits of a Tax Treaty could
be withheld based on an interpretation of the abused treaty rules therefore overlooking
the limits deriving from the possible meanings of those rules.

Paragraph 56 of the Commentary on Article 1 of the OECD Model Convention identifies,

without further investigation and in conjunction with the new Preamble text 28, two
scenarios as abusive: i) those situations in which a person (whether or not a resident of a
Contracting State), acts through a legal entity created in a State essentially to obtain
treaty benefits that would not be available directly; and ii) that case in which an individual
who has in a Contracting State both his permanent home and all his economic interests,
including a substantial shareholding in a company of that State, and who, essentially in
order to sell the shares and escape taxation in that State on the capital gains from the
alienation (by virtue of paragraph 5 of Article 13), transfers his permanent home to the
other Contracting State, where such gains are subject to little or no tax. In both cases,
the Commentaries point to the need to deny the application of treaty benefits as their
concession would run counter to the treaty's object and purpose—specifically, the
prevention of tax avoidance. Notably, these considerations are made without delving into
an interpretation of the purportedly abused rules, which are not even mentioned 29, and
without resorting to the PPT 30.

Paragraph 59 of the Commentary on Article 1 of the OECD Model Convention, on its

turn, indicates that some States consider that a proper construction of tax conventions
allows them to disregard abusive transactions; subsequently, paragraph 61 of the same
Commentary institutes, since 2003, the so-called "Guiding Principle", according to which
the benefits of a double taxation convention should not be available where a main purpose

27
ComOECD 2017, Introduction, par. 16.2.
28
This connection is made very clear in paragraph 54 of the Commentary to Article 1 in fine by stating:
“As confirmed in the preamble of the Convention, it is also a part of the purposes of tax conventions to
prevent tax avoidance and evasion”.
29
As the author has discussed in other contexts, when it comes to companies allegedly engaging in treaty
shopping, the provision most susceptible to have been abused is likely Article 4(1), possibly in conjunction
with Article 1 of the Model (Báez Moreno, Andrés. GAARs and Treaties: From the Guiding Principle to
the Principal Purpose Test. What Have We Gained from BEPS Action 6? /In/ 45 Intertax, Issue 6 & 7, pp.
437-438). When individuals relocate to "low-tax jurisdictions," the taxpayer often relies on the tie-breaker
rules outlined in Article 4(2) of the Model as a fundamental element of their tax planning strategy (Báez
Moreno, Andrés. Cross-Border Mobility of Individuals and Anti-Avoidance Tax Rules. /In/ Mobility of
Individuals and Workforces. Tax Challenges Raised by Digitalization (S. V. Kostić; A. Báez Moreno; V.
Chand and M. Tenore eds.). Amsterdam: International Bureau of Fiscal Documentation, 2024, pp. 215-218.
30
In fact, these examples appear in the Commentaries to the OECD Model as early as 1977, forty years
before the PPT was introduced in the OECD Model.

9
for entering into certain transactions or arrangements was to secure a more favourable tax
position and obtaining that more favourable treatment in these circumstances would be
contrary to the object and purpose of the relevant provisions. Hence, it appears that the
Model Commentaries acknowledge interpretation as a mechanism enabling the
addressing of abusive transactions irrespective of the possible meaning of the normative
expressions contained in the allegedly abused provisions and again without resorting to
the PPT. This “Guiding Principle” pretends to work as a sort of “unwritten GAAR” 31 in
clear contradiction with all the logical and methodological principles we have referred to
previously.

In summary, while the anti-abuse interpretation stemming from the new Preamble should,
for methodological and, mainly, legal reasons, remain within the confines of
interpretation, the Commentaries imply that their authors and allegedly also those who
inspired the new Preamble are either unaware of these limits or, at the very least, do not
consider them to be significant constraints.

II.2 An anti-abuse principle without a concept of abuse

The new Preamble fails to provide any -even brief- definition of the concepts it addresses,
notably those concerning tax avoidance and treaty shopping 32. Therefore, the utilization
of the Preamble as an interpretative tool for preventing abuse needs to rest on the notion
that an inherent, overarching concept of (tax treaty) abuse exists. Indeed, if everything
boils down to the possibility of dealing with abusive transactions in the absence or outside
of special or general anti-abuse rules - which can indicate what is meant by abuse - there
will be no choice but to understand that there is an inherent concept of abuse that
transcends specific legal provisions. Nonetheless, it is evident that there is no universally
accepted or inherent concept of (tax treaty) abuse 33.

Although all GAARs may initially appear to adhere to a shared philosophy, significant
disparities become apparent upon closer examination. A clear illustration of this can be
found in the varying abuse thresholds of diverse GAARs established at the global and
European levels, which the BEPS initiative has directly or indirectly influenced 34.
Similarly, the approaches to abuse employed by local GAARs also yield significant
disparities 35. Therefore, constructing an anti-abuse principle of interpretation without a

31
Schön, Wolfgang. Chapter 12: The Role of “Commercial Reasons”…op. cit. at 12.2.2. A description of
different concepts of abuse (thresholds for determining abuse) can be found in: Osterloh-Konrad, Christine.
Die Steuerumgehung…op. cit. pp. 651-655.
32
Peng, Claire (Xue) & Schuch, Joseph. The Relevance of the Preamble for Treaty Entitlement. /In/ Tax
Treaty Entitlement (M. Lang et al. eds.). Amsterdam: International Bureau of Fiscal Documentation, 2015,
at 1.3.2.3. and 1.3.2.4. Danon, Robert. Chapter 15; The Beneficial Ownership Limitation…op. cit. at
15.3.1.1. Álvarez Palacios, Tomás. The Relevance of the Preamble for Treaty Entitlement. /In/ Access to
Treaty Benefits (C. Dimitropoulou; D. Auer eds.). Vienna: Linde Verlag, 2021, pp. 10-11.
33
Schön, Wolfgang. Chapter 12: The Role of “Commercial Reasons”…op. cit. at 12.2.1.
34
To illustrate this point, it may be adequate to direct the reader's attention to a straightforward comparison
of the abuse thresholds outlined in article 29(9) of the OECD Model Tax Convention, article 6(1) and (2)
of the ATAD Directive or article 1(2) and 1(3) of the Parent Subsidiary Directive. For a more detailed
comparison of e.g. the Principal Purpose Test and the ATAD GAAR see: Maisto, Guglielmo.
Counteracting Tax Treaty Abuses from a European Perspective: Frictions and Interactions between the
OECD PPT and the ATAD GAAR. /In/ Thinker, Teacher, Traveler: Reimagining International Tax Essays
in Honor of H. David Rosenbloom (G.W. Kofler, R. Mason & A. Rust eds.). Amsterdam: IBFD, 2021.
35
While some comparative law studies have attempted to identify certain shared elements among various
domestic GAARs, the prevailing reality is heterogeneity, particularly regarding the presence of tests with

10
shared understanding of abuse is bound to be ineffective or, worse, prone to complete
arbitrariness.

However, again, there is an apparent disconnect between well-constructed theoretical

foundations and the stances articulated in the Commentary to the OECD Model
Convention. Indeed, the Commentaries on Article 1 of the OECD Model not only cite
instances of abusive transactions in the absence of any specific abuse test 36 but also, as
previously mentioned, take a daring step by introducing a notion of abuse seemingly out
of thin air. In essence, the purported guiding principle is a test of abuse invented by the
Commentaries 37. Neither the Guiding Principle nor an anti-abuse interpretation
attempting to maintain internal coherence by drawing upon the concept of abuse inferred
from the former can adequately justify why the abuse test they rely on focuses on one of
the main purposes of the transaction — rather than, for instance, the main, essential, or
sole purpose of the transaction- or entirely objective concepts such as artificiality or lack
of genuineness. The author also fails to acknowledge that the reference to the object and
purpose of the pertinent (abused) provisions is inherent to any GAAR; many GAARs
based upon purely objective tests, particularly the artificiality of the transactions under
scrutiny, do not necessitate a teleological examination of the avoided rules whatsoever.
In essence, the introduction by the Commentaries of a paralegal standard of abuse 38 is
the necessary trade-off for implementing a functional "anti-abuse interpretation”.

II.3 An anti-abuse teleological interpretation principle built upon an inexistent or

contradictive treaty purpose

The Commentaries to the OECD Model 39 and the Explanatory Statement to the MLI40
support the object and purpose of tax treaties to prevent tax avoidance in the pure text of
the new Preamble. This is perfectly acceptable, especially considering that international
lawyers universally acknowledge treaty preambles as the natural starting point for any
inquiry into the object and purpose of a treaty 41. However, this starting point may become
problematic if, taken to the extreme, it is understood that the parties to the Convention
may attribute to it whatever purposes they see fit, whether or not the provisions of the
Convention confirm that purpose. In this context, if a tax treaty lacks robust anti-
avoidance provisions or if such provisions are of limited significance, it becomes

markedly disparate tolerances toward the abuse phenomenon: Rosenblatt, Paulo; Tron, Manuel. General
Report. /In/ IFA Cahiers 2018, Volume 103. Anti-avoidance measures of general nature and scope – GAAR
and other rules SdU, The Hague: 2018, pp. 11-21.
36
ComOECD 2017, Art. 1 par. 56.
37
ComOECD 2017, Art. 1 par. 61.
38
We use the term "paralegal standard" to imply a lack of democratic process, as the Commentaries are
drafted by a select group of officials. Additionally, in the specific instance of the Guiding Principle, it is
particularly ill-considered, as the abuse test it encompasses has faced significant criticism (see: Zornoza,
Juan José; Báez, Andrés. The 2003 Revisions to the Commentary to the OECD Model on Tax Treaties and
GAARs: A Mistaken Starting Point. /In/ Tax Treaties: Building Bridges between Law and Economics
(Michael Lang, Pasquale Pistone, Josef Schuch, Claus Staringer, Alfred Storck, Martin Zagler eds.).
Amsterdam: IBFD, 2010, pp. 153-158).
39
ComOECD 2017, Introduction, par. 16.2: “Since the title and preamble form part of the context of the
Convention1 and constitute a general statement of the object and purpose of the Convention, they should
play an important role in the interpretation of the provisions of the Convention” (emphasis added).
40
ES, par 23: “The inclusion of this statement in the preamble to the Convention is intended to clarify the
intent of the Parties to ensure that Covered Tax Agreements be interpreted in line with the preamble
language foreseen in Article 6(1)” (emphasis added).
41
Kennedy, Abigail. The Effect of Article 6 MLI…op. cit. p. 323 (with an exhaustive list of references in
fn. 7).

