DOUBLE TAX TREATIES AND SUBSTANCE

Treaties between countries for the avoidance of double taxation are a useful device for business planning. For example, it is possible to have an international activity (eg carriage of goods by sea), that is subject to taxation in the country where the service is offered. On the other hand, income for that service may be exempt in the jurisdiction of the party that offers the service. If the two countries involved (country where the service is rendered and country where the service provider is located) have signed a double tax avoidance treaty, then service provider will be taxed in its country (which means that it will be tax exempt) and will avoid the taxation in the country where the service was rendered.
Further, where countries involved have not signed any treaty for the avoidance of double taxation, recourse can be to incorporate a service provider in a country that qualifies for double tax avoidance having signed a relevant treaty with the country where the service is offered. Corporate functions have to take place in the country of incorporation and in general, service provider has to achieve a high degree of substance and activity in the place of incorporation.