Taxand Asia Senior School CONCEPT OF BENEFICIAL OWNERSHIP

Transcription

1 Taxand Asia Senior School CONCEPT OF BENEFICIAL OWNERSHIP

2 Quality tax advice, globally Beneficial Owner Meaning

3 BENEFICIAL OWNER GENERAL MEANING Owner 2 One who has the right to possess, use, and convey something; a person in whom one or more interests are vested [Black s Law Dictionary - Eighth Edition] Ownership is a bundle of rights attached with a property [Indian Supreme Court ruling in the case of Swadesh Ranjan Sinha vs Haradeb Banerjee, AIR 1992 SC 1590] Legal owner One recognized by law as the owner of something; esp., one who holds legal title to property for the benefit of another [Black s Law Dictionary - Eighth Edition] Beneficial owner Owner who enjoys the benefits of ownership One who is entitled to receive the income of an estate without its title, custody, or control [Webster s Dictionary] One recognized in equity as the owner of something because use and title belong to that person, even though legal title may belong to someone else; esp. one for whom property is held in trust [Black s Law Dictionary - Eighth Edition] 2

4 Quality tax advice, globally Beneficial Ownership International Concepts

5 BENEFICIAL OWNER INTERNATIONAL COMMENTARY 1/4 OECD Commentary 4 Treaty benefit to the residents of a contracting state only if they are the beneficial owners of income in the nature of dividends, interest, royalties and fee for technical services ( FTS ) ie passive income Illustrative phraseology (Articles 10, 11 and 12 of the Organisation for Economic Cooperation and development ( OECD ) Model Convention of 2010): Such interest may also be taxed in the Source state and according to the laws of that State, but if the beneficial owner of the interest is a resident of the other Contracting State, the tax so charged shall not exceed 10 percent of the gross amount of the interest OECD commentary recognizes the concept of beneficial owner as a measure used to counter tax avoidance OECD commentary provides that the term 'beneficial owner' should not be interpreted in a narrow technical sense Beneficial owner should be understood in the context and in light of the object and purposes of the tax treaties, including avoiding double taxation and the prevention of fiscal evasion and avoidance 4

6 BENEFICIAL OWNER INTERNATIONAL COMMENTARY 2/4 5 OECD commentary states that receipt of income in the capacity of an agent or a nominee does not give rise to double taxation since the income is not liable to tax in the hands of the agent or nominee in the country of residence, and thus relief from source country taxation shall not be allowed in such cases Conduit companies set up as intermediaries receiving income on behalf of other persons who in fact receive the benefit of the income concerned, should also be denied tax treaty relief for not being the beneficial owner of the income Concept based on the principle of substance over form 5

7 BENEFICIAL OWNER INTERNATIONAL COMMENTARY 3/ Update to OECD 6 The term beneficial owner was added to address potential difficulties arising from the use of the words paid... to a resident of the other contracting state, and it was intended to be interpreted in this context and not to refer to any technical meaning provided under the domestic law of a specific country An agent or nominee or a conduit company acting as a fiduciary or administrator on behalf of interested parties would normally not be regarded as a beneficial owner An obligation to pass the payment to another person might be derived from relevant legal documents or on the basis of facts and circumstances Where the recipient of a income does have the right to use and enjoy the income unconstrained by a contractual or legal obligation to pass on the payment received to another person, the recipient is the beneficial owner In case of abuse of treaty provisions, the limitation of tax should not be granted even if the recipient of the income is considered to be the beneficial owner of that income The meaning of the term beneficial owner must be distinguished from the meaning ascribed to it in the context of other instruments that concern the determination of the persons (typically the individuals) that exercise ultimate control over or assets 6

8 BENEFICIAL OWNER INTERNATIONAL COMMENTARY 4/4 7 UN and US Model Convention The UN and US model convention also use the beneficial ownership concept, without defining the term However, the technical explanation to the US model provides that the term beneficial owner would have the meaning as under the internal law of the country imposing tax, ie the beneficial owner of the relevant income would be the person to which the income is attributable under the laws of the source state Klaus Vogel Klaus Vogel defines a beneficial owner as one who is free to decide: whether or not the capital or assets should be used or made available for use by others; or how the yields therefrom should be used; or both 7

9 CHINESE CIRCULAR 1/5 8 Notice 601 issued by the China s State Administration of Taxation ( SAT ) on October 27, 2009 provides guidance on interpretation of the term beneficial ownership in the context of the China s tax treaties Notice 601 defines the term beneficial owner as a person who has the ownership and control right over the income, rights or property based on which the income is derived Beneficial owner to generally engage in substantive operational activities and can be an individual, a company or any other entity; agents and conduit companies specifically excluded Conduit company defined as a company established for escaping or decreasing taxes, or transferring or accumulating profits, established only for satisfying the organizational form required under the law and not engaging in any substantive operational activities such as manufacturing, distribution or management Determination of beneficial owner to reckon the purpose of the tax treaties, ie (i) avoiding double taxation and preventing tax evasion and omission; (ii) to follow the principle of substance over form ; and (iii) to analyze and judge based on the facts of each case 8

10 CHINESE CIRCULAR 2/5 9 Notice 601 specifies the following elements that are generally regarded as adverse to an applicant s identification as beneficial owner : Obligation to distribute or assign all or majority (eg more than 60 percent) of the proceeds within a specified time limit (eg within 12 months after receiving) to a third country resident No or little operational activities other than holding the property or rights based on which the income is derived Existence of small or few assets, scale or staffing, which barely match the amount of income No or little rights to control or dispose off the income or the property or rights based on which the income is derived Bears no or little risks The contracting country does not tax or exempts the relevant income from tax, or imposes tax at an extremely low effective tax rate Besides the loan contract based on which interests accrue and are paid, the applicant has other similar loan or deposit contracts in respect of amount, interest rate and execution date with a third party 9