11
challenging to assert, even if the parties intend so, that one of the treaty's purposes is to
prevent abuse. Similar to certain internationalists 42, tax lawyers have reached the same
conclusion regarding the interpretative significance of the new Preamble to the CTAs43.
The implications of the preceding statement are clear: When the Preamble is incorporated
alongside the Principal Purpose Test (PPT) within a Covered Tax Agreement, it can, at
most, impact the interpretation of the PPT as deemed suitable 44. However, if the new
Preamble is introduced independently45 or is meant to be retroactively applied as an
interpretive guideline 46, its impact will be minimal or non-existent without an anti-abuse
provision in place. In brief, the object and purpose of a tax treaty are not simply bestowed
upon it by the parties through a superficial label. Instead, they emerge as an abstract
articulation of the treaty's objectives, shaped by the collective impact of its specific
provisions. As the author has argued on previous occasions 47, while the parties are the
owners of the treaty 48 and can accordingly determine the meaning of its terms in a binding
manner, what the parties can never be are the owners of reality.

However, even if one were to recognize an abstract object and purpose of tax treaties
aimed at preventing abuse, it is essential to remember that these treaties serve other
object(s) and purpose(s), often mirrored in their specific provisions, namely promoting
exchanges of goods and services and the free movement of capital and persons by
eliminating international double taxation, which may sometimes conflict with one
another. Faced with this problem, some scholars argue that the main objective of a tax
treaty is to correct double taxation, thus suggesting that in cases where there is a conflict
between this objective and others -namely preventing tax avoidance- prioritizing the relief
of double taxation is paramount 49. In simpler words, they contend that an interpretation
of a tax treaty provision that stops treaty abuse but leads to double taxation cannot be
considered accurate. This approach could significantly hinder the practical functioning of
the new Preamble, as there is a high probability that an anti-abuse interpretation will result
in unresolved double taxation. However, the logical and legal problem that the new
42
Buffard, Isabelle & Zameneck, Karl. The “Object and Purpose” of a Treaty: An Enigma? /In/ 3 Austrian
Review of International & European Law, 1998, p. 333 [a prima facie assumption of the object and purpose
of a treaty must be formed by having recourse to the title, preamble and, if available, programmatic articles
of the treaty. This assumption must then be tested in a second stage against the text of the treaty and all
other available material and, if necessary, adjusted in the light of that test]
43
Dziurdź, Kasper. The Concept of the “Object and Purpose”…op. cit. at 2.2. Peng, Claire (Xue) & Schuch,
Joseph. The Relevance of the Preamble…op. cit. at 1.2.2.
44
This potential influence will be dealt in detail in paragraph III.
45
This scenario is improbable within the framework of the MLI since both the Preamble and the PPT
constitute minimum standards. Similarly, it is implausible that it will occur during bilateral negotiations or
renegotiations of Double Taxation Conventions (DTCs).
46
See in this regard paragraph II.4.
47
Báez Moreno, Andrés, Capítulo 6. Los principios y reglas de prevención del abuso: interpretación
antiabuso y regla del propósito principal. /In/ El tratado multilateral para aplicar las medidas relacionadas
con los tratados fiscales para prevenir la erosión de las bases imponibles y el traslado de beneficios (José
Manuel Almudí Cid; Jorge Alberto Ferreras Gutiérrez & Pablo Andrés Hernández González-Barreda, eds.
Pamplona: Thomson Reuters Aranzadi, 2022, at 172.
48
This being an expression of common use in treaty jargon: see Dörr, Oliver. Article 31. General Rule of
Interpretation…op. cit. p. 594.
49
De Broe, Luc. International Tax Planning and Prevention of Abuse. Amsterdam: International Bureau of
Fiscal Documentation, 2008, at 3.3.1.2.1. De Broe, Luc & Luts, Joris, BEPS Action 6: Tax Treaty Abuse.
/In/ 43 Intertax, Issue 2, p. 144. Danon, Robert J., Treaty Abuse in the Post-BEPS World: Analysis of the
Policy Shift and Impact of the Principal Purpose Test for MNE Groups. /In/ Bulletin for International
Taxation, 2018, p.p. 40. Chand, Vikram. The Interaction of Domestic Anti-Avoidance Rules with Tax
Treaties (with special references to the BEPS project). Geneva-Zürich-Basel: Shulthess, 2018 p. 195. De
Broe, Luc, Role of the Preamble for the Interpretation…op. cit. p. 172.

12
Preamble may pose in the face of contradictory objects and purposes in tax treaties is
much more complex.

The Commentaries to the OECD Model Tax Convention continue to state, in its 2017
version, that “… the principal purpose of double taxation conventions is to promote, by
eliminating international double taxation, exchanges of goods and services, and the
movement of capital and persons” 50 (Emphasis added). However, neither the
Commentaries nor the numerous authors who persist in characterizing the correction of
double taxation as the main, primary, prominent, or prevailing objective of tax treaties
provide any rationale to support this stance. The secondary role assigned to the prevention
of tax avoidance may have been reasonable in tax treaties patterned according to the pre-
2017 versions of the OECD Model Tax Convention, where anti-avoidance provisions
were largely peripheral 51. However, persisting in relegating this purpose to a secondary
position concerning tax treaties impacted by the changes introduced by the MLI -
therefore incorporating, at minimum, the PPT and often a diverse array of SAARs—
implies to simply disregard the current state of affairs. Assigning similar importance to
the various objects and purposes of a tax treaty, particularly those related to correcting
double taxation and preventing tax avoidance, does not resolve the issue; instead, it
exacerbates it. What is the appropriate course of action when interpreting a treaty
provision that encompasses two potential interpretations, one of which resolves double
taxation but allows for treaty abuse, while the other prevents treaty abuse but leads to
double taxation? Neither specialists in treaty law 52 nor international tax lawyers 53 have
successfully resolved this issue; rather, they have simply brought attention to it.

In the author's view, this issue is inherently unsolvable within this context. When a tax
treaty includes provisions that permit various conflicting general objectives and purposes
to be associated with it, determining whether the correct interpretation of a provision
should prioritize one of those purposes becomes a subjective and arbitrary endeavor. The
fundamental mistake lies in failing to recognize that purposive interpretation must begin
with the provision's specific purpose rather than with a generic and overarching objective,
which typically results in purely arbitrary outcomes. The author is aware of the many

50
ComOECD 2017, Article 1, par. 54. The varying significance attributed to different objects and purposes
of tax treaties is apparent throughout the Commentaries to the OECD Model Convention, albeit to a
somewhat lesser degree in certain sections. One such instance can be found in the Introduction to the Model,
where the main objective of tax treaties is underscored as the avoidance of double taxation (ComOECD
2017, Introduction, par. 15.2), while merely stressing the importance of preventing tax avoidance and
evasion (ComOECD 2017, Introduction, par. 15.6). Van Weeghel argues that the overarching purpose of
tax treaties is fully captured in the first paragraph of the Introduction to the 2017 OECD Model (Van
Weeghel, Stef. A Deconstruction…op. cit. pp. 16-17).
51
Convincingly Arnold, Brian J. Tax Treaties and Tax Avoidance: The 2003 Revisions to the Commentary
to the OECD Model. /In/ Bulletin Tax Treaty Monitor, 2004, p. 248. De Broe, Luc. International Tax
Planning and Prevention of Abuse…op. cit. at 3.3.1.2.1.
52
Sinclair, Ian. The Vienna Convention on the Law of Treaties. 2nd ed. Manchester: University Pr., 1984,
p. 130. Buffard, Isabelle & Zameneck, Karl. The “Object and Purpose”… op. cit. p. 329. Gardiner
references a ruling by the Appellate Body at the WTO that highlights the problem but ultimately provides
an unsatisfactory solution (Gardiner, Richard K. Treaty Interpretation…op. cit. p. 216).
53
De Broe, Luc. International Tax Planning and Prevention of Abuse…op. cit. at 3.3.1.2.1. (regarding
alleged ancillary purposes of a treaty). Dziurdź, Kasper. The Concept of the “Object and Purpose”…op.
cit. at 2.4 (advocating for the reconciliation or prioritization of conflicting objectives and, if not feasible,
abandoning purposive interpretation and turning to alternative methods of interpretation).

13
reputable experts on treaties 54 and, in particular, on double taxation conventions 55, who
have argued that Article 31(1) of the VCLT does not require consideration of the specific
purpose of the provision being interpreted but of the object and purpose of the entire
treaty. However, focusing on the specific purpose of the interpreted provision notably
diminishes the contradictions stemming from a broader interpretation of the concept of
object and purpose. While it cannot be entirely discounted, it is far less probable that
inherently contradictory purposes drive a specific provision of a tax treaty. It is evident
that this approach to purposive interpretation significantly limits the scope for an alleged
anti-abuse interpretation principle.

II.4 An anti-abuse interpretation mechanism with unknown objectives

In the OECD Model 2017 and the MLI, the new contents - new title and new Preamble -
were incorporated contemporaneously with that of the Principal Purpose Test. The design
of both new contents as a minimum standard will lead to their systematic joint
incorporation into tax treaties, at least as far as treaties covered by the MLI are
concerned 56. In these circumstances, the question arises as to what the purpose of this
new interpretative principle might be, precisely in a context where tax treaties incorporate
a GAAR with as broad a spectrum as that of the PPT. There are various ways to coordinate
the two measures, and since none of the documents addressing their contents have
expressed a stance on their interaction, an exploration of all possible alternatives is
needed:
i) The new Preamble and the PPT are identical and therefore interchangeable. Although
this idea might have some potential for addressing the problem, it is fundamentally flawed
by several errors. It is not clear that the two norms have the same boundaries. Although
the new Preamble may impact the interpretation of the PPT's objective prong, it is not
necessarily the case that the concept of treaty abuse underlying the new Preamble,
whatever it might be, is identical to the one triggering the PPT's application. Conversely,
the consequences of an anti-abuse interpretation will not necessarily be the same as those
corresponding to the PPT 57. Two rules with different premises and legal consequences
cannot be interchangeable. Besides, the complete identification of the anti-abuse
interpretation with the PPT could be contrary to the rule of effectiveness, according to
which any interpretation that leaves a treaty term meaningless and devoid of any effect

54
Dörr, Oliver. Article 31. General Rule of Interpretation…op. cit. p. 585.
55
Vogel, Klaus; Prokisch, Rainer G. General Report…op. cit. pp. 72-73. Haslehner, Werner,
Introduction….op. cit. at m. no. 99. Avery Jones, John F. & Hattingh, Johann, Treaty Interpretation -
Global Tax Treaty Commentaries, at 3.4.10, Global Topics IBFD).
56
This simultaneous and extensive integration of the new Preamble and the Principal Purpose Test is also
evident in tax treaties negotiated or renegotiated outside the Multilateral Instrument (MLI). Among the nine
tax treaties that entered into force between January 1st and May 9th, 2024, eight included the Preamble and
the PPT with wording identical to Articles 6 and 7 of the MLI. This brief analysis, conducted by the author,
is based on the examination of new tax treaties in English within the IBFD database. It is presumed that a
similar pattern persists for tax treaties renegotiated through the addition of a protocol.
57
As mentioned in previous work, based on the wording of the PPT, it appears that in cases of Rule
Shopping, the legal outcome would be the rejection of not only the distributive rule claimed by the taxpayer,
but also any other distributive rule that could have been applicable in the absence of an abusive transaction
(Báez Moreno, Andrés. GAARs and Treaties: From the Guiding Principle…op. cit. p. 443). This could
never happen in the context of an anti-abuse interpretation, as the interpreter would typically apply the legal
consequences of the circumvented rule.

