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E R I K H E R K S T R Ö T E R N I C E ( F R A N C E )
2 5 S E P T E M B E R 2 0 1 5
Graham, Smith and Partners - Amsterdam
TTN TAX PRIZE 2015
Essay
“Beneficial Owner, fit for purposes or does it need to be redefined?”
Graham, Smith and Partners - Amsterdam
How did I dealt with it?
Graham, Smith and Partners - Amsterdam
Beneficial Owner in the OECD Model Tax Convention
Holding companies and Beneficial Owner
Case Law on the term Beneficial Owner
Conclusion
Articles 10-12 OECD Model Tax Treaty
Graham, Smith and Partners - Amsterdam
Dividends
Royalties 0%
Interest
15%
5%
MAIN QUESTION:
IS COMPANY C THE BENEFICIAL OWNER?
Company country A
Company country B
Company Country C
General background
Graham, Smith and Partners - Amsterdam
Article 10-12 OECD MODEL TAX CONVENTION No defenition
Article 3.2. OECD MODEL TAX CONVENTION No defenition
Article 31 – 33 Vienna Convention Treaty shall be interpreted in good faith in accordance with the
ordinary meaning to be given to the term of the treaty in their context and in the light of its object and purpose
Beneficial owner:
has no domestic meaning;
is related to the words “paid … to a resident”;
should be understood in its context;
also applies to companies; and
stand-alone approach (article 12.5)
2014 OECD Commentary Update
Graham, Smith and Partners - Amsterdam
2014 OECD Commentary Update
Graham, Smith and Partners - Amsterdam
One is not the Beneficial Owner if:
The right to use and enjoy the received dividend is constrained by a contractual or legal obligation;
Obligation: Legal documents;
Facts and circumstances;
Substance.
2014 OECD Commentary Updat
Graham, Smith and Partners - Amsterdam
One is the Beneficial Owner if:
the right to use and enjoy the dividend is unconstrained by a contractual of legal obligation to pass on the payment received to another.
Issue
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Wide rang of possibilities:
unconstrained
I--------------------------------------------------------------I
constrained
No examples
Not very specific and is open to interpretation
Issue
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Country A
Country B
dividend
Country C
Parent company has acquired the Holding and S1 and 2 as an acquisition;
S3 was added as a result of the expanded business;
S1,S2,S3 are working companies;
Holding has no employees
S3 decides to distribute a dividend to Holding
Parent
Holding
S1 S2 S3
Issue
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A
B
treaty benefits
C
Country C is denying treaty benefits
Reasons given: Holding does not have an
operating business;
Holding does not have employees;
Holding is fully owned by parent company; and
When the parent company requires, it will pay dividends to the parent company.
Parent
Holding
S3
Consequence
Graham, Smith and Partners - Amsterdam
Holding has “on the basis of facts and circumstances, in substance, a constrained right to use and enjoy the dividend.”
Consequence: Tax authorities are given the possibility to deny treaty benefits
on any holding company.
Relevant Case Law
Graham, Smith and Partners - Amsterdam
Royal Dutch Shell Case (1994)
Bank of Scotland Case (2006)
Indofood Case (2006)
Prevost Case (2009)
Danis Cases (2010,2011)
A.AS (2012)
Velcro Case (2012)
14
Indofood case (2006)
Indofood (Indonesia)
Subsidiary (Mauritius)
NL
Noteholders
Loan Interest 10%/20% WHT
Interest O% WHT
Contracual terms: • Same interest rate • Payment Indofood NL
day 1 • Payment NL Noteholder
day 2 • Factually, interest paid
directly from Indofood to noteholders
Beneficial owner?
Indofood case (2006)
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Newco is not the beneficial owner: Because the lack of freedom what to do with the interest
Beneficial Owner should be given an international fiscal meaning
16
Prevost Car Case (2009)
CAN Prevost
UK Henlys
SWE Volvo
NL PH BV
5% WHT
15% WHT
10% WHT
Beneficial owner?
Prevost Car Case (2009)
Graham, Smith and Partners - Amsterdam
The beneficial owner is the person/company who receives the dividends for his own use and ejoyment and assumes risk and control
PHBV: No automatic flow of dividends
Available to its creditors
Use the dividends as it wishes
No party of the shareholders’ agreement
Velcro Case (2012)
Graham, Smith and Partners - Amsterdam
(25% WHT)
90 royalty
0% WHT
100 royalty
10% WHT( later 0%)
beneficial owner?
VCI (Canada)
VIBV (Netherlands
Antilles)
VHBV (Netherlands)
Velcro Case (2012)
Graham, Smith and Partners - Amsterdam
Criteria for the meaning of beneficial ownership:
Possession: Dividends received in own bank account;
Risk: The dividends are available to its creditors;
Use and Control: Pay other outstanding obligations.
Conclusion Case Law
Graham, Smith and Partners - Amsterdam
International meaning
More specific explanation
Four elements: Possession;
Use;
Risk; and
Control
Conclusion
Graham, Smith and Partners - Amsterdam
Term B.O causes uncertainty for holding companies;
It does not fit for purposes;
Redefinition:
Beneficiary of the dividend, royalties or interest received;
Strengthed by the four elements from Case Law.
End
Graham, Smith and Partners - Amsterdam
Thank you for your attention
-Erik Herkströter-
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