Treaty access used to be a paperwork question. It is now an evidence question. The entity that cannot show genuine substance, beneficial ownership, and commercial purpose may hold a residency certificate and still lose the benefit it relies on.

EXECUTIVE SUMMARY Double tax treaties remain essential tools in international business: they reduce withholding tax, allocate taxing rights between countries, prevent double taxation, and give cross-border investors greater certainty. But treaty access is no longer a mechanical exercise resting on legal residence and formal ownership. Tax authorities increasingly ask whether the entity claiming benefits has real substance, is the beneficial owner of the income, and was not inserted into the structure mainly to capture a tax advantage. The First-Instance Tax Court of Milan reinforced this reality in Decision No. 3525 of 5 September 2025. The court rejected the Italian Revenue Agency’s attempt to tax a capital gain on the indirect sale of an Italian company, giving decisive weight to the fact that the Luxembourg holding entities held genuine offices, staff, governance processes, and autonomous decision-making. Substance and contemporaneous evidence carried the day. WHAT THIS MEANS FOR YOU •    Incorporation in a treaty jurisdiction is the starting point, not the answer — entitlement must be defensible in substance as well as form. •    Beneficial ownership, commercial purpose, economic substance, and the Principal Purpose Test now sit at the centre of treaty-access risk. •    Holding companies can be respected when they are real — even when lean — but a residency certificate alone will not carry a challenge. •    Treaty planning must evolve into treaty defence: structures should be built to withstand scrutiny from tax authorities, auditors, lenders, buyers, and regulators.

 

1.  Why Treaty Access Is No Longer Automatic

Historically, many cross-border structures were built around treaty networks. A company resident in one jurisdiction could invest into another and claim reduced withholding tax on dividends, interest, or royalties under an applicable double tax treaty. The analysis often focused heavily on legal residence, tax residency certificates, and formal ownership.

That approach is no longer sufficient. Before granting benefits, tax authorities now ask a tougher, more substantive set of questions:

• Why was this entity established in this jurisdiction, and does it have a genuine commercial role?
• Does it actually control the income it receives — or simply pass it on?
• Do its directors make real decisions, and does the entity bear genuine risk?
• Does it have premises, staff, systems, or service support appropriate to its function?
• Was one of the principal purposes of the arrangement to obtain treaty benefits?

These questions reflect a global shift from form-based treaty access to substance-based treaty defence. The taxpayer must now demonstrate that the treaty claimant is not merely a legal recipient, but a genuine commercial participant in the structure.

2.  The Role of Double Tax Treaties in Cross-Border Investment

Double tax treaties are designed to reduce barriers to international commerce. They allocate taxing rights between countries and often reduce or eliminate withholding taxes on cross-border payments. They also provide rules for business profits, capital gains, employment income, permanent establishments, associated enterprises, exchange of information, and dispute resolution.

For businesses and investors, treaties can support inbound and outbound investment, private equity acquisitions and exits, dividend repatriation, cross-border financing, royalty and licensing arrangements, regional holding structures, treasury management, mergers and acquisitions, family office planning, and international expansion.

But treaties were never intended to facilitate artificial arrangements. The central policy tension is clear: treaties should prevent double taxation, not create double non-taxation or reward treaty shopping. That tension is precisely why substance, beneficial ownership, and anti-abuse rules have moved to the foreground.

3.  Beneficial Ownership: More Than Legal Title

Beneficial ownership is one of the most important concepts in treaty access. In many treaties, reduced withholding tax on dividends, interest, or royalties is available only where the recipient is the beneficial owner of the income. Legal ownership alone is not enough.

A company may receive income into its bank account and still fail the beneficial ownership test if it is under an obligation — legal, contractual, or practical — to pass that income to another person. The decisive question is whether the recipient has the right to use and enjoy the income. In practice, tax authorities examine whether the treaty claimant:

• has discretion over the income and can retain, reinvest, or distribute it;
• bears economic risk and exercises real decision-making authority;
• is not acting as an agent, nominee, or intermediary;
• is not part of a back-to-back arrangement with no meaningful spread or risk;
• has a commercial reason for sitting in the ownership or payment chain.

For holding companies the analysis is especially important. A holding company may be respected where it manages investments, exercises control, and makes real decisions. It becomes vulnerable where it merely receives income and immediately channels it onward without discretion.

4.  The Principal Purpose Test and the New Anti-Abuse Environment

The Principal Purpose Test — the PPT — is now a defining feature of international treaty anti-abuse analysis. Introduced as a minimum standard under BEPS Action 6 and written into treaties across the world through the OECD/G20 Multilateral Instrument (MLI), the PPT allows treaty benefits to be denied where it is reasonable to conclude that obtaining those benefits was one of the principal purposes of an arrangement or transaction — unless granting the benefit would accord with the object and purpose of the treaty.