14
must be rejected 58. The requirements of this principle are particularly relevant in a case
such as the one here at stake, where the MLI has invested significant effort in integrating
the new Preamble and the PPT into all CTAs.
ii) The application of the anti-abuse interpretation would only be relevant in cases where
a treaty does not include the PPT 59. This perspective could provide a more equitable
understanding of the role of the anti-abuse interpretation, which would serve as a fallback
option for situations where a treaty does not include the PPT. This legal scenario cannot
be ruled out as the BEPS Action 6 Final Report 60 and the MLI allow parties to meet the
BEPS minimum standard without using the PPT. Indeed Article 7 (15) a of the MLI
permits a Party not to apply the PPT to its covered tax agreements if it intends to use a
combination of a detailed limitation on benefits provision and rules to address conduit
financing structures 61. However, it is improbable for a covered tax agreement to remain
unaffected by the PPT. The Multilateral Instrument (MLI) presents the PPT as the default
option 62, and additionally, the signatories of the Multilateral Convention appear highly
hesitant to implement the minimum standard using a combination of a Limitation of
Benefits Clause (LOB) and anti-conduit rules 63. The widespread rejection of this way of
implementing the minimum standard of Action 6 seems easy to justify. In short, this
option amounted to nothing more than a vain attempt to lure the US into the MLI, as it
was precisely the US that had based its fight against treaty shopping on a combination of
a LOB and domestic anti-conduit rules 64. After the United States declined to sign the
MLI 65, it appears evident that MLI signatories are inclined to adopt the minimum standard
of Action 6 by integrating the PPT into their CTAs. It seems unlikely that the Final Report
on Action 6, along with MLI's extensive endeavors to integrate the new Preamble into all
CTAs, was premised on a highly improbable scenario — namely, the existence of MLI

58
On this interpretative principle and its particular relevance to international treaty law: Dörr, Oliver.
Article 31. General Rule of Interpretation…op. cit. pp. 578 et seq.
59
The 2017 Commentaries to the OECD Model seem to suggest this approach by stating that when "a tax
convention does not include such rules - i.e the PPT and other specific treaty anti-abuse rules-, the question
may arise whether the benefits of the tax convention should be granted when transactions that constitute
an abuse of the provisions of that convention are entered into" and connecting this idea to the following
assertion: " [Some] States […] consider that a proper construction of tax conventions allows them to
disregard abusive transactions" (ComOECD 2017, Article 1, paras. 57 and 59).
60
OECD, Preventing the Granting of Treaty Benefits…op. cit. par. 22.
61
Article 7 (17) a of the MLI seems to imply that some jurisdictions could meet the minimum standard
when, in the future, they adopt through bilateral negotiation a limitation on benefits provision that replaces
the PPT. However, this interpretation would contradict the precise contents of Article 7(15) a of the MLI.
This is precisely the interpretation that the Explanatory Statement seems to embrace when stating that a
Party making a notification under Article 7 (17) a) may also express its intent to adopt a simplified or
detailed LOB provision to supplement paragraph 1 or to replace paragraph 1 with a detailed LOB provision
supplemented by rules to address conduit financing structures (Explanatory Statement, par. 115).
62
Explanatory Statement, par. 90.
63
According to the OECD database on Reservations and Choices of Optional Provisions under the MLI,
no signatory to the Multilateral Convention has reserved the right under Article 7 (15) to not apply the PPT
to its Covered Tax Agreements on the basis that it intends to adopt a combination of a detailed limitation
on benefits provision and either rules to address conduit financing structures or a principal purpose test (see
https://www.oecd.org/tax/treaties/mli-matching-database.htm#reservations-options last accessed 12th
December 2023),
64
Stack, Robert; Shah, Daniel; Lenter, David, United States. /In/ IFA, Reconstructing the treaty network,
Cahiers de droit fiscal international vol. 105, 2020, pp. 877-879.
65
One of the grounds for rejecting the agreement was the consideration that, by signing, the United States
also would not have been able to use the MLI as a mechanism to include its preferred detailed LOB
provision in treaties that currently do not have such a provision (Stack; Shah & Lenter, United States…op.
cit. p. 885.

15
signatories opting out of the PPT. This scenario has ultimately proven to be non-
existent 66.
iii) The new Preamble is merely instrumental with respect to the other anti-abuse rules
contained in the MLI and particularly with respect to the PPT. This idea appeared to be
implied in the BEPS Action 6 Final Report 67 and has been supported by several authors68.
The 2017 Commentaries on the OECD Model have displayed a degree of ambiguity on
this matter. At times, they appear to strongly advocate for the instrumental nature of the
Preamble in relation to conventional anti-abuse clauses 69. However, in other instances,
they seem to acknowledge the potential autonomous application of an anti-abuse
interpretation 70. Be it as it may, adopting this stance notably curtails the real-world
significance of the updated Preamble, nullifying the envisaged dual impact mentioned
earlier. The tangible fruits of establishing it as a minimum standard, along with the
subsequent endeavors of the MLI to integrate it into all covered tax agreements, would
only materialize if its importance in interpreting the PPT were pivotal. Although we will
delve into this issue later, numerous advocates for the strictly supplementary character of
the Preamble have forecasted that its importance in interpreting the PPT will be limited71.

66
In fact, jurisdictions that previously employed anti-treaty-shopping provisions in their domestic laws –
namely Germany and Switzerland according to Duff, David D. & Gutmann, Daniel, General Report. /In/
IFA, Reconstructing the treaty network, Cahiers de droit fiscal international vol. 105, 2020, p. 24) have
ultimately chosen to implement the minimum standard through the PPT.
67
When stating: “[Countries] should also implement that common intention [to eliminate double taxation
without creating opportunities for non-taxation or reduced taxation through tax evasion or avoidance,
including through treaty shopping arrangements] through either the combined approach described in
paragraph 19 (subject to the necessary adaptations referred to in paragraph 6 above), the inclusion of the
PPT rule or the inclusion of the LOB rule supplemented by a mechanism (such as a treaty rule that might
take the form of a PPT rule restricted to conduit arrangements or domestic anti-abuse rules or judicial
doctrines that would achieve a similar result) that would deal with conduit arrangements not already dealt
with in tax treaties” (emphasis added) (OECD, Preventing the Granting of Treaty Benefits…op. cit. par.
22).
68
De Broe, Luc & Luts, Joris, BEPS Action 6…op. cit. p. 144. De Broe, Luc, Fighting Treaty Shopping
After the Multilateral Instrument. /In/ Tax Treaties After the BEPS Project A Tribute to Jacques Sasseville.
Brian J. Arnold (ed.). Ontario: Canadian Tax Foundation, 2018, p. 95. Danon, Robert J., Treaty Abuse in
the Post-BEPS World…op. cit. p. 40 [attributing this approach to the OECD]. De Broe, Luc, Role of the
Preamble for the Interpretation…op. cit. p. 171. Schwarz, Jonathan, The Impact of the New Preamble on
the Interpretation of Old and New Treaties and on Policy of Abuse Prevention. /In/ Bulletin for International
Taxation, 2020, p. 177. Danon, Robert. The PPT in Post-BEPS Tax Treaty Law…op. cit. pp. 251-254.
69
When stating: “Where, however, a tax convention does not include such rules, the question may arise
whether the benefits of the tax convention should be granted when transactions that constitute an abuse of
the provisions of that convention are entered into” and “Other States prefer to view some abuses as being
abuses of the convention itself, as opposed to abuses of domestic law. These States, however, then consider
that a proper construction of tax conventions allows them to disregard abusive transactions, such as those
entered into with the view to obtaining unintended benefits under the provisions of these conventions. This
interpretation results from the object and purpose of tax conventions as well as the obligation to interpret
them in good faith” (ComOECD 2017, Article 1, paras. 57 and 59). This approach may be consistent with
the one stated earlier in point ii. It is plausible to argue that the Preamble may serve as an autonomous anti-
abuse measure only when anti-abuse rules are absent in a DTC. However, in the presence of such rules, the
Preamble can still play a valuable role in facilitating their interpretation.
70
Particularly when stating: “That principle – ie the so-called Guiding Principle- applies independently
from the provisions of paragraph 9 of Article 29, which merely confirm it” (ComOECD 2017, Article 1,
par. 60 in fine). As per certain authors, the Guiding Principle can be viewed as an implied general anti-
avoidance rule that arises from the inherent anti-abuse objective of Double Taxation Conventions.
71
Schwarz, Jonathan, The Impact of the New Preamble…op. cit. pp. 177-178. De Broe, Luc, Role of the
Preamble for the Interpretation…op. cit. p. 171. Brunner, Arthur; Seiler, Moritz, Chapter 33. Implementing
the Multilateral Instrument in Switzerland. /In/ The Implementation and Lasting Effects of the Multilateral

16
iv) The new Preamble seeks to retroactively apply the anti-abuse interpretation to covered
tax arrangements and perhaps even beyond. All the scenarios outlined above essentially
negate the practical impact of the new Preamble. This undermines the overall rule of
effectiveness and appears inconsistent with the substantial efforts invested in its
successful integration into the covered tax agreements. This interpretation would address
the issue that affected pre-MLI versions of covered tax agreements lacking conventional
anti-abuse clauses. Simultaneously, it would confer significant effects on the new
Preamble. Several authors have employed diverse arguments to support this alleged
retroactive effect. For instance, they contend that Article 6(1) of the MLI clarifies an idea
already articulated in the Commentaries to Article 1 of the OECD Model Convention 72.
Alternatively, in somewhat more intricate terms, it has also been argued that the new
Preamble might be construed as a binding agreement concerning the interpretation of a
treaty as outlined in Article 31(3)(b) of the Vienna Convention on the Law of Treaties
(VCLT) 73. Going further, one could even argue that Article 6(1) of the MLI is an
interpretative rule carrying inherent retroactive effects 74. By doing so, and surmounting
potential challenges posed by Article 28 of the VCLT 75, the anti-abuse interpretation
outlined in Article 6(1) would extend its effects to the application of covered tax
agreements even before the MLI enters into force. The proponents of BEPS Action 6 or
those interpreting the rules derived from that action might even contemplate a more
extensive expansion of the anti-abuse interpretation stemming from the new Preamble.
The mere inclusion of the prevention of abuse in the title of a Double Taxation
Convention, other than a covered tax agreement, could prompt the application of an
independent anti-abuse interpretation 76. In a more audacious perspective, some might
even advocate for applying these interpretative consequences to Double Taxation
Conventions that lack a Preamble. This would include those whose titles, akin to all
versions of the OECD Model between 1992 and 2017, contain no reference whatsoever

