Impact of Tax Legislation on Corporate Ownership Structures

Introduction

Taxation plays a pivotal role in shaping corporate ownership structures and influencing business behavior across the globe. While companies are ultimately driven by commercial considerations—market access, operational efficiency, industry competitiveness—tax laws often dictate how these commercial goals are organized structurally. Corporate ownership structures, ranging from wholly owned subsidiaries to complex multi-tiered holding arrangements, have historically evolved in response to changing tax regulations, international treaties, anti-avoidance frameworks, and incentives offered by various jurisdictions.

With the increasing global emphasis on transparency, anti-base erosion measures, and substance-based taxation, organizations are rethinking long-standing tax-driven structures. This article provides an in-depth assessment of how tax legislation impacts corporate ownership, focusing on cross-border arrangements, profit distribution strategies, substance requirements, and the global movement toward harmonized fair taxation.

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1. Tax as a Fundamental Driver of Corporate Ownership Decisions

Corporate ownership structures are influenced heavily by the pursuit of maximizing after-tax returns and maintaining managerial control. Tax legislation—domestic and international—directly impacts these objectives by determining:

• how profits are taxed,

• where they can be earned efficiently,

• how much is retained after statutory liabilities, and

• how investments are routed or repatriated.

1.1 Tax-Driven Incorporation and Subsidiary Location

Companies frequently establish subsidiaries in jurisdictions that offer:

• Reduced corporate tax rates
  e.g., Ireland (12.5%), UAE, Singapore.

• Beneficial Double Taxation Avoidance Agreements (DTAAs)
  e.g., Mauritius historically offered zero capital gains tax on India-sourced gains.

• Favourable regimes for specific assets, such as:

  • Intellectual Property (IP) regimes in Ireland, Luxembourg.

  • Treasury centres in Singapore.

  • Investment holding companies in the Netherlands.

1.2 Illustrative Examples

• Mauritius–India Route:
  Before 2017, Mauritius was the preferred jurisdiction for FDI into India due to the capital gains exemption under the India–Mauritius DTAA.

• Double Irish Structure:
  U.S. technology giants used Ireland-based entities to defer U.S. taxes and reduce European effective tax rates.

These examples demonstrate how incentives embedded in tax statutes shape ownership choices—often more significantly than operational considerations.

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2. Corporate Tax Rates and Structural Arbitrage

Differential tax rates across jurisdictions create opportunities for tax arbitrage, motivating corporations to structure ownership chains strategically.

2.1 Use of Intermediate Holding Companies

Multinational enterprises (MNEs) frequently use intermediate holding companies in jurisdictions that offer:

• territorial tax systems (tax on domestic income only),

• extensive treaty networks (Singapore, Netherlands),

• interest/royalty exemptions, or

• participation exemptions on capital gains.

2.2 Example: U.S. Multinational Structuring

A U.S.-based MNE operating across Asia may route investments through Singapore to avail:

• exemption on foreign-sourced dividends,

• reduced withholding taxes under treaties,

• competitive corporate tax rates.

This structure is often “tax-efficient” rather than operationally essential.

2.3 Regulatory Pushback

Regulators worldwide have implemented measures to counter artificial arbitrage:

• OECD BEPS (Base Erosion and Profit Shifting)

• India’s GAAR

• Controlled Foreign Corporation (CFC) Rules in the U.S., U.K., EU

• Global Minimum Tax (OECD Pillar 2)

This has reduced the benefits of routing profits through low-tax jurisdictions without genuine activities—or “substance”.

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3. Anti-Avoidance Rules and the Rise of Substance Requirements

The modern international tax framework emphasizes substance over form.

3.1 General Anti-Avoidance Rule (GAAR)

GAAR allows tax authorities to disregard transactions or structures that:

• lack commercial substance, and

• are undertaken solely or primarily for obtaining tax benefits.

India’s GAAR (Chapter X-A, Income-tax Act) empowers authorities to recharacterize arrangements such as:

• circular transactions,

• multi-layered holding companies,

• shell entities without employees or real assets.

3.2 Principal Purpose Test (PPT) under MLI

More than 90 tax treaties of India have been amended through the Multilateral Instrument (MLI) to incorporate PPT.
A treaty benefit can be denied if obtaining that benefit was one of the principal purposes of an arrangement.

3.3 Controlled Foreign Corporation (CFC) Regulations

CFC rules require parent companies to pay home-country taxes on the passive income of foreign subsidiaries, even without repatriation. This discourages:

• parking profits in tax havens,

• using passive holding companies,

• artificial profit-shifting arrangements.

3.4 OECD Pillar Two: Global Minimum Tax

Pillar Two mandates a 15% global minimum effective tax rate for large MNEs.
This historic shift:

• neutralizes the incentive to shift profits to low/no tax jurisdictions,

• reduces the viability of tax haven-based structures,

• encourages entities to build genuine economic activity rather than paper entities.

