Profit shifting rules have moved from academic talking points to boardroom risks. Tax authorities are sharpening their tools, and dividend tax together with withholding tax (WHT) is now front-line territory. Funds, pension schemes, and corporates that route dividends, interest, and royalties through multi-jurisdictional structures are realising today’s tests go far beyond paperwork. Substance, purpose, and pricing must align. If they do not, treaty rates disappear, quick-refund channels stall, and WHT leakage escalates.
From BEPS to here: why WHT is in the crosshairs
A decade of OECD Base Erosion and Profit Shifting (BEPS) reforms embedded anti-abuse tests in treaties and domestic laws. The Principal Purpose Test (PPT) lets authorities deny treaty benefits if one key purpose of an arrangement is to secure a lower WHT rate. This standard has become normal in new and renegotiated treaties. Peer reviews keep the pressure on.
Courts reinforced the trend. The Court of Justice of the EU’s Danish “beneficial ownership” judgments set strict limits. They confirmed that conduit companies cannot rely on WHT exemptions under the Parent-Subsidiary or Interest & Royalties directives. National courts quickly applied this logic. In Denmark, the Supreme Court stressed that beneficial ownership, commercial purpose, and cash-flow substance must exist. If they do not, exemptions collapse and retroactive WHT follows.
Profit shifting rules that directly affect WHT
Profit shifting often brings transfer pricing to mind. Yet the harshest and fastest impact usually appears in dividend tax and WHT. Three main triggers dominate.
First, anti-abuse rules block treaty relief. If a holding company exists mainly to secure a zero or 5% dividend WHT rate, authorities will act. When the vehicle lacks staff, risk, and decision-making capacity, it looks artificial. The result is simple: full domestic WHT of 15%, 25%, or even 35%, and no reclaim.
Second, beneficial ownership tests pierce through nominees. If a company books income but must pay it on under binding back-to-back terms, it is not the real owner. Authorities treat it as a conduit. The true beneficial owner is somewhere else. Refund rights fall away.
Third, anti-hybrid and GAAR regimes tighten the net. The EU’s Anti-Tax Avoidance Directive (ATAD) brings controlled-foreign-company rules, interest caps, and hybrid-mismatch provisions. These may not alter WHT rates directly but they change the way income is categorised and taxed. In practice, this often blocks treaty relief and worsens the net WHT burden.
Pillar Two changes the game: the STTR
Pillar Two is often described as a 15% global minimum tax. From a WHT angle, the Subject-to-Tax Rule (STTR) matters most. It lets source countries “tax back” certain related-party payments, such as royalties or interest, if the recipient faces a nominal rate below 9%. Even if a treaty caps WHT, the STTR allows the source to levy more.
This rule especially affects developing countries that see tax bases erode through outbound flows. For multinational groups, the STTR feels like a floor for WHT. It reduces the benefit of routing flows into low-tax jurisdictions.
For dividends, the STTR does not apply, but the pattern is clear. Where structures exist only to cut dividend tax via treaty shopping, PPT and beneficial ownership rules step in. That leaves investors facing higher WHT, fewer reclaims, and longer waits.
Relief at source, reclaims, and the EU’s FASTER shift
Procedure often determines success. Even strong claims fail if the reclaim system drags. The EU’s FASTER Directive, adopted in 2024, introduces a standard digital tax residence certificate. It forces member states to offer either relief at source or rapid refund channels. In theory, this means quicker WHT recovery on EU dividends.
But the speed comes with a filter. Relief at source requires custodians and intermediaries to vet beneficial ownership and treaty entitlement. If your structure triggers red flags, you may be excluded before any refund is processed. The process is faster only for compliant structures.
What regulators examine – and where claims fail
Authorities check three things: commercial rationale, substance, and alignment of cash flow. They want to see that the claimant of WHT relief truly owns the capital, bears real risk, and makes genuine decisions. They review board minutes, agreements, treasury records, and fund flows. If cash arrives and leaves immediately under binding onward-payment terms, the conduit story writes itself.
Since the Danish cases, regulators take a harder line. Expect longer questionnaires, detailed beneficial ownership declarations, and more denials when answers look vague or inconsistent.
Dividend tax and WHT: the financial hit
The impact is not abstract. Take a EUR 10 million dividend. At 0% treaty relief, no tax is withheld. If denied, a 15% domestic WHT applies. That means a EUR 1.5 million outflow at source. Relief at source blocked? Then you face a long reclaim process, with uncertain odds.
Royalties and financing flows face another trap. The STTR can impose a 9% tax even when a treaty headline rate suggests less. Double-taxation risk grows if credits do not align. These frictions mean WHT now eats into cash flows in ways that boards must monitor.
A forward-looking WHT playbook
Managing WHT risk under profit shifting rules requires a proactive approach. Map every dividend, royalty, and interest channel against PPT exposure, beneficial ownership, ATAD, and STTR. Document substance at each holding company: staff, risks, and decision-making. If back-to-back traits exist, fix them now.
For royalties and financing, model the STTR and decide whether on-shoring is cheaper than routing via low-tax hubs. For dividend tax, prepare evidence files that show commercial purpose and genuine control.
In the EU, align to FASTER. Standardise documentation into a digital package. Partner with custodians that have relief-at-source capabilities and know how to screen anti-abuse. Outside the EU, apply the same rigour.
Above all, be realistic. If the board cannot explain why a holding structure exists beyond tax savings, regulators will see through it. That weakness translates directly into lost dividend tax relief and failed WHT reclaims.
Conclusion
Profit shifting rules have redefined withholding tax. It is no longer a routine back-office reclaim. It is now a test of governance and substance. With PPT, beneficial ownership, and anti-hybrid laws in play, the margin for treaty shopping is gone. Pillar Two’s STTR adds a global backstop. The EU’s FASTER project accelerates refunds, but only for those who can pass the upfront tests.
In today’s environment, WHT must be treated as a core performance metric. Investors that align their structures and processes can still reclaim effectively. Those who rely on form over function will see dividend tax and WHT erode their returns.
