What Is Artificial Avoidance in Tax Law?
Artificial Avoidance refers to an anti-avoidance concept covering non-genuine arrangements set up mainly for a tax advantage which defeats the purpose of applicable tax law.
Also known as: Artificial arrangement, Non-genuine arrangement.
How Artificial Avoidance works
Artificial Avoidance is assessed when a taxpayer uses an arrangement, or a series of steps, whose main purpose or one of whose main purposes is a tax advantage, and tax authorities examine whether the arrangement reflects valid commercial reasons and economic reality before disregarding it for tax purposes. Within the European Union, Article 6 of the Anti-Tax Avoidance Directive requires Member States to ignore, for corporate tax purposes, arrangements which are not genuine, meaning not put into place for valid commercial reasons which reflect economic reality, and to calculate the tax liability under national law. In treaty practice, the October 2015 BEPS Action 7 report addresses the artificial avoidance of permanent establishment status, including commissionaire arrangements, and proposes changes to Article 5 of the OECD Model Tax Convention. Domestic general anti-avoidance rules, judicial doctrines and burdens of proof differ between countries, so the same arrangement may be respected in one jurisdiction and recharacterised in another.
Artificial Avoidance vs Tax Evasion
Unlike tax evasion, which involves concealing income or facts in breach of the law, Artificial Avoidance concerns arrangements which may be disclosed and formally lawful yet are disregarded because they lack genuine commercial substance.
Example
Illustrative example: A small software company resident in Country A, an EU Member State, transfers its client contracts to a newly formed affiliate in Country B, while developers, management and client negotiations remain in Country A and the affiliate has no staff or premises. If the Country A tax authority concludes that one of the main purposes of the transfer was a tax advantage defeating the purpose of Country A law, and that the arrangement lacks valid commercial reasons reflecting economic reality, the authority may ignore the arrangement under its general anti-abuse rule and calculate corporate tax under national law, subject to the facts and any treaty in force.
Common misconception
Myth: Any structure which is correctly registered and disclosed to the tax authorities is protected from challenge.
Reality: Formal registration and disclosure do not by themselves establish genuineness, since anti-abuse rules generally examine whether an arrangement has valid commercial reasons reflecting economic reality.
Frequently asked questions
What is an artificial arrangement in tax law?
An artificial arrangement in tax law is generally a step or series of steps lacking valid commercial reasons which reflect economic reality, put in place mainly to obtain a tax advantage; national rules and case law define the exact test.
What does artificial avoidance of PE status mean?
Artificial avoidance of permanent establishment status describes arrangements, such as certain commissionaire structures, which keep a taxable presence below treaty thresholds; the October 2015 BEPS Action 7 report proposed changes to Article 5 of the OECD Model to address them.
Related terms
- Tax Evasion — Unlawful concealment, often confused with artificial avoidance
- GAAR (General Anti-Avoidance Rule) — Domestic rule used to disregard artificial arrangements
- EU Anti-Tax Avoidance Directive (ATAD) — EU source of the non-genuine arrangement test
- Economic Substance — Factor weighed when judging whether arrangements are genuine
- Permanent Establishment (PE) — Status targeted by BEPS Action 7 changes
Related guides
- Tax management approaches: from compliance to aggressive strategies — Spectrum from compliance to aggressive planning
- Incorporation options for location-independent entrepreneurs — Company set-ups where substance questions arise
Sources
- EUR-Lex: Council Directive (EU) 2016/1164 (ATAD)
- European Commission Recommendation (EU) 2016/136 on tax treaty abuse
Last verified: 2026-10-08. This entry is general information, not tax or legal advice; rules vary by country and change over time.
