Tax7 min read
Treaty shopping doesn't work, and what does
The structure that worked in 2014 fails in 2026, and it fails on a test so broadly drafted that arguing about it is usually pointless. The good news is that most founders are trying to solve a withholding problem they do not actually have.
The classic move is simple enough to explain in a sentence. Your country has a poor treaty with the country paying you, so you put a company in a third country that has a good treaty with both, and route the income through it.
For about thirty years this worked, which is why an entire advisory industry grew up around it and why the diagrams are still circulating. It stopped working, comprehensively, between 2017 and 2020, and the reason it stopped is worth understanding — because the same reasoning now applies to a lot of structures that are not obviously treaty shopping.
What closed it
The principal purpose test
The Multilateral Instrument, which amended most of the world's bilateral tax treaties simultaneously rather than one at a time, inserted a test into each of them. In substance: a treaty benefit is denied if obtaining that benefit was one of the principal purposes of the arrangement, unless granting it would accord with the object and purpose of the relevant provisions.
Read that again slowly, because the drafting is doing a great deal of work. Not *the* principal purpose — *one of* them. Not proven beyond doubt — reasonable to conclude. There is no threshold, no safe harbour and no percentage. If a tax authority forms the view that the structure exists partly for the treaty, the benefit goes, and the burden of showing otherwise is effectively yours.
It now applies across the large majority of treaties in force. The question is no longer whether your structure is technically within the treaty. It is whether you can explain why it exists for a reason other than the treaty.
Limitation on benefits
US treaties took a different route and got there first. Rather than a purpose test, they contain objective limitation-on-benefits articles: to claim, you must be a qualified person under one of several defined categories — publicly traded, sufficiently owned by residents of the same state without excessive base erosion, engaged in an active trade or business connected to the income, or granted discretionary relief.
A holding company with one director, no employees and a single function fails every category. It is not a judgement call; it is a checklist, and the checklist was written specifically to exclude that company.
Beneficial ownership
Older and quieter than either, and the one that does most of the work in practice. Reduced rates on dividends, interest and royalties are available to the beneficial owner of the income. An entity contractually or practically obliged to pass the money straight on is a conduit, not a beneficial owner.
The Court of Justice of the European Union confirmed in 2019, in the Danish cases on the Parent-Subsidiary and Interest and Royalties Directives, that abuse can be denied even where the member state has no domestic anti-abuse rule to rely on. The principle does not need to be enacted to be applied.
The question most founders should ask first
Before designing anything: what withholding are you actually suffering?
This sounds facetious. It is not. A large share of the founders who arrive asking about treaty planning are not subject to any withholding at all, and are about to spend real money solving a hypothetical.
Take the common case on this blog: a non-resident owning a US LLC, providing services to customers, with no US office and no US personnel. The LLC is disregarded. Its income is business profit, not a dividend, interest or royalty. There is no US withholding to reduce, because there is no fixed, determinable, annual or periodical payment being made and no effectively connected income. The treaty rate on nothing is nothing. The full obligation set is in what a non-resident with a US LLC actually owes the IRS, and withholding is largely absent from it.
Withholding is a real problem for a defined list of income types.
| Income type | Withholding exposure | Does a treaty help? |
|---|---|---|
| Services performed outside the US for US clients | None — the income is foreign-source | No treaty needed. This is most readers. |
| Dividends from a US corporation | Yes, at the statutory rate absent relief | Yes, materially — this is what treaties are for |
| Royalties for US-sourced licensing | Yes | Yes, often to zero |
| Interest | Yes, subject to significant statutory exemptions | Sometimes; the exemptions often do the work first |
| Business profits with no permanent establishment | Generally none | The treaty confirms the position rather than reducing a rate |
| Business profits with a permanent establishment | Taxed on a net basis, with filing obligations | A treaty defines the PE threshold; it does not remove the tax |
What actually works
1. Be resident where you claim to be resident
The most durable treaty position is the least clever one: you personally live somewhere with a decent treaty network, and you can prove it. A certificate of residence issued by a tax authority that genuinely regards you as resident is worth more than any structure, and it is the document every withholding agent will actually ask for.
Which means the planning happens at the level of where you are resident, not at the level of where a company is registered. That is the recurring theme of everything on this blog, and it is not a coincidence — it is where the rules have deliberately moved the leverage.
2. Substance, if an entity is genuinely needed
Where a holding company has a real commercial job, it needs to look like it. Decision-makers physically present. Board meetings held where the company is, with minutes that reflect actual decisions. Its own bank account, its own premises or a genuine service agreement, its own staff or contracted functions, its own accounts. The test everyone applies is whether the entity could have made the decisions attributed to it. A nominee director signing what he is sent cannot.
This is expensive, which is the point. Substance requirements are designed so that structures only survive where the underlying business is large enough to justify the real activity.
3. Use domestic exemptions before treaties
Frequently there is a statutory relief that gets you to the same place without a treaty claim at all — portfolio interest rules, participation exemptions, and within the EU the directives on parent-subsidiary and interest-and-royalty payments. They have their own anti-abuse conditions, but a domestic exemption you plainly qualify for is a stronger position than a treaty benefit you have to argue for.
4. Change the income type, not the route
Withholding attaches to characterisation. A payment structured as a royalty is withheld on; the same commercial arrangement structured as a service fee for work performed abroad frequently is not. This must reflect what actually happens — recharacterising a licence as a service while continuing to license is simply mislabelling. But where the substance genuinely admits either treatment, the choice is legitimate and it is made in the contract, not in the corporate chart.
5. Have no permanent establishment
Under almost every treaty, business profits are taxable only in the state of residence unless there is a permanent establishment in the source state. Not having one is the strongest position available, and it is achieved through how you operate rather than through where you incorporate.
The hybrid trap, for LLC owners specifically
One trap catches this audience in particular. A US LLC is fiscally transparent for US purposes, so a treaty claim in respect of its income is made by the member, not the company. Whether that works depends on whether the member's country of residence also treats the LLC as transparent — and many do not.
Where the two countries disagree, modern treaties contain provisions denying benefits precisely in that mismatch. So the answer to "can I claim the treaty through my LLC" is: only if both sides agree what the LLC is. That classification question is the same one that decides your domestic tax treatment, and it is covered in CFC rules will find your offshore company.
What to do instead
- Establish what withholding you are actually suffering, on which specific payments. Very often the answer is none.
- If some, check the statutory exemptions before opening a treaty.
- If a treaty is needed, claim it as who you are — get the certificate of residence, complete the right withholding certificate, and check the limitation-on-benefits article applies to you as a person.
- Only consider an intermediate entity where it has a commercial job you can describe without using the word tax, and where the business is large enough to give it real substance.
- Assume everything is visible, and that the structure will be read by someone applying a purpose test with no threshold.
- Spend the planning effort on personal residence, which is where the remaining leverage genuinely is.
The uncomfortable summary is the same one that keeps recurring: for a founder-scale business, corporate structure is a weak lever and personal residence is a strong one. Treaty shopping was the last widely-marketed exception to that, and it has been closed for the better part of a decade.
The residence side, evidenced
Certificates, presence and the filings that follow — tracked, so the treaty position you rely on is one you can actually document.
See how residency worksFounders 8 does not provide tax advice. Tax residency depends on facts and rules specific to each jurisdiction — review your position with a qualified adviser.