Treaty relief and non-CIV funds discussion draft

The OECD is consulting on examples to illustrate the interaction between the BEPS Action 6 treaty provisions and the treaty entitlement of non-collective-investment vehicle funds.

The OECD has released a Discussion Draft on three examples to illustrate the interaction between the treaty provisions of the report on BEPS Action 6 and the treaty entitlement of non-collective-investment vehicle (non-CIV) funds. The examples consider a regional investment platform, securitisation vehicle and real estate fund example and confirm that simply ensuring that treaty benefits are available in these scenarios will not bring into play the principal purpose test (PPT) anti-treaty abuse provision. However, the current examples do little to provide any real guidance on the application of the BEPS rules to less vanilla investment scenarios.

It is intended that, following feedback, these examples will be included in the commentary on the PPT rule.


The final report issued by the Organisation for Economic Cooperation and Development (OECD) in October 2015 on Action 6 (Preventing the Granting of Treaty Benefits in Inappropriate Circumstances) indicated that further work would take place in relation to the treaty entitlement of “non-CIV funds” ie investment vehicles that do not qualify as “collective investment vehicles” (CIV) within the meaning of the 2010 OECD Report, “The Granting of Treaty Benefits with Respect to the Income of Collective Investment Vehicles”. In March 2016, the OECD published a consultation document on the treaty entitlement of non-CIV funds which included a number of specific questions covering a range of specific issues and possible approaches that might be adopted. Details can be found in the article, “OECD BEPS consultation on treaty entitlement of funds”.

Draft examples

The December 2016 Discussion Draft contains three draft examples on the interaction between the treaty provisions of the report on BEPS Action 6 and the treaty entitlement of non-CIV funds. These examples are based on subsequent work by Working Party No. 1 on Tax Conventions and Related Questions related to the application of the PPT rule 6 with respect to some common transactions involving non-CIV funds. The Discussion Draft invites comments on three draft examples under consideration by the Working Party for inclusion in the Commentary on the PPT rule.

The three examples include a regional investment platform, a securitisation company and a real estate fund example. Each of the examples stress that the mere fact that the withholding tax position was a relevant consideration in the formation of the investment vehicle or investment structure would not by itself be sufficient to trigger the PPT rule. It is necessary to consider the context in which the investments are made, the wider reasons for establishing the vehicle in the particular State and the wider activities and functions of the investment vehicle. In the absence of facts showing that the vehicle is part of an arrangement or relates to another transaction undertaken for the principle purpose of obtaining Treaty benefits, it would be unreasonable to withhold Treaty benefits. In particular, the examples indicated that the existence of experienced local management to review and approve investments, the availability of skilled and experienced local personnel and support services and the existence of a stable regulatory and legal systems may all be features which justify the creation of an investment vehicle which subsequently makes cross-border investments taking advantage of reduced Treaty rates of withholding tax.

The examples stress that the intent of treaties is to provide benefits to encourage cross-border investment and simply ensuring that it is possible to take advantage of those benefits or taking into account there availability is not sufficient to bring into effect the PPT.

However, the three examples appear to be entirely uncontroversial examples of non-CIV investment structures and, as such, may throw little light onto the application of the PPT rule in relation to more grey areas of tax planning.

Limitation on benefits (LOB) rule

The Discussion Draft also explains that work on guidance on the application of the LOB rule to non-CIV vehicles has not been progressed. Since the decision was taken not to include a detailed LOB in the multilateral instrument, the Working Party decided that it was not necessary to design a multilateral solution to the issue of the treatment of non-CIV funds in a detailed LOB provision. The Working Party also concluded that the provisions of the simplified LOB included a derivative benefits provision, which meant that few non-CIV funds would fail to qualify for treaty benefits under that rule. However, the Discussion Draft suggests that further agreement on this issue may be taken forward through the Treaty Relief and Compliance Enhancement (TRACE) Implementation Package, a standardised system for claiming withholding tax relief at source on portfolio investments.


Comments should be sent by 03 February 2017 by e-mail to in Word format and addressed to the Tax Treaties, Transfer Pricing and Financial Transactions Division, OECD/CTPA.

The draft examples included in the Discussion Draft do not represent the consensus views of the OECD but are intended to provide stakeholders with substantive proposals for comment.

This document (and any information accessed through links in this document) is provided for information purposes only and does not constitute legal advice. Professional legal advice should be obtained before taking or refraining from any action as a result of the contents of this document.