Setting up a holding company in a treaty-friendly jurisdiction for low withholding rates — this model is being squeezed worldwide. PPT and LOB clauses in modern tax treaties let authorities deny benefits when structures lack real economic substance.
What PPT and LOB are
Two standard anti-abuse tools from BEPS Action 6 (OECD/G20), now in most modern tax treaties (rolled out via the MLI — the multilateral convention Vietnam has signed):
- PPT (Principal Purpose Test): if one of the principal purposes of an arrangement is obtaining treaty benefits → benefits denied. A broad, qualitative standard giving tax authorities wide interpretive room.
- LOB (Limitation on Benefits): only qualified persons (resident individuals, listed companies, companies with real business activity) get benefits — a “hard” checklist test.
Short version: PPT asks “why this structure”, LOB asks “who gets the benefits”.
How letterbox holdings get targeted
The classic squeezed scenario: a group sets up a holding company in country X (whose treaty with Vietnam gives low dividend/interest/royalty withholding), with no office, staff or real activity — a pure letterbox passing money through. On outbound payments from Vietnam, the tax authority applies PPT: the holding’s principal purpose is treaty benefits → treaty denied, withholding at the (much higher) domestic rate.
Audit practice: authorities examine substance — does the board really meet, where are investment decisions made, who are the managing staff. Paper-thin “substance” signals abuse.
Building real economic substance
- Real substance: the holding has an office, managing staff (even partly outsourced), a board that meets and decides in the holding jurisdiction.
- Real functions: investment management, risk governance, fundraising — not just “passing money through”.
- Documentation: meeting minutes, investment decisions, management-service contracts — prove activity in writing.
- Non-tax purpose: record business reasons (capital-market proximity, legal frame, group governance) — PPT looks at the overall motive.
Golden rule: the structure must stand even without tax benefits — if removing treaty benefits makes the structure pointless, PPT will deny it.
Restructuring existing setups: do not wait
Groups with existing intermediate holdings should self-review before the tax authority asks:
- Map treaty usage: which treaty benefit each cross-border cash flow relies on, under which article.
- PPT/LOB-test each link: which holdings are “thin”, which flows lack economic purpose.
- Add substance or restructure: strengthen real activity at the holding, or move to a direct structure if the holding has no reason to exist.
- Defence files: prepare economic-purpose evidence now — do not “build” files after the audit notice.
The Vietnam context: MLI and new practice
Vietnam signed the MLI — its tax treaties are being automatically supplemented with PPT (and LOB for some treaties). In practice, Vietnam’s tax authority increasingly cites PPT in audits of cross-border structures, especially dividend, interest and royalty flows through intermediate jurisdictions. FDI groups with multi-tier holdings should treat 2026 as the review year — transfer-pricing and treaty audits often travel together.
When specialist tax advice is mandatory
Do not self-design when: setting up a new intermediate holding; large dividend/interest/royalty flows cross multiple jurisdictions; the tax authority has asked for explanations on treaty application; or a cross-border M&A seller proposes a “tax-optimised” structure. Advisers fluent in BEPS/MLI and Vietnamese audit practice are mandatory — PPT is a qualitative test with no formula.
Frequently asked questions
What is the PPT in tax treaties?
The Principal Purpose Test (BEPS Action 6): treaty benefits are denied if one of the principal purposes of an arrangement is obtaining them; rolled out via the MLI, which Vietnam signed.
How does LOB differ from PPT?
PPT asks ‘why’ the structure exists (qualitative purpose test); LOB asks ‘who’ qualifies (only checklist-qualified persons get benefits).
Can letterbox holdings lose treaty benefits?
Yes — if the holding has no real activity (office, staff, genuine investment decisions), authorities apply PPT to deny benefits, withholding at higher domestic rates.
How does a holding structure survive PPT?
Build real economic substance: genuine activity, staff and decisions in the holding jurisdiction, full documentation; the golden rule is the structure must stand even without tax benefits.
Contact FLAT Law Firm
FLAT Law Firm works with tax advisers on cross-border structuring: PPT/LOB reviews and real economic substance. Contact us before setting up a new holding or when asked for explanations.
