Economic substance and GAAR: everything everywhere all at once

A report on a session at the IBA’s 26th Annual US and Europe Tax Practice Trends Conference held in Rome on 17 April 2026

Session Co-Chairs

Stefano Petrecca, CBA, Rome
Stanley C Ruchelman, Ruchelman, New York

Speakers

Jakob Skaadstrup Andersen, Gorrissen Federspiel, Copenhagen
Dèlcia M Capocasale, Cuatrecasas, Barcelona
Francesco Gucciardo, Aird & Berlis, Toronto
Dhruv Janssen-Sanghavi, Janssen-Sanghavi & Associates, Mumbai (India) and Leiden (the Netherlands)
Eric B Sloan, Gibson Dunn, New York

Reporter

Katharina Schluecke
Linklaters, Duesseldorf
katharina.schluecke@linklaters.com

Introduction

To fight tax planning initiatives with which they disagree, tax authorities around the globe regularly challenge transactions using arguments based on general anti-abuse rules (GAAR) and the purported absence of economic substance of a transaction or a structure. While the terms used are similar, their application varies from jurisdiction to jurisdiction. The panel focused on the application of GAAR and the absence of economic substance by tax authorities in several countries, in particular Denmark, Spain, Canada, India and the United States, and analysed recent trends regarding the approach of tax authorities and judgments by various courts. In conclusion, one can see a clear trend of a more aggressive application of GAAR provisions by tax authorities to specifically target cross-border structures in order to ‘secure’ the domestic tax base.  

Panel discussion

Denmark

First, Jakob Skaadstrup Andersen gave a brief overview of the latest rulings of the Court of Justice of the European Union (CJEU) on the principles and requirements of European law regarding the application of GAAR provisions and substance requirements, focusing in particular on the Nordcurrent case and the Danish cases. He began with the Danish cases in which the CJEU focused on the European principle regarding abuse in tax matters. Andersen set out the objective and subjective requirements developed by the CJEU and explained their meaning and application. In particular, he emphasised the distinction between compliance with formal requirements and the commercial reasoning behind a transaction. In this context, he also highlighted the specific facts and circumstances in the Danish cases, as the entities were mere letterbox companies. In particular, he stressed that these specifics are reflected in the outcome of the CJEU's ruling and therefore must be considered when interpreting the judgment in the Danish cases. Therefore, given the particular facts and circumstances of those cases, the CJEU's ruling and the principles it applied are consistent with the European principles established in its earlier case law and do not amount to a change in the CJEU’s jurisprudence, a point that is often made by tax authorities in Europe.

Andersen then provided a brief overview of the Nordcurrent case. In this case, the CJEU focused on the European requirements relating to substance as well as the principles the CJEU developed with regard to the relevant review period for the substance analysis. Although the ruling of the CJEU in the Nordcurrent case was perceived as quite innovative, Andersen noted that the judgment was not made by the full chamber of the Court. The case was presented to only three judges, which indicates that, from the CJEU’s perspective, the legal issues raised in the Nordcurrent case were not considered very ‘new’ or super relevant from a European law perspective.

Andersen concluded his analysis with the statement that the abuse doctrine developed by the CJEU can be applied only in exceptional circumstances. Therefore, and despite the position often taken by tax authorities, the doctrine has very limited application from a European law perspective, which Andersen identified as one of the key takeaways. He closed his overview by referring to three supreme court rulings of EU Member States (two made by the Corte Suprema di Cassazione (Italy) and one by the Hoge Raad (Netherlands)) regarding the application of GAAR provisions and substance requirements in holding company cases.

Spain

Delcia M Capocasale started her presentation with a brief overview of the Spanish GAAR regime. In particular she highlighted the three Spanish legal anti-abuse concepts, namely: (1) substance over form; (2) simulated transactions; and (3) fraud of law. She then outlined the recent developments in the application of the GAAR provisions and the approach taken by the Spanish tax authorities. Delcia noted that taxpayers are facing an increasingly aggressive stance from the Spanish tax authorities, which aligns with a trend that can be observed across EU Member States. In addition, there is a tendency that Spanish tax authorities apply the Spanish GAAR principles influenced by international GAAR concepts such as the beneficial ownership test. Delcia also pointed out that in cross-border holding company structures, Spanish tax authorities frequently make assumptions about a lack of substance solely based on the legal form of the structure.

After the general overview, Capocasale focused on recent Spanish case law concerning the application of the Spanish GAAR provisions. She gave a brief overview of a case involving an ultimate beneficial owner in Qatar that was recently decided by the Spanish Supreme Court. In this case, the Court provided some clear guidance with regard to the substance requirements under Spanish law that must be met by holding companies. The Court also clarified that a holding structure cannot per se be treated as an abusive structure. The Spanish GAAR cannot be applied as a legal presumption; instead, the tax authorities must prove abuse on a case-by-case basis. This approach aligns with the jurisprudence of the CJEU. In this context, Capocasale also referred to the guidelines of the Organisation for Economic Co-Operation and Development (OECD) regarding holding company requirements. She concluded her analysis by explicitly pointing out that, despite the aggressive approach of the tax authorities, recent trends in Spanish case law continue to strengthen taxpayers’ positions and therefore act as a counterbalance. However, she noted that this comes at the cost of significant expense for the taxpayer in terms of legal costs and potential reputational risk in the interim. Capocasale then turned to cases in which the Spanish tax authorities have challenged structures where Spanish subsidiaries paid interest to foreign parent entities within multinational groups headed in the US. In these cases, the Spanish tax authorities applied the European beneficial ownership test to interest payments and denied deductibility. The Spanish National High Court has since confirmed this approach.

