Economic Substance Doctrine (in law)

The Economic Substance Doctrine is a legal principle used by authorities to prevent taxpayers from creating transactions that lack genuine economic purpose solely to reduce taxes. For a transaction to be respected, it must have real financial or business reasons beyond just tax benefits, and it should meaningfully affect the taxpayer’s financial situation. This doctrine ensures that tax benefits are only granted when the transaction has substantial economic substance—meaningful activities, risks, or assets—preventing artificial arrangements designed solely to exploit loopholes in tax laws.