GAAR and Fintech Holding Structures — Avoiding the Impermissible Arrangement Trap

Fintech groups often use complex holding structures to manage operations across multiple jurisdictions. These structures present significant General Anti-Avoidance Rule (GAAR) risks under the Direct Tax Code (DTC) 2025. This guide analyses the GAAR implications of fintech holding structures and provides strategies for defensible structuring.

The GAAR Framework

Section 178 — Applicability of GAAR

Section 178(1) provides that "an arrangement entered into by an assessee may be declared to be an impermissible avoidance arrangement and the consequence in relation to tax arising from it may be determined". Section 178(2) clarifies that GAAR "may be applied to any step in, or a part of, the arrangement".

Section 179 — The Impermissible Avoidance Arrangement Test

An arrangement qualifies as an impermissible avoidance arrangement where the main purpose is to obtain a tax benefit, and it:

1. Creates rights or obligations not ordinarily created between persons dealing at arm's length
2. Results in misuse or abuse of the provisions of the Act
3. Lacks commercial substance or is deemed to lack commercial substance under Section 180
4. Is entered into by means not ordinarily employed for bona fide purposes

Section 179(2) — The Presumption

Section 179(2) creates a presumption that an arrangement has been entered into for the main purpose of obtaining a tax benefit if the main purpose of a step in, or a part of, the arrangement is to obtain a tax benefit.

GAAR Risks in Fintech Holding Structures

1. Jurisdictional Arbitrage

Locating holding companies in low-tax jurisdictions with no substantial commercial purpose other than tax benefit is a significant red flag.

2. Complex Layering

Multiple layers of entities with no clear commercial rationale beyond tax optimisation may trigger GAAR scrutiny.

3. Intellectual Property Structures

Fintech groups often hold IP in offshore entities. This may raise GAAR concerns if:

• The IP is not developed in that jurisdiction
• The IP is not actively managed in that jurisdiction
• The structure is designed to shift profits to a low-tax jurisdiction

4. Service Fee Structures

Management fees, service fees, and royalty payments to offshore entities may raise GAAR concerns if:

• The fees are not at arm's length
• The services are not actually provided
• The structure is designed to shift profits

5. Round Trip Financing

Structures involving funds flowing out of India and back through related entities may be challenged as round trip financing.

The Commercial Substance Test

Section 180 — Lack of Commercial Substance

Section 180(1) deems an arrangement to lack commercial substance if:

• (a) The substance or effect of the arrangement as a whole is inconsistent with, or differs significantly from, the form of its individual steps
• (b) It involves or includes:
  • Round trip financing
  • An accommodating party
  • Elements that have the effect of offsetting or cancelling each other
  • A transaction disguising value, location, source, ownership or control of funds
• (c) It involves the location of an asset, transaction, or place of residence without substantial commercial purpose other than obtaining a tax benefit
• (d) It does not have a significant effect upon business risks or net cash flows apart from the tax benefit

Application to Fintech Holding Structures

For a fintech holding structure to have commercial substance, it must:

• Have a genuine business purpose beyond tax optimisation
• Reflect economic reality
• Not involve round trip financing or accommodating parties
• Have a significant effect on business risks or net cash flows

Defensible Fintech Holding Structures

1. Document Commercial Rationale

Maintain comprehensive documentation of the commercial rationale:

• Why was the holding structure chosen?
• What are the operational benefits?
• What are the regulatory requirements?

2. Ensure Substance in Holding Company

The holding company must have genuine substance:

• Physical presence (office, employees)
• Decision-making in the jurisdiction
• Board meetings in the jurisdiction
• Regulatory compliance in the jurisdiction

3. Arm's Length Pricing

All related-party transactions must be at arm's length:

• Management fees
• Service fees
• Royalty payments
• Financing arrangements

4. Avoid Artificial Steps

The structure should not include steps that serve no commercial purpose other than tax optimisation.

5. Consider the Economic Substance Doctrine

The structure should be evaluated against the economic substance doctrine.

Consequences of GAAR Invocation

Section 181 — Consequences

If a fintech holding structure is declared to be an impermissible avoidance arrangement, Section 181 empowers the tax authorities to:

• Disregard, combine, or recharacterise any step in the arrangement
• Treat the arrangement as if it had not been entered into or carried out
• Disregard any accommodating party
• Reallocate income, expenditure, deduction, relief, or rebate among parties
• Treat equity as debt or vice versa
• Treat capital receipts as revenue receipts or vice versa

Practical Implications

• Recharacterisation of income
• Disallowance of deductions
• Reallocation of income to India
• Denial of treaty benefits

Expert Legal Guidance

Anuj Desai & Associates provides comprehensive legal advisory services on GAAR compliance for fintech holding structures. Our direct tax experts help fintech groups evaluate structures for GAAR risk, document commercial rationale, and navigate the regulatory framework. We assist in structuring defensible arrangements, preparing documentation, and representing clients before income-tax authorities.

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Disclaimer: This article provides general information and does not constitute legal advice. For specific guidance on GAAR compliance or any other direct tax matter, please consult qualified legal professionals.

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Need Expert Legal Guidance?

Navigating the complex GAAR framework for fintech holding structures requires experienced legal counsel. At Anuj Desai & Associates, we provide comprehensive direct tax advisory services, including:

• Structure Review: GAAR risk assessment for fintech holding structures
• Documentation: Assistance with commercial rationale documentation
• Substance: Guidance on ensuring substance in holding companies
• Representation: Representation before income-tax authorities

Contact us for expert legal guidance on your fintech structuring matters.