Sham transaction

Tax Glossary Definition

Sham transaction

A sham transaction is a transaction that lacks genuine commercial substance or intent and is carried out solely to evade taxes or mislead authorities. Although it may appear legally valid in form, it is disregarded for tax purposes because it does not reflect a real economic activity or legitimate business purpose.

Example: If a company records a fake sale to an affiliated entity merely to claim tax deductions or inflate revenue without any actual transfer of goods or services, the tax authorities may treat it as a sham transaction and ignore it when assessing taxable income.

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