Instrument. Georg Kofler; Michael Lang; Jeffrey Owens; Pasquale Pistone; Alexander Rust; Josef Schuch;
Karonline Spies & Claus Staringer, eds. Amsterdam: IBFD, 2021, at 875-877.
72
Jirousek, Heinz; Zöhrer, Christiane & Dziwinski, Karol. Die Auswirkungen des MLI auf das
österreichische DBA-Netzwerk. /In/ Österreichische Steuerzeitung, 15-16, 2017, p. 395. Jirousek, Heinz,
Austria /In/ IFA, Reconstructing the treaty network, Cahiers de droit fiscal international vol. 105, 2020, pp.
163-164. This author refers to ComOECD 2014, Article 1, par. 9.4.
73
Blum, David W, The Relationship between the OECD Multilateral Instrument and Covered Tax
Agreements: Multilateralism and the Interpretation of the MLI /In/ Bulletin for International Taxation,
2018, p. 134.
74
With all necessary nuances, the retroactive nature of interpretative provisions has traditionally been
acknowledged. On this problem: Thuronyi, Victor; Brooks, Kim & Kolozs, Borbala, Comparative Tax Law.
Alphen aan den Rijn, 2016, p. 64.
75
According to von der Decken, the provision in Article 28 of the VCLT stating that treaties shall not be
retroactive unless a different intention appears from the treaty or is otherwise established pertains to
situations where retroactivity arises from the inherent nature of the treaty. This includes treaties designed
to interpret a preceding treaty (von der Decken, Kerstin. Article 28. Non-retroactivity of treaties. /In/ Vienna
Convention on the Law of Treaties. A Commentary. Oliver Dörr/Kirsten Schmalenbach (Eds.). Second
edition. Berlin: Springer, 2018, pp. 511-512). Some authors have raised objections, contending that
alterations to a Covered Tax Agreement (CTA) due to the Multilateral Instrument (MLI) could potentially
impact the pre-MLI version of that Double Taxation Convention (DTC), invoking the prohibition of
retroactivity outlined in Article 28 of the Vienna Convention on the Law of Treaties (Duff & Gutmann,
General Report…op .cit. p. 44).
76
While only a few pre-MLI Double Taxation Conventions (DTCs) explicitly state this purpose in their
Title or Preamble (see Duff & Gutmann, General Report…op .cit. p. 22), it is crucial to note that, at least
since 2003, the Commentaries to Article 1 have maintained that preventing tax avoidance is also an
objective of tax conventions (On these 2002 changes in the Commentaries: Arnold, Brian J. Tax Treaties
and Tax Avoidance: The 2003 Revisions…op. cit. pp. 247-249).

17
to the purposes of the Convention. Indeed, the 2017 Commentaries 77 suggest that the
removal of the reference to the elimination of double taxation from the title of the Model
in 1992 was driven by the implicit acknowledgement that these agreements could serve
purposes beyond the elimination of double taxation, including, among others, the
prevention of tax avoidance. In a more decisive twist, it could even be argued that all the
interpretative consequences of the new Preamble could also be projected onto a treaty
that does not even mention the purposes of the Convention in its title. This omission
would somehow work as an implicit recognition that the prevention of abuse (and not
only the correction of double taxation) is among the purposes of the treaty. As
unconventional as it may seem, certain tax authorities have begun to propose these and
similar approaches 78. As expected, these arguments are also beginning to surface in case
law 79.
The author diverges from several of the earlier interpretations, especially that aiming to
transform the Preamble text into a retroactive anti-abuse tool. At this juncture, his sole
purpose was to underscore the challenging integration of the new Preamble into Tax
Treaties containing explicit anti-abuse provisions and the extraordinary extension of its
impacts to rationalize the substantial efforts dedicated to its inclusion in all CTAs.

Taken together, the points outlined from II.1 to II.4 above unmistakably lead to a
straightforward conclusion: the new Preamble, when considered independently, should
result in minimal change regarding the interpretation of tax treaties. Only a significant
departure from the logical and legal principles of interpretation and certain basic
consensuses on the appropriate way to deal with tax avoidance would enable the Preamble
to achieve the effects envisioned by BEPS proponents and the implementers of the MLI.
Now, the question arises whether the new Preamble alters anything when linked to the
Principal Purpose Test. This different problem will be addressed in the following section.

III. The alleged complementary function of the new Preamble regarding the PPT.

The Principal Purpose Test stipulates that even if it is demonstrated that obtaining a
benefit under the Convention was one of the principal purposes of the transaction under
analysis, this can still be deemed non-abusive and eligible for the benefits of the
Convention if it is shown that granting the benefit would be in accordance with the object
and purpose of the relevant provision of the Convention (emphasis added). Building upon
this teleological prong 80 of the PPT, both the Commentaries to the OECD Model Tax

77
ComOECD 2017, Introduction, par. 16.
78
Duff & Gutmann, General Report…op .cit. p. 47.
79
Despite its verbose argumentation and the difficulty of fully endorsing its postulates, the ruling of the
Argentine Supreme Court on September 2, 2021, in the Molinos Río de la Plata case (AR: CSJN [Supreme
Court], 2 Sept. 2021, CAF 1351/2014/CA1–CS1 CAF 1351/2014/1/RH1, Molinos Río de la Plata S.A. c/
Dirección General Impositiva) seems to raise this argument precisely in relation to a tax treaty that does
not even adhere to the structure or basic tenets of the OECD Model. Although the defects of the ruling
make it challenging to discern its precise meaning, some authors have interpreted specific passages -
correctly, in the opinion of the author - as containing traces of this retroactive effect of the Preamble and,
in general, of the anti-abuse mechanisms whose inclusion in modern tax treaties has been promoted by
BEPS (see, in particular Martín Jiménez, Adolfo. Is There an International Minimum Standard on Tax
Treaty Shopping After BEPS Action 6? Some Recent Divergent Trends. /In/ World Tax Journal, 2022, p.
468).
80
Essentially, Professor Schön diverges from the predominant approach of delineating two tests (subjective
and objective) within the Principal Purpose Test. Instead, he advocates for a distinction between a

18
Convention 81 and numerous scholars 82 have established a connection between the PPT
and the new Preamble of the CTAs; put in straightforward terms if 1) a transaction is
abusive where the benefits deriving from it are not in accordance with the object and
purpose of the corresponding provisions and 2) the Preamble states that a CTA should
not create opportunities for non-taxation or reduced taxation through tax evasion or
avoidance (including through treaty-shopping arrangements aimed at obtaining reliefs
provided in this agreement for the indirect benefit of residents of third jurisdictions; then
3) the Preamble (defining a purpose of the treaty) must necessarily influence how the PPT
(referring to the purpose of the abused provision) is applied.
In the author's opinion, this connection between the general tax treaty purpose(s) and the
application of the Principal Purpose Test is incorrect or should, at least, be extensively
nuanced.

III.1 Linking the teleological prong of the PPT to the specific purpose of the abused tax
treaty provision.

A thorough examination of the teleological prong of the PPT reveals that it pertains to the
specific object and purpose behind the relevant provision of the Convention that has been
abused rather than the overarching purpose of the tax treaty 83. This approach -i.e., asking
about the conformity with the object and purpose of the particular treaty provision that
may have been abused- holds significant implications. As the author has contended in
previous work 84, a rigorous application of the PPT to cases of Treaty Shopping would
ensure that any transaction aligns with the intended objective and purpose of the provision
being exploited. In these instances, such provision typically pertains to the residency rule
outlined in Article 4 of the OECD Model Tax Convention 85. If we consider the objectives

teleological/normative prong and a principal purpose test (Schön, Wolfgang. Chapter 12: The Role of
“Commercial Reasons”…op. cit. at 12.2.1). The author adopts the same terminology in this article.
81
ComOECD 2017, Art. 29, par. 173. While the Commentaries extensively mention the effects of the new
Preamble on interpretation, this is the sole explicit reference to the author's awareness regarding the
Preamble's impact on the interpretation of the PPT.
82
Kuźniacki, Błażej. The Principal Purpose Test…op. cit. pp. 261-272 Duff, David G. Tax Treaty Abuse
and the Principal Purpose Test – Part 2. /In/ 66 Canadian Tax Journal, 2018. pp. 986-988. Chand, Vikram.
The Principal Purpose Test in the Multilateral Convention: An in-depth Analysis. /In/ 46 Intertax, Issue 1,
2018, pp. 25-26. Gomes, Marcus Livio. The DNA of the Principal Purpose Test in the Multilateral
Instrument. /In/ 47 Intertax, Issue 1, 2019, p. 88. Zahra, Ian. The Principal Purpose Test: A Critical Analysis
of Its Substantive and Procedural Aspects – Part 1. /In/ 73 Bulletin for International Taxation, Issue 11,
2019, at 3.3.1. Kennedy, Abigail. The Effect of Article 6 MLI…op. cit. p. 339-340. Schön, Wolfgang.
Chapter 12: The Role of “Commercial Reasons”…op. cit. at 12.4.1. Franchuk, Khrystyna. The Assistance
of Examples of the Application of the Principal Purpose Test Listed in the Commentary on Article 29(9) of
the OECD Model in Establishing the Legal Certainty of the Test. /In/ 5, International Tax Studies, No. 11,
2022 at 2.2.2.5. Li, Jinyan. Finding the Purpose of Tax Treaty Provisions Under GAAR: Lessons from Alta
Energy. /In/ 105 Tax Notes International, 2022, p. 161.
83
Báez Moreno, Andrés. La Cláusula del Propósito Principal (Principal Purpose Test). Un Análisis Crítico
de la Acción 6 del Proyecto BEPS. /In/ Estudios Financieros. Revista de Contabilidad y Tributación, nº
404, 2016, pp. 24-36. Báez Moreno, Andrés. GAARs and Treaties: From the Guiding Principle…op. cit.
pp. 436-440. Danon, Robert J., Treaty Abuse in the Post-BEPS World…op. cit. p. 45. Danon, Robert. The
PPT in Post-BEPS Tax Treaty Law…op. cit. p. 258. De Broe, Luc, Role of the Preamble for the
Interpretation…op. cit. p. 171. Mithe, Ameya. Critical Analysis of the Principal Purpose Test and the
Limitation on Benefits Rule: A World Divided but It Takes Two to Tango. /In/ World Tax Journal, 2020, p.
150. Kennedy, Abigail. The Effect of Article 6 MLI…op. cit. p. 339.
84
Báez Moreno, Andrés. GAARs and Treaties: From the Guiding Principle…op. cit. p. 437.
85
Numerous authors contend that in treaty shopping cases, the provision that is exploited is Article 4 of the
OECD Model Tax Convention: Van Weeghel, Stef. A Deconstruction…op. cit. p. 23 [adding the

