How does the concept of "substance over form" affect business transactions?

The concept of "substance over form" emphasizes that the economic realities of a business transaction should take precedence over its legal form when determining its tax treatment. In practice, this means that tax authorities focus on the actual nature and circumstances of a transaction rather than solely on how it is documented or structured legally.

This approach ensures that the taxation reflects the true economic activity involved. For instance, if a transaction is structured to imply a certain legal form that favors tax avoidance or benefits, but the economic reality shows a different intent or outcome, tax authorities can disregard the legal form to ensure fair taxation based on the underlying substance.

The other options don't align with this principle. Legal documents alone do not determine tax relevance, as they might illustrate a transaction's form without reflecting its substance. Similarly, focusing only on the stated agreements overlooks the true economic realities that can significantly impact tax treatment. Lastly, the idea that both legal form and economic reality are equally considered inaccurately characterizes the priority of substance over form, which explicitly favors substance in tax determination.