Section 180: when an arrangement is deemed to lack commercial substance

Introduction

Section 180 specifies when an arrangement lacks commercial substance for GAAR purposes. The tests look to economic effect against legal form, circular funding, accommodating parties, disguised ownership, tax-driven location and real business-risk or cash-flow change.

Key takeaways

When an arrangement is deemed to lack commercial substance

An arrangement is deemed to lack commercial substance if:

• the substance or effect of the arrangement as a whole is inconsistent with, or differs significantly from, the form of its individual steps or a part; or
• it involves or includes round trip financing, an accommodating party, or elements that offset or cancel each other, or a transaction conducted through one or more persons that disguises the value, location, source, ownership or control of funds involved; or
• it involves locating an asset, a transaction, or a party's place of residence without any substantial commercial purpose other than obtaining a tax benefit (but for Chapter XI) for a party; or
• it does not have a significant effect on the business risks or net cash flows of any party, apart from the effect attributable to the tax benefit that would otherwise be obtained.

What counts as round trip financing

Round trip financing includes any arrangement in which, through a series of transactions, funds are transferred among the parties and those transactions have no substantial commercial purpose other than obtaining the tax benefit (but for Chapter XI). This applies irrespective of whether the funds can be traced to any specific transfer or receipt, the timing or sequence of transfers, or the means, manner or mode through which the funds are transferred or received.

Factors that are relevant but not sufficient on their own

The following may be relevant, but are not sufficient by themselves, to determine whether an arrangement lacks commercial substance:

• the period or time for which the arrangement (including its operations) exists;
• the fact that taxes have been paid, directly or indirectly, under the arrangement;
• the fact that an exit route (including transfer of any activity, business or operations) is provided by the arrangement.

Step-by-step flow for applying Section 180

1. 1

   Compare the substance of the whole arrangement with the form of its steps

   Under Section 180(1)(a), if the substance or effect of the whole is inconsistent with, or differs significantly from, the form of its individual steps or a part, it is deemed to lack commercial substance.

   • Significant difference: Deemed to lack commercial substance.
   • No significant difference: Go to the next step.
2. 2

   Does it involve any of the features in clause (b)?

   Round trip financing (as explained in Section 180(2)), an accommodating party, elements that offset or cancel each other, or a transaction through one or more persons that disguises the value, location, source, ownership or control of funds.

   • Yes: Deemed to lack commercial substance.
   • No: Go to the next step.
3. 3

   Is a location chosen only for the tax benefit?

   Clause (c) covers locating an asset, a transaction or a party's residence without any substantial commercial purpose other than obtaining a tax benefit.

   • Yes: Deemed to lack commercial substance.
   • No: Go to the next step.
4. 4

   Does the arrangement significantly affect business risks or net cash flows?

   Under clause (d), ignore any effect that comes only from the tax benefit. The period of existence, payment of some tax and an exit route are relevant under Section 180(3) but are not sufficient on their own.

   • No significant non-tax effect: Deemed to lack commercial substance.
   • Significant non-tax effect: Not deemed to lack commercial substance under Section 180.

Practical checklist

Glossary

Round-trip financing

A series of fund transfers lacking substantial commercial purpose beyond tax benefit, as specified here.

Accommodating party

A participant whose role can indicate lack of commercial substance under the provision.

Frequently asked questions