Capocasale concluded with an overview of some recent developments where Spanish tax authorities challenged the treatment of capital gains in cross-border holding structures. In these cases, Spanish tax authorities took the view that the fact that the deal team for the sale of the Spanish subsidiary was located in Spain was sufficient to create a nexus for Spanish taxation. This trend indicates that Spanish tax authorities are going beyond a substance-based analysis of the transaction and now scrutinise the overall set‑up of the structure.

Canada

At the beginning of his presentation, Francesco Gucciardo gave a brief overview of the historical developments of the GAAR system in Canada. He explained that traditionally, Canada followed a formal approach, and as a result, a ‘substance over form’ approach has not been an inherent element of Canadian tax law. This approach has been reinforced by past court rulings in which Canadian tax courts rejected Canada Revenue Agency (CRA) arguments based on economic substance when applying Canadian GAAR provisions. Gucciardo then highlighted some recent changes in Canadian tax law. These changes were mainly triggered by two recent court rulings, Canada v Alta Energy and Deans Knight Income Corp v. Canada, which Gucciardo briefly presented. In these cases, the Canadian Supreme Court held that the Canadian GAAR cannot be used as tool to require economic substance for the application of a tax treaty.

In response to these rulings, the Canadian legislator amended and modernised the Canadian GAAR by introducing an economic substance test that is commensurate with international developments. Gucciardo specifically drew attention to ‘soft language’ in the Canadian provision in relation to the application of the economic substance test. This is significant as originally the draft provision included a legal presumption of abuse. Gucciardo explained the reasoning for this ‘systemic’ change in the legislation process. He also noted that, while the softened language is welcome from the taxpayers’ perspective, in practice it leads to great legal uncertainty with regard to the application of the GAAR provision. Francesco noted that there are no court rulings yet on the application of the new Canadian GAAR and the application of the economic substance test. However, in April 2026, the CRA issued updated guidance of its view of the GAAR, including an example of its application.

Gucciardo also gave an overview of the modernisation of Canadian transfer pricing rules which reflect the broader trend away from a form-based approach and towards prioritising economic reality.

India

Dhruv Janssen-Sanghavi began by giving a brief overview of the historical developments of anti-avoidance principles in India and their evolution into the GAAR. Deconstructing the Indian Supreme Court ruling in the Hyatt International case, he explained how the Court applied a fluid ‘substance over form’ approach without so much as invoking the GAAR. The case concerned the existence of a permanent establishment from an economic substance perspective. After outlining the facts and circumstances and the key arguments of the Court, Dhruv noted that, although the facts of the case were highly specific, this case reflects a broader trend in India. Tax authorities and courts increasingly prioritise economic substance and are prepared to sacrifice the letter of the law to reach a particular outcome.

Janssen-Sanghavi then turned to the Tiger Global case. He gave a brief overview of the facts and circumstances and the judgment of the court. In this context, he highlighted practical issues that arise when the Indian tax authorities seek to apply GAAR provisions. Janssen-Sanghavi also briefly explained the ‘Head and Brain’ test the court applied in the Tiger Global case. In this context, he highlighted that a proper application of the Indian GAAR provisions requires a very strict procedure if carried out strictly in line with the letter of the law. In particular, the burden of proof for the application of the Indian GAAR lies with the tax authorities. These requirements were not fulfilled in the Tiger Global case. Nonetheless, the Indian Court proceeded to decide the matter rather than dismiss the case. In Janssen-Sanghavi’s view this was a significant overreach of the Court’s power.

Janssen-Sanghavi concluded his presentation by observing that, in the light of the trend in Indian tax cases, litigators must focus more on carefully presenting the facts and circumstances to demonstrate the business reasons for the structure adopted, the business activity that was actually carried on by various Indian and foreign companies in that structure, and the economic benefit that was derived by the Indian member of the multinational group from the structure and the way operations were carried on. This approach would be essential to ensure that the substance of the transaction is clearly visible, and that it cannot be substituted with a form suitable to the revenue.

The US

Eric B Sloan started his presentation by highlighting the freedom of tax planning under US tax law and giving a brief overview on the development of the anti-abuse and interpretive principles by the US courts. It began with the development of the ‘substance over form’ doctrine by the Supreme Court. The doctrine shaped the case law during the ‘tax shelters’ era, when courts used it as a general anti-abuse tool. It was ultimately codified as the economic substance doctrine in s7701(o) of the US Internal Revenue Code in 2010. Sloan then outlined the formal legal requirements of this provision and the principles governing its application. He also noted that, following the codification of the economic substance doctrine, the Internal Revenue Service (IRS) began to challenge many structures that previously seemed acceptable under a ‘white list’ that accompanied codification.

Sloan went on to highlight several recent cases pending before US courts – in particular, the Liberty Global case, the Patel case and the Otay case – concerning the application of the economic substance doctrine. These cases indicate that a more aggressive approach has been taken by the IRS in this area.

In this context, Sloan also gave an overview on recent reactions and trends of the IRS in applying GAAR principles in the US even though, as he pointed out, the US does not have a GAAR. In particular, he focused on a revenue ruling issued in 2024 that applies the economic substance doctrine to related-party ‘basis shifting’ transactions and he criticised the approach of the IRS. Sloan concluded his presentation by highlighting the practical challenges and legal uncertainty created for the taxpayer by the 2024 ruling, including questions regarding how it aligns with the statutory requirements of the codified economic substance doctrine.