Motive test

The motive test is a principle commonly used in tax law to identify and prevent tax avoidance. It examines the primary purpose or intent behind a transaction to determine whether it was undertaken for genuine commercial reasons or primarily to reduce tax liability.

Key Features: Focuses on the intent or objective of a taxpayer in executing a transaction. Applied to transactions, arrangements, or schemes that might be structured to gain tax advantages. If the principal purpose is tax avoidance, tax authorities may disregard the transaction or apply anti-avoidance provisions. Helps distinguish between legitimate business decisions and those motivated solely by tax benefits.

Example: A company transfers assets to a subsidiary in a tax-free jurisdiction solely to reduce taxable income in its home country. Under the motive test, tax authorities may conclude that the primary purpose was tax avoidance and deny the tax benefits