Treaty shopping
Treaty shopping is the practice of routing income through a third country purely to use its favourable tax treaty and obtain a lower withholding-tax rate than would otherwise apply. A company in one country sets up a holding company in another, chosen only because that second country has a low-withholding treaty with the third country where the income is actually earned. The OECD's BEPS Action 6 introduced a principal-purpose test and limitation-on-benefits rules to attack this, requiring the treaty benefit to fit the treaty's actual purpose. Despite those changes, routing income through intermediate holding companies remains widespread.
ByLoopholeKiln EditorialPublished
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Example: a company wants dividends out of India and, rather than taking them directly and paying a high withholding tax, holds its stake through Mauritius to use the India-Mauritius treaty (a route India substantially amended after 2016).
Why it matters to a small business: your income from customers is straightforward trading income. There is no withholding tax to structure around and no treaty to shop for at small-business scale.