19
outlined in the Commentaries to the OECD Model Tax Convention regarding the concept
of residence, which include establishing the personal scope of the convention and
resolving cases of double taxation arising from dual residency or taxation in both the
resident and source state 86, then granting tax treaty benefits to the most insubstantial
conduit would, at least at first glance , seem to align with the stated object and purpose of
Article 4. Furthermore, applying the objective prong of the Principal Purpose Test is not
any simpler in instances of rule shopping. The absence of a purposive rationale behind
the distribution rules in Articles 6 to 22 of tax treaties, beyond the essential sharing of
taxation rights between two states, often makes it challenging to definitively determine
whether a transaction aiming to avoid one distribution rule in favour of a more
advantageous one aligns with or contradicts the object and purpose of the rule being
circumvented or applied 87.
This interpretation renders the Principal Purpose Test a rule with an impractical
application. If strictly adhered to, it implies that no instance of treaty shopping would be
deemed abusive, while cases of rule shopping could only be resolved through arbitrary
judgments 88. When it comes to cases of Treaty Shopping, the conclusion mentioned
above is no longer just a theoretical forecast. The ruling by the Canadian Supreme Court
in the Alta Energy case 89, while not explicitly addressing the application of the Principal
Purpose Test but rather the analogous Canadian General Anti-Avoidance Rule (GAAR),
significantly complicates the application of GAARs that rely heavily on the purpose of
the allegedly abused provisions. This intricacy is especially noticeable within Tax
Treaties because the Court adopts a unified, textual, contextual, and purposive
interpretation of the specific provisions in issue when determining the abusive nature of
transactions without delving into the pursuit of overarching policies within the Tax
Treaty 90. Furthermore, the judgment delineates the intent of Articles 1 and 4 of the Model
by focusing on establishing the subjective scope of application of tax treaties and

distributive rule of the tax treaty - in the specific case Article 10 on dividends - to which the treaty shopper
has acceded]. Danon, Robert. The PPT in Post-BEPS Tax Treaty Law…op. cit. p. 258 [in combination with
the applicable distributive rule and, as the case may be, the relief provisions]. Schwarz, Jonathan, The
Impact of the New Preamble…op. cit. p. 177. Schön, Wolfgang. Chapter 12: The Role of “Commercial
Reasons”…op. cit. at 12.4.2.4.
86
ComOECD 2017, Article 1, para. 1.
87
Báez Moreno, Andrés. GAARs and Treaties: From the Guiding Principle…op. cit. pp. 438-439.
According to the author, some notable exceptions exist to this absence of logic within the distribution rules.
Specifically, the author points to specific transactions to avoid the emergence of a Permanent
Establishment. A case in point is Example J found in the Commentaries to the OECD Model Tax
Convention, which, unlike the other examples of the Commentaries, makes at least a rudimentary reference
to the object and purpose of Article 5(3) of the Model. Example E in the Commentary similarly draws on
the object and purpose of the provision being circumvented, although the author believes that the
teleological analysis in this instance is simplistic and technically flawed.
88
Many authors have pointed out considerable difficulties and the unsatisfactory outcomes that stem from
a strict interpretation of the objective prong of the Principal Purpose Test: Chand, Vikram. The Interaction
of Domestic Anti-Avoidance Rules…op. cit. pp. 193-194. Van Weeghel, Stef. A Deconstruction…op. cit. p.
14 [While rightly pointing out that the difficulties of the teleological prong of the PPT (and the Guiding
Principle) may affect tax authorities or taxpayers depending on who bears the burden of proof]. Elliffe,
Craig. The Meaning of the Principal Purpose Test: One Ring to Bind Them All? /In/ World Tax Journal,
2019, p. 74. Danon, Robert J., Treaty Abuse in the Post-BEPS World…op. cit. p. 45. Chand, Vikram. The
Principal Purpose Test…op. cit. p. 24. Duff, David G. Chapter 36: Canada: Tax Treaty Abuse – Alta
Energy Luxembourg S.A.R.L. v. The Queen. /In/ Tax Treaty Case Law around the Globe 2022 (E.
Kemmeren et al. eds.). Amsterdam: International Bureau of Fiscal Documentation, 2023, at 36.5 (Referring
to the Canadian GAAR but in terms that can be perfectly extrapolated to the PPT).
89
Canada v. Alta Energy Luxembourg S.A.R.L., 2021 SCC 49.
90
Canada v. Alta Energy Luxembourg S.A.R.L., 2021 SCC 49, par. 49.

20
streamlining their straightforward and secure implementation 91. Notably, it refrains from
mandating that residency implies the presence of substantial economic ties with the
intended State of residence 92. Prominent authors, both within and outside Canada, have
suggested that the outcome of the case would likely have remained unchanged had it
pertained to a Tax Treaty incorporating the new Preamble 93. In essence, if the General
Anti-Avoidance Rule, or its equivalent the Principal Purpose Test, considers the object
and purpose of the provisions being abused, the inclusion of a preamble referring to the
general purposes of tax treaties would not significantly alter the analysis. The same
opinion is held by those who, beyond the Alta Energy case, have argued that the Preamble
should exert minimal or negligible influence on interpreting the PPT 94.

III.2 Saving the teleological prong of the PPT (and the PPT itself) by linking it to the
general object(s) and purpose(s) of the tax treaty.

While the interpretation described above is sound, the author had, in previous work,
foreseen that the practical application of the PPT would diverge significantly from the
described path. This application was anticipated to place significant emphasis on the
overall objectives of the Tax Treaty. The object and purpose of the particular tax treaty
provision subject to abuse would be relativized, marginalized or disregarded entirely.
Instead, it would be supplanted by examining the broader aims of the Tax Treaty,
particularly the non-creation of opportunities for non-taxation or reduced taxation through
tax evasion or avoidance. 95 An influential minority of scholars appear to be leaning
towards this approach, endeavouring to blur somewhat the distinction between the object
and purpose of a specific provision and that of the tax treaty in general. They argue that
virtually all provisions within a tax treaty are geared towards serving its overarching
objectives. Consequently, a provision's specific object and purpose cannot be
comprehended independently of the broader aims of the treaty 96. Those in favour of not
giving too much weight to the exact wording of the PPT and qualifying its scope by
resorting to the general object(s) and purpose(s) of tax treaties have even gone so far as
to establish rules of relationship between specific and general purposes stating, for
example, that i) taxpayers (in order to escape the application of the PPT) must show that
the tax benefit is both in line with the general goals of the treaty and with the specific
purpose underlying the allocation rule in issue97; or ii) where the text of a treaty provision

91
Canada v. Alta Energy Luxembourg S.A.R.L., 2021 SCC 49, paras 42-56.
92
Canada v. Alta Energy Luxembourg S.A.R.L., 2021 SCC 49, paras 57-67.
93
Brown, Catherine Anne ; Bogle, Joseph. Treaty Shopping and the New Multilateral Tax Agreement—Is
it Business as Usual in Canada? /In/ 43 Dalhousie Law Journal, Issue 1, 2020, pp. 15-18 (although before
the judgment of the Canadian Supreme Court was handed down). Martín Jiménez, Adolfo. Is There an
International…op. cit. p. 464 (not emphatically tough); Kandev, Michael N.; Lennard, John J. Treaty
Shopping in Canada after Alta Energy Luxembourg (2021): A Closed Door without a Lock? /In/, Bulletin
for International Taxation, 2022, p. 122.
94
Schwarz, Jonathan, The Impact of the New Preamble…op. cit. pp. 177-178. De Broe, Luc, Role of the
Preamble for the Interpretation…op. cit. p. 171.
95
Báez Moreno, Andrés. La Cláusula del Propósito Principal…op. cit. pp. 33-36. Báez Moreno, Andrés.
GAARs and Treaties…op. cit. pp. 439-440.
96
Kok, Reinaut. The Principal Purpose Test in Tax Treaties under BEPS 6. /In/ 44 Intertax, Issue 5, 2016,
p. 409. Kuźniacki, Błażej. The Principal Purpose Test…op. cit. pp. 262-272. Duff, David G. Tax Treaty
Abuse and the Principal Purpose Test – Part 2…op. cit. pp. 986-992. Gomes, Marcus Livio. The DNA of
the Principal…op. cit. pp. 87-88. Schön, Wolfgang. Chapter 12: The Role of “Commercial Reasons”…op.
cit. at 12.4.1. Kennedy, Abigail. The Effect of Article 6 MLI…op. cit. p. 340.
97
Elliffe, Craig. The Meaning…op. cit. p. 74. Schön, Wolfgang. Chapter 12: The Role of “Commercial
Reasons”…op. cit. at 12.4.1.

21
does not suggest a specific rationale, its object and purpose can generally be construed in
light of the object and purpose of the treaty as a whole 98. In the author's perspective, these
and other intricate interpretative suggestions 99 aim to circumvent (albeit unsuccessfully)
the likelihood that a reinterpretation of the teleological aspect of the PPT, heavily reliant
on the general objectives of tax treaties, consistently results in categorizing any
transaction with the attainment of treaty benefits as one of its primary purposes as abusive.
This sort of automatism becomes evident when analyzing the teleological prong of the
PPT as interpreted by the Commentaries to the OECD Model Tax Convention. This is
briefly discussed below.
The Commentaries on the teleological aspect of the PPT within the OECD Model Tax
Convention are fragmented and somewhat disjointed. Indeed, in contrast to the other
normative elements within the clause, such as the concepts of "benefit," "arrangement or
transaction," or "one of the principal purposes," there are no sections in the Commentary
systematically analysing the concept of “benefit […] in accordance with the object and
purpose of the relevant provisions of the Convention”. However, the detailed analysis of
the different examples of interpretation of the PPT contained in the Commentaries gives
an accurate picture of the approach they intend to take to the teleological prong of the
PPT, in line with the wrong way the author has been asserting so far:
i) Paragraph 173 of the Commentary to Article 29(9) of the OECD Model stands out as
the sole passage that appears, at first glance, to allude, in the abstract, to the concept of
"object and purpose of the provisions of the Convention." However, despite clarifying
that Article 29(9) should be interpreted within the context of paragraphs 1 to 7 and the
remainder of the Convention, including its Preamble, the Commentary is predominantly
based upon a strange example. The example revolves around a public company whose
shares are regularly traded on a recognised stock exchange in the Contracting State of
which the company is a resident and derives income from the other Contracting State.
Such a public company is a bank that enters into a conduit financing arrangement intended
to indirectly provide a resident of a third State with the benefit of lower source taxation
under a tax treaty.
The example proves oversimplified and captious. 100. Beyond this the Commentaries
contain and untenable statement according to which even when the object and purpose of
Article 29 (2) (c) of the OECD Model Tax Convention is to establish a threshold for the
treaty entitlement of public companies whose shares are held by residents of different
States the provision, when read in the context of the Preamble, cannot be considered as
having the purpose, of authorising treaty shopping transactions entered into by public
companies. According to the author, it is evident that the Tax Treaty provision
acknowledging the listed bank's qualified resident status is not the one being abused 101.
In essence, no taxpayer would undergo the process of being listed on a recognized stock

98
Duff, David G. Tax Treaty Abuse and the Principal Purpose Test – Part 2…op. cit. p. 990. Kennedy,
Abigail. The Effect of Article 6 MLI…op. cit. p. 340.
99
For instance, the two-stage analysis proposed by Chand according to which the taxpayer has to first
determine the object and purpose of the relevant provisions in light of the objectives pursued by a tax treaty
and then prove that the transaction respects the object and purpose of the relevant provisions at stake
(Chand, Vikram. The Principal Purpose Test…op. cit. p. 26).
100
Certainly, the mention in the example of a conduit financing arrangement intended to indirectly provide
tax treaty benefits to a resident of a third State completely predetermines the case's result.
101
Certainly, the example attempts to navigate around the challenging issue highlighted by the author,
which is that in cases of Treaty Shopping, the abused provisions of the Tax Treaty are Articles 1 and 4,
specifically the resident concept they encompass.

