Tax
Principal purpose test
Also known as PPT
The principal purpose test denies a tax treaty benefit where it is reasonable to conclude that obtaining that benefit was one of the principal purposes of an arrangement or transaction, unless granting it would accord with the object and purpose of the relevant treaty provisions.
In plain terms: If you set the structure up mainly to get the treaty rate, you do not get the treaty rate.
Why it matters
Introduced into most of the world's treaty network at once through the OECD multilateral instrument. It is the reason interposing a holding company in a favourable treaty jurisdiction stopped working after 2017, and it applies to arrangements entered into before it as well.
Common misunderstanding
Assuming a commercial reason cures it. The test asks whether the benefit was *one of* the principal purposes, not the only one — so a structure with genuine commercial substance can still fail if the treaty rate was a main driver.
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