Evolution of ‘beneficial ownership'

Despite the historical existence of ‘beneficial ownership', very little jurisprudence is available on the meaning of the term.

Aseem Chawla
Surabhi Singhi
The concept of ownership is of both legal and social interest.
The meaning of the term is seen as an instrument of judicial policy that has assumed political significance. Historically, Salmond noted that “ownership in its most comprehensive signification denotes the relation between a person and any right that is vested in him. That which a man owns in this sense is in all cases a right.” Therefore, analytically ownership is said to consist of bundle of claims, liberties powers and immunities.
Modern developments in the context of severance of control from ownership signify that now it is the person's position and role that determines the relation with things and not vice versa as it used be.
Tax systems, in the light of severance of the concept of control and ownership, have pronounced a new order by qualifying the term “ownership”, and requiring it to be “beneficial” in nature.
The reference to the concept of beneficial ownership was incorporated in various significant articles in the Organization for Economic Co-operation and Development (OECD) Model Tax Convention on Income and Capital in 1977 without providing an unequivocal meaning thereof.
Reference to beneficial ownership is found in the Commentary on Articles 10, 11 and 12 of the OECD Model. Further, it is provided in Articles 10 to 12 of the OECD Model that the limitation of tax in the State of source on dividends, interest and royalties would be denied if the conduit company is not its “beneficial owner”, which can be said to be the defining moment giving universality to the term “beneficial ownership” in international tax.
However, this was not really the first appearance of the term “beneficial ownership” in the arena of international tax. The term draws background from various treaties on inheritance tax; to exemplify; Article III of the 1945 UK/US treaty on the estates of deceased persons refers to “shares or stock held by a nominee where the beneficial ownership is evidenced by scrip certificates or otherwise”. However, no further guidance has been provided to the term.
Prior to 1977, the use of the term was also found when in the supplementary protocol in 1966 in the US/UK treaty when the term “subject to tax” requirement in dividends, interest and royalty articles was substituted.
Amongst myriad illustrations, other examples of the use of beneficial ownership in pre-1977 treaties include the 1968 UK/Netherlands, the 1969 Australia/Japan, the 1975 UK/Spain and the 1968 Ireland/France treaties, and the 1968 protocol amending the 1947 UK/Antigua treaty.
Despite its historical existence and the important role of beneficial ownership, being incorporated in the significant articles of the OECD Model as stated above, very little jurisprudence is available on the meaning of the term “beneficial ownership”.
International practices
Though there is little legislative or administrative guidance on the concept, there has been significant development on the interpretation of the term by the judicial forums and authorities worldwide.

The concept of “beneficial ownership” is not new for the domestic tax laws in many overseas jurisdictions.
The French General Tax Code has included the term in two provisions involving anti-abuse directions. Moreover, various EC directives have included beneficial ownership condition in relation to interest, royalties and dividends.
The term also finds its relevance in the various tax treaties of numerous countries when dealing with dividends, interests, royalties and other income clauses. However, the term has not been exhaustively defined anywhere in the statute books, leaving the heinous task at the behest of the judiciary.
The recent interpretations to the term have demonstrated the meaning and helped understand the true nature of the term. The Indonesian Tax Court in the P. T.Transportasi Gas Indonesia vs Direktur Jenderal Pajak case has observed that to determine the beneficial ownership of certain income, the facts of the case should be examined so as to determine if the person could freely enjoy such income and if the country of residence had taxed such income.


Furthermore, in the celebrated case of Prevost Car, the court concluded that the `beneficial owner' of dividends is the person who receives the dividends for his/her own use and enjoyment and assumes the risk and control of the dividend he or she received. Further, the Indonesian Directorate General of Taxation issued two key regulations dated November 5, 2009, laying down the conditions for income recipients to enjoy the treaty benefits include that the company is not established in the jurisdiction of the relevant treaty's counterparty merely to obtain the treaty benefits, and the transaction itself is not structured solely to take advantage of the treaty benefits. Therefore, the recent evolution in this regard reveals that the approach taken for determination of the meaning of the term "beneficial ownership" is based on the substance over form doctrine allowing the authorities to examine the transaction despite the legal situation created by the parties. Furthermore, countries such as Vietnam are seeking to disregard the legal entity set up for determination of the euphemistically known practice "abusive transfers" and impose the corporations income-tax on such transfers, thereby giving the term "beneficial ownership" a new dimension to explore. Also, over recent months, the authorities in various jurisdictions have brought in several significant circulars and regulations introducing additional prerequisites for persons seeking to claim tax treaty benefits. The significant developments in this regard in China are as under: Guoshuihan (2009 No. 601 "Circular 601 ") deals with the requirement in tax treaties that the recipient of interest, dividends and royalties sourced in People's Republic of China should have "beneficial ownership" over the income in order to qualify for any protection under the treaty. The circular, inter alia, requires that a beneficial owner must have substantive operating activities and should not be an agent or a "conduit". The Circular further identifies the various "adverse factors" which may be reviewed by the tax authorities to conclude that a recipient of income should not qualify as the beneficial owner. Guoshuihan (2009 No. 698 "Circular 698") deals with "indirect offshore share disposals" undertaken by investors. Such disposals may be required to be disclosed to the tax authorities and may potentially be subject to taxation in the country where they are considered to be motivated by tax-avoidance purposes. Therefore, it can be seen that the recent judicial and legislative mandate worldwide is hovering around taxation of transactions disregarding the legal standing of the parties and determination of the true nature and the beneficial owner of the income at hand.
(The authors are Partner and Associate, respectively, Amarchand & Mangaldas & Suresh A. Shroff & Co.)