This has changed the tone of treaty planning. A taxpayer may satisfy every formal treaty requirement and still face denial of benefits if the structure appears to have been created mainly to access a treaty advantage. The analysis is highly fact-specific and turns on commercial evidence. Relevant questions include:

• Was the entity inserted shortly before the transaction or payment?
• Was the jurisdiction chosen primarily because of its treaty network?
• Does the entity perform real functions, and are there business reasons beyond tax savings?
• Do board minutes and transaction documents support the commercial rationale?
• Would the transaction have occurred in a similar way without the treaty benefit?

The PPT does not prohibit tax-aware structuring. Businesses are entitled to consider tax outcomes. But the structure must be anchored in genuine commercial purpose — not treaty advantage alone.

5.  Lessons from the Milan Holding Company Ruling

The Milan decision is not simply a case about Luxembourg holding companies. It is part of a wider conversation about the line between artificial interposition and genuine cross-border structuring — and it offers an unusually clear illustration of how that line is drawn on the facts.

THE CASE AT A GLANCE •    Court & decision: First-Instance Tax Court of Milan, Decision No. 3525, 5 September 2025. •    Structure: an international private equity fund held a well-known Italian company (pet-care sector) through two Luxembourg entities — Lux I, which controlled Lux II, which in turn controlled the Italian company. Lux I sold its stake in Lux II. •    Challenge: the Italian Revenue Agency invoked Article 37(3) of Presidential Decree 600/1973, argued the Luxembourg entities were mere conduits lacking economic substance, and sought to tax the gain in Italy at 26%. •    Outcome: the court sided with the fund. Board meetings and shareholder assemblies were held regularly with experienced professionals (some Luxembourg-resident); investment and distribution decisions were taken autonomously by the boards; and there was no pre-established, automatic mechanism for passing the proceeds onward.

 

The practical lesson is important. Holding companies can be respected when they are real. The court was explicit that a light corporate footprint — a small office with one or two employees — does not, by itself, signal interposition; economic and operational substance must be assessed concretely. This does not mean every holding company will survive scrutiny. It means that substance, autonomy, and evidence can be decisive.

For treaty planning, the message is direct: do not assume a tax residency certificate alone will suffice. Be ready to demonstrate why the treaty claimant is entitled to the benefit in substance as well as in form.

6.  What Tax Authorities Look For: Treaty-Shopping Red Flags

Treaty shopping refers to arrangements where a person who is not entitled to treaty benefits accesses them indirectly by interposing an entity in a treaty jurisdiction. When authorities test a claim, they look for tell-tale indicators that the claimant has no genuine connection to the jurisdiction and no real role in the structure:

• a holding company with no meaningful premises, personnel, or service support;
• directors who do not exercise independent judgement, and board minutes that merely rubber-stamp pre-decided transactions;
• income that is automatically passed onward, or back-to-back financing with little margin or risk;
• an entity inserted shortly before a dividend, sale, refinancing, or royalty payment;
• no commercial explanation for the jurisdiction chosen;
• professional advisers controlling the entity without real board oversight;
• no evidence that the company could use or enjoy the income — and thin or generic documentation.

No single indicator proves abuse. But each one raises audit risk, and where several appear together, a treaty-access challenge becomes considerably more likely.

7.  Conducting a Treaty-Access Review

If Section 6 is the authority’s lens, the treaty-access review is the adviser’s method — a structured diagnostic run before a benefit is claimed, before a major transaction closes, or before responding to a tax enquiry. A robust review tests the claim across the dimensions on which it could fail:

• Legal basis and residence: the treaty article relied on, and the claimant’s tax residence.
• Beneficial ownership: whether the entity has the right to use and enjoy the income.
• Commercial purpose: the non-tax business reasons for the structure, the jurisdiction, and the transaction.
• Substance: governance, directors, premises, staff, service providers, and risk assumption.
• Funds flow: how income moves before and after payment, and whether back-to-back arrangements exist.
• Evidence quality: the standard of board minutes, decision papers, and contemporaneous records.
• Timing and anti-abuse exposure: entity formation relative to transactions, and PPT/anti-abuse risk.

The objective is to find weaknesses before they become disputes. Treaty-access risk should be managed proactively, not reactively.

8.  Caribbean Relevance: Why Regional Groups Should Pay Attention

Caribbean businesses increasingly operate across borders. A Jamaican group may hold assets in the United States, Canada, the United Kingdom, or Latin America. A Barbados or Cayman structure may be used for investment pooling, private equity transactions, or family office planning. A regional group may receive dividends, interest, royalties, management fees, or capital gains from foreign jurisdictions.

