Business purpose test

Tax Glossary Definition

Business purpose test

Business Purpose Test – A criterion applied by tax authorities to determine whether a transaction or structure has a genuine commercial or economic rationale apart from achieving a tax benefit. The test helps differentiate legitimate business decisions from arrangements designed mainly to minimize or avoid tax obligations.

Example: Establishing a subsidiary to enter a new regional market would typically meet the business purpose test, whereas forming one solely to secure a tax benefit would likely fail it.

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