22
exchange solely to abuse the benefits of a Tax Treaty. However, what is crucial in this
example is that the Commentaries overlook the object and purpose of the provision
allegedly being abused, opting to apply the Principal Purpose Test in line with the broader
objects and purposes of the tax treaty.
ii) Most of the examples in the Commentaries to illustrate the practical application of the
PPT are resolved on the basis of the general object(s) and purpose(s) of the Tax Treaties,
both to conclude that transactions are abusive 102 or not abusive103. Where the
Commentaries conclude that obtaining Tax Treaty benefits is abusive, they state that it
would be contrary to the object and purpose of the tax convention to grant the benefit of
that exemption or limitation under a treaty-shopping arrangement. These examples do not
refer to the general object and purpose of the tax treaty (outlined in the Preamble), which
could potentially oppose the granting of the treaty benefit under consideration. In cases
where it is determined that the Principal Purpose Test does not apply due to the non-
abusive nature of the transaction, the examples draw upon the overarching goal of tax
conventions of encouraging cross-border investment 104. Finally, the Commentaries
provide examples where the teleological prong of the Principal Purpose Test is entirely
omitted 105, or it is unclear whether the rule applies under the teleological prong 106.
iii) It should be acknowledged that in at least two instances within the Commentaries, the
potential application of the Principal Purpose Test hinges on the object and purpose
behind the provision purportedly abused 107. While the Commentaries generally proceed
in the correct direction in these cases, the analysis of the object and purpose behind the
abused provisions appears to be lacking. In fact, the resolution of the cited examples
appears to conflate the purpose of the provisions in issue with the very regulation object
by indicating, for example, that subparagraph [(2)a) of article 10] uses an arbitrary
threshold of 25 per cent for the purposes of determining which shareholders are entitled
to the benefit of the lower rate of tax on dividends 108. In this instance, the Commentaries
exhibit a tautology by suggesting that a rule diminishing the maximum tax rate on
dividends at source for significant holdings serves the purpose of diminishing the
maximum tax rate on dividends at source for significant holdings (!). 109 The deficiency

102
ComOECD 2017, Article 29, par. 182 (Examples A and B).
103
ComOECD 2017, Article 29, par. 182 (Examples C, D, K and L).
104
This approach relies on two distinct models. On the one hand, example C appears to merge the overall
objects and purposes of tax treaties with those specific to its provisions by stating that given that a general
objective of tax conventions is to encourage cross-border investment, obtaining the benefits of the
convention is in accordance with the object and purpose of the provisions of that convention (ComOECD
2017, Article 29, par. 182 (Example C in fine). On the other hand, examples D, K, and L advocate an even
more complex solution. The utilization of the teleological aspect of the PPT—under the general purpose of
tax treaties to provide benefits to encourage cross-border investment—hinges on whether the investment
made is part of an arrangement undertaken for the principal purpose of obtaining the benefit of the
Convention (ComOECD 2017, Article 29, par. 182 (Examples D, K and L).
105
ComOECD 2017, Article 29, par. 182 (Examples F, H and I).
106
ComOECD 2017, Article 29, par. 182 (Examples G and M).
107
ComOECD 2017, Article 29, par. 182 (Examples E referring to the object and purpose of article 10(2)a)
of the OECD Model Tax Convention and J referring to the object and purpose of article 5(3) of the OECD
Model Tax Convention). ComOECD 2017, Article 29, par. 182 Example I also makes reference to the
object and purpose of the relevant provisions, yet it does not specify the particular provisions involved in
the given case.
108
ComOECD 2017, Article 29, par. 182 Example E.
109
Although not to the extent seen in example E, example J also presents a form of tautological reasoning
by stating that granting the benefit of that rule (article 5(3) of the OECD Model conditioning the existence
of a Construction Site PE to it lasting more than twelve months) in these circumstances (a fragmentation
of 22 months expected project into different contracts each lasting 11 months) would be contrary to the

23
in argumentation apparent in the resolution of these examples shows, as previously noted,
that the absence of a purposive rationale behind the distribution rules in Articles 6 to 22
of tax treaties makes it very difficult to apply the Principal Purpose Test canonically to
alleged Rule Shopping cases without incurring serious arbitrariness 110.

III.3 The shortcomings of linking the teleological prong of the principal purpose test to
the general objects and purposes of tax treaties: circularity, confusion between the
prongs of the rule and excessive reliance on economic substance.

Despite the commendable efforts of academic works aiming to address the significant
deficiencies of the Principal Purpose Test by linking its teleological aspect with the
overarching object(s) and purpose(s) of tax treaties, particularly the newly introduced
contents of the Preamble, the author believes that the examples provided in the
Commentaries and their corresponding solutions highlight the considerable challenges
that such an interconnected interpretation might pose in practice:
i) Some scholars raised concerns about the circular nature of the Guiding Principle, which
was introduced in the Commentaries to the OECD Model Tax Convention in 2003. This
principle stipulates that for a transaction to be deemed abusive, the acquisition of tax
benefits associated with the transaction must contradict the object and purposes of the
relevant treaty provisions. This circularity became apparent when connecting this
teleological aspect with the overarching aims of tax treaties 111. Given its almost identical
wording, similar circularity has been criticized regarding the teleological aspect of the
principal purpose test 112. Indeed, this circularity becomes unmistakably evident when
examining the examples provided in the Commentaries. In resolving some of these
examples it is determined that the Principal Purpose Test is applicable because the

object and purpose of that paragraph, as the time limitation of that paragraph would otherwise be
meaningless.
110
In the author's perspective, ComOECD 2017, Article 29, par. 182 Example E implicitly acknowledges
this notion by affirming that subparagraph [(2)a) of Article 10] uses an arbitrary threshold of 25 per cent
for the purposes of determining which shareholders are entitled to the benefit of the lower rate of tax on
dividends (emphasis added). However, in the author's perspective, this arbitrary nature of Article 10(2)(a)
of the OECD Model Tax Convention extends to nearly all rules governing the allocation of taxing rights
outlined in Articles 6 to 22. This generally accounts for the challenging application of teleological criteria
(and consequently, the Principal Purpose Test) to instances of abuse concerning allocation rules. The author
contends that strategies involving the exploitation of the Permanent Establishment concept may constitute
an exception, as this concept permits a teleological approach in a more traditional sense. On this issue,
which goes far beyond the scope of this paper: Báez Moreno, Andrés. Tomando en Serio las Palabras y las
Finalidades de la Ley. A Propósito del Teletrabajo y los Establecimientos Permanentes. /In/ DIREITO
TRIBUTÁRIO: Estudos em Homenagem ao Professor Luís Eduardo Schoueri. Sao Paulo: NSM, 2023, pp.
481-485.
111
Arnold, Brian J. Tax Treaties and Tax Avoidance: The 2003 Revisions…op. cit. p. 247 [indicating
explicitly that it should be necessary for the tax authorities to establish a more specific treaty scheme or
purpose that is frustrated or abused by the transaction]. Broe, Luc. International Tax Planning and
Prevention of Abuse…op. cit. at 3.3.1.2.3. Arnold, Brian J.; van Wheegel, Stef. The Relationship between
Tax Treaties and Domestic Anti-Abuse Measures. /In/ Tax Treaties and Domestic Law (G. Maisto ed.).
Amsterdam: International Bureau of Fiscal Documentation, 2006, at 5.4.3. Zornoza, Juan José; Báez,
Andrés. The 2003 Revisions to the Commentary…op. cit. p. 156.
112
De Broe, Luc. Tax Treaty and the EU Law aspects of the LOB and PPT provision proposed by BEPS
Action 6. /In/ Base Erosion and Profit Shifting (BEPS) – Impact for European and international tax policy
(Danon, R. ed.). Geneva, Zurich and Basel: Schulthess, 2016, p. 213. Báez Moreno, Andrés. GAARs and
Treaties: From the Guiding Principle…op. cit. p. 440. Kuźniacki, Błażej. The Principal Purpose Test…op.
cit. p. 266 (with nuances). Schön, Wolfgang. Chapter 12: The Role of “Commercial Reasons”…op. cit. at
12.4.2.1 (referring to a particular interpretation of the teleological prong of the Principal Purpose Test).

