TTN TAX PRIZE 2015 · VHBV (Netherlands) Velcro Case (2012) Graham, Smith and Partners - Amsterdam

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?”


How did I dealt with it?


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


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


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


2014 OECD Commentary Update


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


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


Wide rang of possibilities:

unconstrained

I--------------------------------------------------------------I

constrained

No examples

Not very specific and is open to interpretation

Issue


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


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


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


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)


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)


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)


(25% WHT)

90 royalty

0% WHT

100 royalty

10% WHT( later 0%)

beneficial owner?

VCI (Canada)

VIBV (Netherlands

Antilles)

VHBV (Netherlands)

Velcro Case (2012)


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


International meaning

More specific explanation

Four elements: Possession;

Use;

Risk; and

Control

Conclusion


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


Thank you for your attention

-Erik Herkströter-

Documents

TTN TAX PRIZE 2015 · VHBV (Netherlands) Velcro Case (2012) Graham, Smith and Partners - Amsterdam