Economic Substance Doctrine

The Economic Substance Doctrine is a legal principle used to determine whether a transaction has real economic significance or substance, rather than being merely a formal or paper-based arrangement. When assessing a transaction, courts will look at whether it genuinely alters a taxpayer's economic position or if it was primarily designed to achieve tax benefits without real economic impact. Essentially, if a deal is structured primarily to avoid taxes but lacks real purpose or effect, it may be deemed invalid under this doctrine, leading to potential tax consequences for the parties involved.