What Is a Conduit Company?
A Conduit Company is an intermediate entity in international tax structures which receives income and passes most of the income onward to another person.
Also known as: Conduit Entity, Intermediate Company.
How Conduit Company works
A Conduit Company is interposed between a payer and an ultimate recipient, typically in a jurisdiction offering favourable treaty or directive access, and tax authorities then decide whether to respect the company or to look through it and treat the payment as made directly to the ultimate recipient. Under United States Treasury Regulation 1.881-3, an intermediate entity may be disregarded as a conduit where participation reduces withholding tax under section 881 and occurs under a tax avoidance plan, and the financing arrangement is then recharacterized as a transaction directly between the remaining parties. Within the EU, the general anti-abuse rule in Article 6 of Directive 2016/1164 requires Member States to ignore non-genuine arrangements whose main purpose is a tax advantage defeating the object of the applicable law, while treaty principal purpose tests and beneficial ownership requirements pursue similar aims. An intermediate company with genuine functions, staff and commercial reasons is generally assessed differently from one with no activity beyond passing payments through, with outcomes depending on facts and local rules.
Conduit Company vs Holding Company
Unlike a holding company, which owns and manages participations and may retain income, a Conduit Company is characterised by passing most received income onward, a feature which anti-abuse rules examine closely.
Example
Illustrative example: A company in Country C lends money to an operating company in Country A through a subsidiary in Country B, because the treaty between Country A and Country B reduces withholding tax on interest. If the Country B subsidiary pays nearly all interest received straight to Country C and has no other activity, the Country A authority may treat the interest as paid directly to Country C and apply the withholding rate available between Country A and Country C, subject to Country A's anti-abuse rules and the treaty text.
Common misconception
Myth: Routing payments through a company in a treaty country secures the treaty rate on those payments.
Reality: Tax authorities may look through a Conduit Company under anti-abuse rules, beneficial ownership requirements or principal purpose tests and deny treaty or directive benefits where the arrangement lacks genuine substance.
Frequently asked questions
What is a conduit company in tax?
A Conduit Company is an intermediate entity which receives income such as interest, dividends or royalties and passes most of the income onward to another person, often located in a third jurisdiction.
How do tax authorities treat conduit companies?
Tax authorities may disregard a Conduit Company under rules such as United States Treasury Regulation 1.881-3 or the EU general anti-abuse rule, treating payments as made directly to the ultimate recipient where the arrangement is mainly tax-driven.
Related terms
- Treaty Shopping — Practice for which conduit companies are typically used
- Principal Purpose Test — Treaty anti-abuse test applied to conduit arrangements
- Limitation on Benefits (LOB)
Related guides
- Tax treaties and international taxation — Treaty access which conduit arrangements seek
- Tax management approaches: from compliance to aggressive strategies — Spectrum from compliant to aggressive structuring
Sources
Last verified: 2026-10-08. This entry is general information, not tax or legal advice; rules vary by country and change over time.
