1. Introduction

In a recent decision, the Indian tax authorities sought to deny to a UAE company the benefit of the India-UAE tax treaty. The Indian tax authorities invoked Art. 29 (Limitation of benefits) of that tax treaty because the UAE company’s directors were citizens of Germany, Portugal, and India (but not the citizens of the United Arab Emirates).

Though Art. 29 of the India-UAE tax treaty is titled ‘Limitation of benefits’, in substance, it embodies the ‘principal purpose test’ (PPT) – like the PPT discussed in the Final Report on Action Item 6 of the OECD’s Base Erosion and Profit Shifting (BEPS) project, which is now embodied in Art. 7(1) of the OECD’s Multilateral Instrument (MLI).

In the above-mentioned decision, the UAE company succeeded and the Indian tax authorities’ attempt to apply Art. 29 of the India-UAE tax treaty was rejected. However, it is important to analyse as to whether the outcome could change after coming into force of the Multilateral Instrument.

This article analyses the above-mentioned decision and the relevant aspects of the BEPS Action Item 6 Report including the principal purpose test and the issue of ‘double non-taxation’.

Finally, this article deals with the question as to whether the OECD’s Multilateral Instrument’s coming into force could affect a court’s approach and conclusion in a case involving similar facts. In that context, the author finds a landmark Canadian decision of high persuasive value.