The principal purpose test as a tool to combat abuse of tax benefits under double taxation avoidance agreements

Introduction. The escalation of globalization has intensified tax avoidance through abuse of Double Taxation Avoidance Agreements (DTAAs), threatening fiscal security and fair competition. The international community developed the Principal Purpose Test (PPT) as a key anti-abuse mechanism. Its novelty and evolving jurisprudence necessitate thorough analysis. The purpose of the paper is to analyze the PPT’s evolution from an OECD guiding principle to a binding treaty norm; elucidate its two-pronged structure and core application principles; and investigate global judicial interpretation practices regarding its implementation. Results. The PPT originated in the 2003 OECD Model Tax Convention Commentary as a guiding principle denying treaty benefits where obtaining them was a «principal purpose» contradicting the treaty’s object and purpose. The BEPS Project (Action 6, 2015) transformed it into a minimum standard, codified in Article 29(9) of the 2017 OECD Model and implemented globally via the Multilateral Instrument. The PPT operates as a «two-pronged test»: 1) Benefits are denied if «one of the principal purposes» was obtaining them (subjective element); 2) Benefits may still apply if granting them aligns with the «object and purpose of the relevant provisions» (objective element), with the burden of proving this alignment resting solely on the taxpayer. This structure creates legal uncertainty due to the subjective element’s breadth. The 2021 Alta Energy decision by Canadian Supreme Court clarified application thresholds. The Court emphasized the provision’s deliberate lack of anti-abuse mechanisms, the foreseen non-taxation outcome under the treaty’s investment-stimulation purpose, and fundamental principles of legal certainty and pacta sunt servanda. Conclusion. The PPT is essential for combating treaty abuse but inherently balances flexibility against legal uncertainty due to its two-pronged structure and burden allocation. Judicial interpretation, exemplified by Alta Energy сase, is crucial for concretizing application and ensuring predictability. This underscores the need for careful analysis of specific treaty provisions’ purposes when applying the objective element.