In each case, treaty access and substance can become relevant. Even where no Caribbean jurisdiction features in the Milan case, the underlying principles travel. Tax authorities are more coordinated than ever, and banks, auditors, buyers, and investors are increasingly focused on beneficial ownership, tax governance, and substance. Regional groups should be asking:

• Are our foreign holding companies properly governed — and can we defend our treaty claims?
• Do our board minutes show real decisions, and are our cash flows consistent with beneficial ownership?
• Do we have evidence of commercial purpose, and have we reviewed our structures under modern anti-abuse rules?
• Are we ready for due diligence if we sell, refinance, or raise capital?

For many groups, the honest answer is “not yet, fully.” That gap is an opportunity — to build tax resilience before pressure arrives, rather than under audit.

9.  Composite Case Study: Treaty Benefit Under Challenge

Consider a Caribbean-owned group that invests into a European operating company through an intermediate holding company in a treaty jurisdiction. The holding company receives dividends and claims reduced withholding tax under a treaty. On review, the tax authority asks why the holding company was inserted into the structure. The group offers a residency certificate and incorporation documents — but the authority wants more: board minutes, bank records, director information, cash-flow detail, service agreements, and proof of beneficial ownership of the dividends.

Whether the claim survives turns almost entirely on the evidence. The contrast below captures the difference:

Vulnerable holding company	Defensible holding company
No meaningful records or accounting trail	Documented investment mandate and accounting records
No independent board deliberation	Experienced directors holding regular board meetings
Dividends immediately transferred onward	A clear dividend policy and evidence of retained earnings
Existence only as a treaty-access vehicle	Minutes showing distributions were considered, not automatic

 

The second structure is far more defensible. The difference is not legal form — both are validly incorporated. It is evidence of substance, purpose, and control.

10.  Dawgen Global’s Treaty Defence Framework

Dawgen Global recommends that businesses treat treaty access not as an administrative formality but as a position to be defended. Our framework rests on five pillars:

Pillar	What it establishes
Treaty Eligibility	Confirms the claimant is tax resident in the treaty jurisdiction and satisfies the relevant treaty provisions.
Beneficial Ownership	Assesses whether the entity has the right to use and enjoy the income, rather than acting as a conduit.
Commercial Purpose	Documents the non-tax business reasons for the structure, the jurisdiction, and the transaction.
Economic Substance	Evaluates governance, directors, premises, staff, service providers, risk assumption, and decision-making capability.
Evidence File	Maintains contemporaneous board minutes, decision papers, tax advice, cash-flow and bank records, service agreements, and compliance filings.

 

Together, these pillars move a client from treaty access to treaty resilience — from a claim that depends on paperwork to one that can be defended on the facts.

11.  Practical Steps to Strengthen Treaty Claims

Where Section 7 sets out how to diagnose a position, this is the remediation list — the concrete actions that close the gaps a review uncovers:

• Map the estate: identify every entity claiming reduced withholding tax or capital-gains protection.
• Refresh governance: update board minutes and decision processes so they reflect genuine deliberation.
• Document rationale: record the commercial reasons for each holding company and jurisdiction.
• Test the flows: review dividend, interest, royalty, and management-fee movements, and whether income is retained, reinvested, or automatically passed on.
• Align form to conduct: check intercompany agreements against what actually happens in practice.
• Build the evidence file: prepare beneficial-ownership support and refresh substance evidence annually.
• Stress-test transactions: assess PPT and anti-abuse exposure before any major event, and take advice in high-value cases.

These steps matter most where a planned exit, dividend repatriation, refinancing, restructuring, or tax audit is on the horizon — the moments when treaty claims are tested in earnest.

12.  Conclusion: Treaty Planning Must Become Treaty Defence

The international tax environment has changed. Treaty access can no longer be treated as a simple matter of residence certificates and corporate charts. Authorities now test whether the claimant has substance, beneficial ownership, commercial purpose, and decision-making autonomy.

The Milan ruling shows that substance can defend a structure — but it also reminds taxpayers that evidence is what carries the day. A holding company must be able to show that it is more than an address, more than a bank account, and more than a legal step in a tax-efficient chain.

For businesses operating across borders, the strategic question is no longer only “Can we claim the treaty benefit?” The better question is: “Can we defend it?”

At Dawgen Global, we help clients answer that question — through international tax advisory, treaty-access reviews, beneficial-ownership analysis, substance diagnostics, governance documentation, and tax-controversy readiness. In today’s environment, treaty planning must be built to withstand scrutiny.

Dawgen Global is an integrated, multidisciplinary professional services firm in the Caribbean region, offering big-firm capabilities without the big-firm price. Our Tax practice assists clients with domestic and international tax advisory, corporate structuring, tax compliance, transaction support, transfer pricing, tax-controversy readiness, and cross-border business planning.

At Dawgen Global, we help you make smarter and more effective decisions.

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