24
allegedly abused provision cannot be considered as having the purpose of authorising
treaty-shopping transactions entered into by public companies 113 or because it would be
contrary to the object and purpose of the tax convention to grant the benefit of that
exemption under that treaty-shopping arrangement 114. Nowhere in the Commentaries is
there justification provided for why cases of treaty shopping are being addressed 115;
essentially, once it is established that one of the principal purposes for the arrangement
was to gain treaty benefits, the deduction is made that these benefits ought to be withheld
because the arrangement is deemed abusive as a form of treaty shopping. It appears as if
the Commentaries regard the existence of treaty shopping as a premise rather than a
conclusion. Simplified to its core, the Commentaries assert something astonishingly
tautologic like we are dealing with abusive treaty shopping, and therefore not
permissible, because treaty shopping goes against the object and purpose of the tax treaty
of preventing tax avoidance through treaty shopping. In addition, as rightly pointed
out 116, Examples A and B do not challenge the taxpayer's nexus, which would typically
result in the purported treaty shopping scenario. Instead, they address abusive transactions
falling under the realm of Rule Shopping.The circularity in the examples continues, with
other sections in the Commentaries exacerbating it. Examples D, K, and L 117, beginning
with the premise that the aim of tax treaties is to offer incentives for cross-border
investment, conclude that the Principal Purpose Test should not be applied because the
arrangement under scrutiny was not primarily undertaken for the principal purpose of
obtaining the benefits of the tax treaty. Thus, the Commentaries condition the application
of the teleological prong of the Principal Purpose Test on obtaining treaty benefits being
one of the main purposes of the transaction. While conventional logic and the typical
interpretation of the rule suggest that once verified that one of the main purposes of the
transaction is to capture the benefits of the Convention, the transaction might still be
deemed non-abusive if the pursuit of those benefits aligns with the teleological prong of
the Commentary's rationale regresses to the initial point. In theory, moreover, in these
cases, the Commentaries generate circular reasoning without any need for it, for if it could
be concluded that obtaining the benefits of the Convention was not one of the main
purposes of the transaction, there was no need to consider the application of the
teleological prong of the rule 118.
ii) Several renowned authors have voiced concerns regarding certain sections of the
Commentary on Article 29, particularly paragraph 174 119, which suggests that any
arrangement whose main objective is to secure a more favourable tax treatment does not

113
ComOECD 2017, Article 29, par. 173 in fine.
114
ComOECD 2017, Article 29, par. 182, Examples A and B.
115
The example in ComOECD 2017, Article 29, par. 173 seems deliberately constructed to create the
impression of abuse by indicating that a bank that enters into a conduit financing
arrangement intended to provide indirectly to a resident of a third State the benefit of lower source taxation
under a tax treaty (emphasis added).
116
Van Weeghel, Stef. A Deconstruction…op. cit. p. 32.
117
ComOECD 2017, Article 29, par. 182, Examples D, K and L.
118
As concluded by Zahra in relation to example D: Zahra, Ian. The Principal Purpose Test…op. cit. at
3.3.2.3.
119
According to which: “The provisions of paragraph 9 establish that a Contracting State may deny the
benefits of a tax convention where it is reasonable to conclude, having considered all the relevant facts and
circumstances, that one of the principal purposes of an arrangement or transaction was for a benefit under
a tax treaty to be obtained. The provision is intended to ensure that tax conventions apply in accordance
with the purpose for which they were entered into, i.e. to provide benefits in respect of bona fide exchanges
of goods and services, and movements of capital and persons as opposed to arrangements whose
principal objective is to secure a more favourable tax treatment”. (ComOECD 2017, Article 29, par. 174
emphasis added).

25
promote bona fide exchanges of goods and services and movements of capital and persons
and should ultimately trigger the application of the Principal Purpose Test 120. The author
squarely agrees with the criticism but argues that the passage mentioned in the
Commentary stems not from a punctual misinterpretation of the Principal Purpose Test
but rather from its flawed design. It precisely reflects the problematic approach to the
objective prong of the PPT based upon the general objects(s) and purpose(s) of Tax
Treaties. Indeed, while the fallacy of this argument is apparent, if the objective prong of
the Principal Purpose Test is equated with the general objects and purposes of the tax
treaty, and the preamble of the treaty explicitly rejects tax avoidance through treaty-
shopping arrangements, it is plausible that a tax authority keen on eliminating any room
for tax planning and courts lacking expertise in international tax matters may yield to the
application of the PPT. This will mainly occur when determining whether a treaty-
shopping structure or, more neutrally, whether an entity residing in a Contracting State
but "created" by a resident of a Third State (without a tax treaty or with a less
advantageous one) can avail itself of the benefits contained in the treaty with the State
where the investment is made 121. In essence, the technical flaws of the Principal Purpose
Test (PPT) are unlikely to hinder its application. Instead, its simplistic logic favours its
systematic use, creating a self-fulfilling prophecy. According to this view, any
arrangement aiming to access the benefits of a tax treaty, especially if multiple states are
involved, is automatically suspected of treaty shopping. Consequently, it is deemed
appropriate to invoke the PPT, as the very purpose of a tax treaty is to prevent such
instances of treaty shopping from succeeding.
iii) Some authors 122 have defended the rationale behind the Principal Purpose Test,
especially its objective prong, by suggesting that an arrangement or transaction backed
by a valid commercial reason should be respected under that prong. Their argument
revolves around the notion that double taxation conventions primarily aim to facilitate
exchanges of goods and services and the movement of capital and individuals by
eliminating international double taxation123. This reinterpreted understanding of the
Principal Purpose Test language can serve as a rational framework for assessing instances
of Rule Shopping, especially when they involve self-canceling or mutually offsetting
arrangements 124 or in unique cases of Treaty Shopping marked by round-tripping
strategies 125. Ultimately, this approach to the PPT's objective prong indirectly aligns with

120
Blessing, Peter H. Limitations on Treaty Access by or through Commercial Entities. /In/ Current Tax
Treaty Issues. 50th Anniversary of the International Tax Group (G. Maisto ed.). Amsterdam: International
Bureau of Fiscal Documentation, 2020, p. 268. Schön, Wolfgang. Chapter 12: The Role of “Commercial
Reasons”…op. cit. at 12.4.2.2.
121
This same pessimistic prediction can be seen also in: Báez Moreno, Andrés. GAARs and Treaties: From
the Guiding Principle…op. cit. pp. 439-440.
122
Duff, David G. Tax Treaty Abuse and the Principal Purpose Test – Part 2…op. cit. p. 992 [proposing a
genuine cross-border economic activity regarding instances of treaty shopping). Kuźniacki, Błażej. The
Principal Purpose Test…op. cit. pp. 266-272 [referring to genuine economic transactions or
arrangements]. Schön, Wolfgang. Chapter 12: The Role of “Commercial Reasons”…op. cit. at 12.4.2.4.
[referring bona fide commercial reasons or economic reality].
123
This aim is reflected in the Commentaries (ComOECD 2017, Article 1, par. 54) and can, to some extent,
be traced in the new Preamble when referring to the development of economic relationship and the
elimination of double taxation.
124
Schön, Wolfgang. Chapter 12: The Role of “Commercial Reasons”…op. cit. at 12.4.2.4 [not referring
explicitly to Rule Shopping cases].
125
Danon, Robert. The PPT in Post-BEPS Tax Treaty Law…op. cit. p. 259 [Danon describes round-tripping
as structures in which income arising in one Contracting Statçe is artificially shifted to an entity interposed
in the other Contracting State and then transferred back to resident investors of the first Contracting State
(Danon, Robert. The PPT in Post-BEPS Tax Treaty Law…op. cit. p. 244)].

26
the longstanding concept of artificiality often employed by General Anti-Avoidance
Rules 126. However, the complexity escalates when attempting to apply this approach to
purported instances of traditional Treaty Shopping involving more than two states 127. For
the Principal Purpose Test to effectively serve as a General Anti-Avoidance Rule
safeguarding the purported function of tax treaties in fostering cross-border investment,
it is crucial to acknowledge that not all cross-border investment flows merit tax treaty
benefits. Given the inherently bilateral nature of the tax treaty network and its foundation
on a principle of pure reciprocity, it is prudent for the PPT to discern between "good and
bad" cross-border investments 128. However, within the framework of the commented
expansive interpretation of the objective prong of the Principal Purpose Test, this notion
introduces a new dilemma rather than resolving the problem: What criterion should be
employed to determine that a cross-border investment is "good" and thus aligns with the
primary purpose of Tax Treaties? Asserting that abusive investments or those that result
in treaty shopping are undeserving of treaty protection creates the circularity we
previously criticized. In this context, the sole viable option is identifying cross-border
investments worthy of protection, with those made by taxpayers who demonstrate
sufficient substance and activity in the jurisdiction where they claim residency 129. Yet
again, the challenge lies in determining both the presence and, more importantly, the level
of activity and substance required by the primary objective of a Tax Treaty and,
consequently, according to this approach, the Principal Purpose Test. This task is far from
straightforward. Consequently, the most discerning commentators advocate for a legal
definition of substance. They look to other provisions of the Model and the Multilateral
Instrument, such as those attributing qualified resident status for purposes of applying the
Limitation on Benefits rules 130 or to other normative materials stemming from the BEPS
initiative. These may include the modified nexus approach of BEPS Action 5 131 or the
new developments in transfer pricing outlined in BEPS Actions 8 to 10 132. Each of these
comprehensive proposals encounters substantial legal challenges, the discussion of which
exceeds the scope of this paper's characteristics, preventing us from delving into them in
depth 133. However, what is most pertinent for our current focus is that the Commentaries

126
At times, this concept has been suggested as a potential alternative to address the numerous challenges
associated with the PPT's objective prong: Báez Moreno, Andrés. GAARs and Treaties: From the Guiding
Principle…op. cit. p. 440.
127
These potential abuses of tax treaties are the most worrying, as evidenced by the Preamble's explicit
mention of "treaty-shopping arrangements aimed at obtaining reliefs provided in this Convention for the
indirect benefit of residents of third States" (in this vein: Kaka, Porus F. From the Avoidance of Double
Taxation to the Avoidance of Double Non-Taxation: The Changing Objectives of Tax Treaties. /In/ 75
Bulletin for International Taxation, 2021, at 1).
128
Brian J. Arnold. An introduction to tax treaties. Available at https://www.un.org/esa/ffd/wp-
content/uploads/2015/10/TT_Introduction_Eng.pdf (last accessed April 18th 2024), at par. 46 [referring
more in general to tax avoidance as an inappropriate incentive to (international) commerce]. Kuźniacki,
Błażej. The Principal Purpose Test…op. cit. p. 267 [following Arnold]. Schön, Wolfgang. Chapter 12: The
Role of “Commercial Reasons”… op. cit. at 12.4.2.2 and 12.4.2.4.
129
Schön, Wolfgang. Chapter 12: The Role of “Commercial Reasons”… op. cit. at 12.4.2.2 and 12.4.2.4.
130
Van Weeghel, Stef. A Deconstruction…op. cit. pp. 38-39. Schön, Wolfgang. Chapter 12: The Role of
“Commercial Reasons”… op. cit. at 12.4.2.2.
131
Danon, Robert J., Treaty Abuse in the Post-BEPS World…op. cit. pp. 48-49.
132
Martín Jiménez, Adolfo. Tax Avoidance and Agressive Tax Planning as an International Standard -
BEPS and the “New” Standards of (Legal and Illegal) Tax Avoidance. /In/ Tax Avoidance Revisited in the
EU PEBS Context (Ana Paula Dourado ed.). Amsterdam: International Bureau of Fiscal Documentation,
2017, p. 55. Danon, Robert J., Treaty Abuse in the Post-BEPS World…op. cit. p. 48 [although less
emphatically].
133
Particularly critical of these proposals, for reasons the author shares: Van Weeghel, Stef. A
Deconstruction…op. cit. pp. 38-40.

27
to the OECD Model have not displayed a tendency towards this model of "systematic
normativization" of the substance concept, even though there is a noticeable inclination,
particularly in crafting examples illustrating the application of the PPT, to rely on
substance in determining the application of the rule 134. Certainly, the resolution of
numerous examples found in the Commentaries demonstrates a less stringent approach
that aligns with the inconsistent application of the PPT, especially its objective prong, as
previously discussed. This assertion warrants further elaboration.

