Updated
GL-G-04
01 / In 30 seconds
The short answer
- What it is
- A general rule against abuse of tax law
- Against what
- Against artificial schemes whose only purpose is a tax saving
- The key criterion
- The existence of a business purpose beyond reducing tax
- What happens
- The tax authority may recalculate the tax as if the scheme did not exist
- Why it matters
- The formal legality of each step is no protection if the scheme is artificial
02 / In plain words
What GAAR means
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.
A case from practice
A client was considering a reorganisation immediately before selling an asset. We discussed not only the tax result but also how this arrangement would look in an audit and how it could be justified on the merits.
When it may be applied
- Restructuring before a major transaction
- Setting up intermediate companies
- Moving assets between jurisdictions
- Schemes around selling a business
- Structures without real activity
- Tax audits of cross-border transactions
03 / What it covers
What the tax authority assesses
Purpose
- Whether there is a business purpose
- The balance of purposes
- Economic sense
Reality
- Actual activity
- Staff and functions
- Place where decisions are taken
Signs of a scheme
- Set up before the transaction
- No other content
- Circular transactions
Consequences
- Recalculation of tax
- Interest and penalties
- Litigation
04 / How it works
How to reduce the risk
Formulate the business purpose
Ensure the transactions are real
Document the rationale
Avoid artificial steps
Be ready to explain the structure
05 / Key facts
What you need to know
01
The rule is general, not a list of specific prohibitions
02
The formal legality of the steps does not guarantee the scheme will be recognised
03
The substance of the transaction is assessed, not only its form
04
The key criterion is the existence of a business purpose
05
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
06 / Expert advice
How to prepare in advance
Any restructuring must have a business purpose that you can clearly explain and support with documents: managerial, operational, investment. Decisions are recorded in writing when they are taken. Structures set up right before a transaction and having no other content are the main risk zone.
What we do for you. We do not build schemes for clients that rest solely on the tax result. Such arrangements create a risk that materialises years later — at the worst possible moment, in an audit or when the business is sold.
Dmitry NagyTax consultant, international taxation and compliance (ex-Big4)
07 / Questions
Frequently asked questions
A general rule against abuse of tax law: it allows an artificial scheme created mainly for a tax benefit to be disregarded.
It does not list schemes but sets a general criterion. So an arrangement that formally breaches no specific rule may still fall within it.
Not always. The arrangement is assessed as a whole: if it has no economic sense beyond the tax one, its form offers no protection.
A rationale for a transaction unrelated to reducing tax: ease of management, entering a market, bringing in an investor, ring-fencing risks.
The tax authority may recalculate the liabilities as if the scheme did not exist, charging interest and penalties. A court dispute is possible.
Have a real business purpose, ensure the transactions have actual substance and document the rationale at the time decisions are taken.
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