As a result, corporate ownership chains worldwide are being flattened, simplified, and realigned toward home jurisdictions.

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4. Withholding Taxes, Treaty Networks, and Profit Repatriation Strategies

Withholding taxes on dividends, interest, or royalties heavily influence cross-border ownership design.

4.1 Treaty-Driven Holding Structures

Corporates design ownership chains to minimize withholding tax leakages by selecting jurisdictions with:

• 0–5% treaty withholding rates (e.g., Netherlands–India for dividends before 2020),

• participation exemptions on capital gains,

• exemptions on royalty/interest flows.

4.2 Treaty Shopping Restrictions

MLI provisions such as:

• Principal Purpose Test (PPT), and

• Limitation of Benefits (LOB) clauses

have made treaty shopping far more difficult.

4.3 Example: Decline of Mauritius and the Rise of Singapore/Netherlands

After the 2016–17 renegotiation of the India–Mauritius and India–Singapore DTAAs:

• Capital gains exemption was removed.

• Grandfathering applied only for investments before April 2017.

• Substance requirements became stringent.

Consequently:

• Mauritius-based holding structures declined sharply,

• Singapore and Netherlands gained traction due to stronger real economic presence.

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5. Transfer Pricing Regulations and Group Ownership Dynamics

Transfer pricing (TP) legislation ensures that transactions between related entities occur at arm’s length prices, preventing artificial profit shifting.

5.1 TP Rules Influence Ownership Allocation of Functions and Assets

Companies reorganize ownership of:

• intellectual property (IP),

• supply chain operations,

• service centres,

• risk-bearing entities,

to align with transfer pricing scrutiny.

5.2 Shift Toward Regional Hubs

Tax authorities now scrutinize whether:

• IP owners actually control R&D decisions,

• logistics centres bear real commercial risk,

• service entities have adequate staff and leadership.

This has led to the creation of regional business hubs in jurisdictions like:

• Singapore,

• India (for R&D centres),

• the UAE.

5.3 Country-by-Country Reporting (CbCR)

CbCR under BEPS Action 13 increases transparency by requiring disclosure of:

• revenues,

• profits,

• employees,

• tangible assets,

• taxes paid

for each jurisdiction.
This significantly reduces the incentive to maintain opaque ownership structures that shift profits to low-tax countries without activity.

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6. Domestic Tax Reforms and Their Impact on Ownership Realignment

Domestic tax reforms often trigger large-scale restructuring of corporate groups.

6.1 Indian Corporate Tax Reform (2019)

India reduced its corporate tax rates to:

• 22% for existing companies,

• 15% for new manufacturing companies.

This incentivized:

• re-domiciling of foreign holding structures into India,

• onshoring of IP and treasury functions,

• consolidation of Indian group entities,

• reduction of round-tripping structures.

6.2 U.S. Tax Cuts and Jobs Act (TCJA) 2017

The TCJA introduced:

• Reduction of corporate tax from 35% to 21%

• Global Intangible Low-Taxed Income (GILTI) rules

• Base Erosion Anti-Abuse Tax (BEAT)

• A quasi-territorial system

This led many U.S. groups to:

• unwind offshore holding companies,

• repatriate large cash reserves,

• realign ownership of IP to the U.S.

6.3 EU Anti-Tax Avoidance Directives

The EU’s ATAD framework imposes:

• Interest deduction limitations,

• Anti-hybrid rules,

• CFC rules,

• Exit taxation,

fundamentally reshaping cross-border ownership structures of European conglomerates.

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Conclusion

Tax legislation has always influenced corporate ownership structures, but the global tax landscape has undergone unprecedented transformation in recent years. With the convergence of:

• OECD BEPS initiatives,

• GAAR in major jurisdictions,

• global minimum tax (Pillar Two),

• enhanced transfer pricing enforcement,

• stricter treaty anti-abuse rules,

• transparency-driven regulations such as CbCR,

the era of complex, opaque, multi-tier tax-driven structures is diminishing.

The new paradigm emphasizes:

• Substance over form

• Transparency over secrecy

• Economic reality over artificial arrangements

• Compliance over aggressive arbitrage

Corporate ownership structures are becoming simpler, more localized, and more aligned with genuine economic activity. As global tax cooperation strengthens, the future of corporate structuring will increasingly prioritize operational efficiency, governance integrity, and sustainable long-term value creation over purely tax-driven motives.

Disclaimer: Every effort has been made to avoid errors or omissions in this material in spite of this, errors may creep in. Any mistake, error or discrepancy noted may be brought to our notice which shall be taken care of in the next edition In no event the author shall be liable for any direct indirect, special or incidental damage resulting from or arising out of or in connection with the use of this information Many sources have been considered including Newspapers, Journals, Bare Acts, Case Materials , Charted Secretary, Research Papers etc

LegalMantra.net Team

Prerna Yadav

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