GAAR

In plain words

GAAR (general anti-avoidance rule) is a general rule against abuse of tax law. Its distinctive feature is that it does not list specific prohibited schemes: instead it sets a general criterion allowing the tax authority to disregard an artificial arrangement created mainly for a tax benefit.

The logic is simple. Each individual step of a scheme may be formally lawful: the company was set up in accordance with the law, the contract is valid, the payment went through. But if the arrangement as a whole has no economic sense beyond reducing tax, the tax authority may look at the substance of the transaction rather than its form and recalculate the liabilities as if the scheme did not exist.

The key criterion is roughly the same in all formulations — the existence of a business purpose. A reorganisation for ease of management, setting up a company for a real market, moving functions to where the activity takes place — all of this has a rationale. An arrangement set up a month before a transaction and having no content other than the tax result is a typical target of such a rule.

When it may be applied

What the tax authority assesses

How to reduce the risk

1. 01Formulate the business purpose
2. 02Ensure the transactions are real
3. 03Document the rationale
4. 04Avoid artificial steps
5. 05Be ready to explain the structure

What you need to know

• The rule is general, not a list of specific prohibitions
• The formal legality of the steps does not guarantee the scheme will be recognised
• The substance of the transaction is assessed, not only its form
• The key criterion is the existence of a business purpose
• The wording of the rule differs between countries

Common mistakes

• ✕Assuming the legality of each step protects the scheme
• ✕Setting up a structure immediately before a transaction
• ✕Having no documented rationale for the business purpose
• ✕Building arrangements without real activity
• ✕Copying a scheme found on the internet

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