Beneficial Ownership – Anti-treaty shopping measures - International Taxation - Income Tax

Beneficial Ownership Anti-treaty shopping measures Though concept of beneficial ownership has not a clear definition, it may in relevance of conduit companies. In simple words the term beneficial ownership implies restriction on availability to treaty benefit by persons who are beneficial owners of income. This concept has been referred in various tax treaty Articles relating to interest, royalty, fees for technical services, fees for included services, dividend of model tax treaty of OECD, US, UN. Provision of beneficial ownership restricts the treaty benefit to the beneficial owner and excludes the concessional withholding tax benefit from the legal owner if he is not the beneficial owner and the beneficial owner is not a resident of that state. The term beneficial owner is not defined in the treaty. In general parlance it implies a division between the legal rights and the rights of enjoyment over the economic benefit recognized by law. According to Vogel the issue of control is the most important factor to decide who the beneficial owner is. He defines beneficial owner as a person who is free to decide (i) whether or not the capital or other asset should be used or made available for use by others (i.e. the right over capital), or (ii) on how the yields from them should be used (i.e. the right over income), or (iii) both. The OECD commentary excludes an intermediary, such as an agent or nominee as a beneficial owner. OECD has done extensive work to bring more clarity to this concept. The OECD Commentary makes it very clear that that source state is not compelled to give the benefit of Article 10,11 and 12 just because the income is received by a resident of the other contracting state. The recipient must be the beneficial owner of the income, and this concept excludes conduit companies, agents and nominees.