The analysis in the Commentary's examples of the activity and substance of taxpayers
(companies) that might eventually be engaged in (unacceptable) treaty shopping
strategies is poor and very inconclusive. Primarily, the examples fail to thoroughly
examine the activity and substance of the intermediate entities under examination, despite
some academic suggestions implying otherwise 135. Upon closer examination, it becomes
evident that a thorough analysis of economic substance is found only in examples G136,

134
On this heavy reliance on substance by the Examples contained in the Commentaries: Danon, Robert J.,
Treaty Abuse in the Post-BEPS World…op. cit. p. 48. Kuźniacki, Błażej. The Principal Purpose Test…op.
cit. p. 267.
135
Kuźniacki, Błażej. The Principal Purpose Test…op. cit. p. 267 [suggesting that examples A,B, C,D, F,
G, H, I, K, L and M at paragraph 182 of the Commentary to article 29(9) analyse, positively or negatively,
the economic substance and valid business reasons of the transactions described in connection with the
purpose of the tax treaties to encourage cross-border business activities].
136
According to the example: “This decision is mainly driven by the skilled labour force, reliable legal
system, business friendly environment, political stability, membership of a regional grouping, sophisticated
banking industry and the comprehensive double taxation treaty network of State R, including its tax treaties
with the five States in which TCO owns subsidiaries, which all provide low withholding tax rates. […]
Assuming that the intra-group services to be provided by RCO, including the making of decisions necessary
for the conduct of its business, constitute a real business through which RCO exercises substantive
economic functions, using real assets and assuming real risks […]” (ComOECD 2017, Article 29, par. 182,
Example G).

28
H 137, and K 138, and to a lesser extent in examples L 139 and M 140 of the Commentary141.
However, even among the limited examples that examine the activity and/or substance of
the companies involved, such analysis is minimally beneficial for applying the Principal
Purpose Test to different factual constellations 142. Indeed, the examples that delve deeper
into substance appear tailored to support a predetermined conclusion, which consistently
leans towards the non-application of the Principal Purpose Test (PPT). These instances
are constructed using stereotypical formulas that strongly suggest the presence of
significant activity and corresponding substance. Indeed, the frequent mentions of a
skilled labor force, experienced local management, or reliable regulatory and legal
systems, just to name a few, and the cumulative convergence of all these elements of
activity and substance in the examples imply a notion of 'ideal substance,' which
inevitably leads to a predetermined conclusion. However, such ideal circumstances are
rarely encountered in complex, ambiguous real-life cases. It is surprising (and
disappointing) that none of the examples that conclude the necessary application of the
Principal Purpose Test (PPT) do so by determining that the company denied treaty
benefits lacks the necessary activity or substance 143. Furthermore, and of even more

137
According to the example: “TCO therefore establishes RCO, a subsidiary resident of State R (a country
where there are developed international trade and financial markets as well as an abundance of highly-
qualified human resources), as a base for developing its foreign business activities. RCO carries on diverse
business activities such as wholesaling, retailing, manufacturing, financing and domestic and international
investment. RCO possesses the human and financial resources (in various areas such as legal, financial,
accounting, taxation, risk management, auditing and internal control) that are necessary to perform these
activities. It is clear that RCO’s activities constitute the active conduct of a business in State R”.
(ComOECD 2017, Article 29, par. 182, Example H).
138
According to the example: “The decision to establish the regional investment platform in State R was
mainly driven by the availability of directors with knowledge of regional business practices and
regulations, the existence of a skilled multilingual workforce, State R’s membership of a regional grouping
and the extensive tax convention network of State R, including its tax convention with State S, which
provides for low withholding tax rates. RCO employs an experienced local management team to review
investment recommendations from Fund and performs various other functions which, depending on the
case, may include approving and monitoring investments, carrying on treasury functions, maintaining
RCO’s books and records, and ensuring compliance with regulatory requirements in States where it invests.
The board of directors of RCO is appointed by Fund and is composed of a majority of State R resident
directors with expertise in investment management, as well as members of Fund’s global management
team. RCO pays tax and files tax returns in State R”. (ComOECD 2017, Article 29, par. 182, Example K).
139
According to the example: “In establishing RCO, the bank took into account a large number of issues,
including State R’s robust securitisation framework, its securitisation and other relevant legislation, the
availability of skilled and experienced personnel and support services in State R and the existence of tax
benefits provided under State R’s extensive tax convention network”. (ComOECD 2017, Article 29, par.
182, Example L).
140
According to the example: “After a review of possible locations, Real Estate Fund decided to establish
RCO in State R. This decision was mainly driven by the political stability of State R, its regulatory and
legal systems, lender and investor familiarity, access to appropriately qualified personnel and the extensive
tax convention network of State R, including its treaties with other States within the specific geographic
area targeted for investment”. (ComOECD 2017, Article 29, par. 182, Example M).
141
Example C could be included in this list, wherein establishing a manufacturing plant for electronic device
production assumes the presence of both activity and substance.
142
Navarro is moderately critical of the substance-related examples in the Commentaries, although he
approaches them from the perspective of the (physical or digital) presence of relevant employees in the
corresponding jurisdiction: Navarro, Aitor. The Incidence of Cross-Border Mobility of Individuals on Post-
BEPS Substance Requirements. /In/ Mobility of Individuals and Workforces. Tax Challenges Raised by
Digitalization (Svetislav V. Kostić et al. eds.). Amsterdam: International Bureau of Fiscal Documentation,
2024, pp. 385-390.
143
As accurately pointed out by van Wheegel Example A and Example B (both denying treaty benefits in
treaty shopping scenarios) do not question the nexus of the taxpayer with the state of residence but rather
address abusive transactions (van Weeghel, Stef. A Deconstruction…op. cit. p. 32).

29
concern for the present case, in numerous examples where the Commentary scrutinizes
the activity and substance of intermediate entities and determines it to be adequate, it
remains unclear whether the tax benefits are granted solely as a result of applying the
objective prong of the Principal Purpose Test or due to other factors. The link between
the overarching objective of tax conventions to promote cross-border investment
(objective prong) and the non-application of the Principal Purpose Test (PPT) seems
evident in examples C and K 144. However, it is less apparent in examples G 145, H146, L147,
and M 148. In this context, deriving practical conclusions regarding how the overarching
objective of tax conventions to promote cross-border investment functions when
implementing the PPT becomes exceedingly challenging.

In summary, resorting to the new Preamble to overcome an overly strict reading of the
teleological prong of the Principal Purpose Test comes with its own problems. Indeed, in
some cases, referring to the general purposes of the tax treaty does not facilitate the
application of the PPT, and in others, it clearly leads to a circular and confusing
application of the rule.

IV. Conclusions.

One of the BEPS tax treaty consequences announced with the most fanfare was the
incorporation of a Preamble into the OECD Model 2017 and all tax agreements covered
by the multilateral instruments. Not only was there a lot of hype around the rather
simplistic idea that tax treaties should not facilitate their very abuse. The ideologues of
BEPS and the technicians who designed the Multilateral Instrument invested enormous
effort to ensure that the new Preamble and its essential contents were incorporated into
the Covered Tax Agreements without exception.
Despite the high expectations that some wanted to place on it, the new Preamble is a
smokescreen that, at best, will prove harmless. As the title of this paper suggests, the new
Preamble may be irrelevant. However, in worse scenarios it can lead to untenable

144
In any event, van Wheegel's insights into the specific manner in which the overarching objectives and
purposes of tax treaties should function concerning Collective Investment Vehicles are highly relevant and
may challenge the conclusion drawn in the text concerning example K (van Weeghel, Stef. A
Deconstruction…op. cit. p. 35).
145
Regarding example G, several authors have questioned whether the PPT's non-application is due to the
influence deployed by the objective prong, either because they understand that the purposive prong of the
rule is not even verified (Chand, Vikram. The Principal Purpose Test…op. cit. p. 33) or because it is unclear
under which of the two tests of the rule the final decision has been taken (van Weeghel, Stef. A
Deconstruction…op. cit. p. 34).
146
An example that the Commentaries resolve by employing the purposive prong of the Principal Purpose
Test, although it might have been more logical to utilize the object and purpose of the treaty instead (van
Weeghel, Stef. A Deconstruction…op. cit. pp. 34-35).
147
While initially, the resolution of example L suggests that the described facts satisfy the purposive prong
of the Principal Purpose Test, the concluding remarks of the example are somewhat enigmatic, indicating
that “(…) in the absence of other facts or circumstances showing that RCO’s investment is part of an
arrangement or relates to another transaction undertaken for a principal purpose of obtaining the benefit
of the Convention, it would not be reasonable to deny the benefit of the State R-State S tax convention to
RCO”.
148
The resolution of example M is mainly irrelevant to the objective prong of the PPT if one considers that,
as indicated by the very example, the taxpayer would not obtain treaty benefits that are better than the
benefits to which its investors would have been entitled had they made the same investment directly (van
Weeghel, Stef. A Deconstruction…op. cit. p. 37).

30
interpretations that may jeopardize the very survival of tax treaties if they are to remain
instruments that provide certain degree of stability and legal certainty to cross-border
taxpayers. Indeed, the dilemma between irrelevance and irrationality faced by the new
Preamble is evident in the two main interpretative consequences it is frequently attributed.
Except in particular cases, resorting to the Preamble as an autonomous anti-abuse
mechanism implies disregarding the limits of tax treaty interpretation 149, handling a
nonexistent - and therefore arbitrary - concept of treaty abuse 150, and baselessly
privileging general purposes of tax treaties over others 151. Apart from the above, it is
difficult to ascertain how this anti-abuse interpretation copes with the other GAARs and
SAARs that Covered Tax Agreements may incorporate, especially with the Principal
Purpose Test (PPT) 152.
The Principal Purpose Test is a poorly designed GAAR whose objective prong, when
interpreted strictly, can make its application impossible, particularly in cases of treaty
shopping 153. However, a more flexible application of this rule in line with the general
purposes of tax treaties contained in the Preamble 154 may have dire consequences. Indeed,
resorting to these purposes may induce a circular, confusing, and arbitrary application of
the PPT 155.
Any legal scholar knows that an interpretation of a legal term rendering it void of content
is, in principle, unacceptable. From this point of view, the central idea of this article -
i.e., the new Preamble should not have any effect on the interpretation of tax treaties -
should be rejected. However, this interpretative maxim cannot be taken to the extreme
of forcing the relevance of the Preamble even at the expense of compromising the
methodological and legal postulates that govern the interpretation of tax treaties. In tax,
as in any other field of law, the application of rules implies frequently more of a weighing
of evils than goods.

149
See paragraph II.1.
150
See paragraph II.2.
151
See paragraph II.3.
152
See paragraph II.4.
153
See paragraph III.1.
154
As suggested by the Commentaries to the OECD Model and some scholars: see See paragraph III.2.
155
See paragraph III.3.

31