11 CHINESE CIRCULAR 3/5 10 Besides the transfer contracts of copyright, patent or technology based on which loyalties generate or are paid, the applicant has other transfer contracts in respect of right to use or ownership of copyright, patent or technology with a third party Circular 30 dated June 29, 2012 allows safe harbor for companies listed in the treaty partner country or 100 percent subsidiaries of such listed companies against the adverse factors test prescribed in Notice

12 CHINESE CIRCULAR 4/5 Circular 165 issued by the SAT on April 12, 2013 provides clarification on interpretation of the term beneficial owner in context of dividends under the China s tax treaty with Hong Kong ( HK ). Circular 165 confirms the position put forward in Circular 601 and Circular 30, and lays down the following principles: Consider totality of facts on a case-to-case basis Beneficial owner status should not be adversely affected where a HK resident does not make any distributions of dividend to a non-hk resident A single project holding company may be regarded as adverse to an applicant s identification as beneficial owner, although solely by this item itself will not deny tax treaty benefits, due to the BO shall be comprehensively analyzed and determined pursuant to various criteria Assets should not be equated with the registered capital of the HK resident; while assessing whether HK resident s staffing level is commensurate with its income, the responsibilities and nature of the staff should also be considered Following aspects should be considered while determining the rights of control and disposal: 11 11

13 CHINESE CIRCULAR 5/5 12 Whether the Articles of Association of the HK resident grant such rights? Whether such right has been previously exercised by the HK resident? Whether the exercise of such rights is voluntary (which will be evidenced by the resolutions passed at the Board meetings or general meetings)? The HK taxing mechanism, which provides tax exemption on its resident s offshore sourced income should not have a negative impact on determining the beneficial ownership of the income Consistent treatment of granting benefits under the Chinese tax treaty should be adopted by different local tax authorities 12

14 INDONESIA REGULATION 1/4 In 2009 and 2010, the Director General of Taxes ( DGT ) of Indonesia had issued regulations number PER-61/PJ/2009 and PER-62/PJ/2009 dated November 5, 2009 which had been amended by PER-24/PJ/2010 and PER-25/PJ/2010 dated April 30, 2010 ( DGT Regulations ), providing guidance on the implementation of tax treaties and the prevention of tax treaty abuse In these two regulations, the following principles emerge: Tax treaty benefits will be granted only where: The recipient of the income is not a domestic Indonesian tax payer; The administrative requirements to apply the treaty provisions have been fulfilled; and The foreign taxpayer is the beneficial owner of the income sourced from Indonesia / Any person seeking treaty benefits shall provide a Certificate of Domicile ( COD ) in a prescribed form, ie: Form DGT -1 for general foreign taxpayers; Form DGT 2 for: foreign taxpayers that receive or earn income through a custodian from transfer of shares / bonds on Indonesian capital markets except for interest and dividend; foreign bank taxpayer; or 13

15 INDONESIA REGULATION 2/4 foreign pension fund In case there is a difference between the legal form of a structure / scheme and its economic substance, the tax treatment will be based on the economic substance Treaty abuse will be deemed to exist in cases where: A transaction has no economic substance and is arranged solely to obtain treaty benefits; A transaction has a structure / scheme whose legal form differs from its economic substance, which is solely for the purpose of obtaining treaty benefits; The recipient of the income is not the beneficial owner of the economic benefits of the income; agents, nominees and conduit companies are precluded from qualifying as beneficial owners The beneficial owner test is to be applied only in respect of income for which the relevant treaty article contains a beneficial owner requirement Treaty abuse shall not be deemed to exist in case the income recipient is: An individual who does not act as an agent or nominee; An institution specifically identified in the treaty or one that has been jointly approved between the countries 14

16 INDONESIA REGULATION 3/4 A foreign taxpayer that receives or earns income through a custodian from transfer of shares/bonds traded or reported in a capital market in Indonesia except for, interest and dividend and provided that the foreign taxpayer does not act as an agent or nominee; A public listed company the shares of which are being traded regularly. A pension fund which was established following the regulation in the treaty partner and a taxpayer in the treaty partner. A bank; or A company that meets the following requirements: The establishment of the company and the transaction is not structured solely for the purpose of obtaining treaty benefits; The business activities are managed by the company s own management, which has adequate authority to execute the transaction; The company has employees and engages in an active business; active business interpreted with reference to the costs incurred, business efforts and significant activities undertaken to continue as a going concern; The Indonesian-sourced income of the company is subject to tax in its country of residence; and 15

17 INDONESIA REGULATION 4/4 50 percent or more of the company s total income is not used to fulfill obligations to other parties such as interest, royalty or other fees* *This requirement does not apply for the payment of common company expenses, normal salary to employee and dividend payment In case the Indonesian tax authority determine that a tax treaty has been abused, then: The tax treaty benefits could not be applied; and No refund of overpaid income tax would be allowed to be claimed by the offshore taxpayer In case the Indonesian tax authority determine that the foreign taxpayer is not the beneficial owner of the income sourced from Indonesia or that a tax treaty has been abused, then the payment of income sourced from the Indonesian taxpayer is subject to tax per Article 26 of the Income Tax Law at the rate of 20 percent 16

18 Indian Case Studies Quality tax advice, globally

19 CASE STUDY 1 1/4 US Co 100% USA Transaction 1: Purchase of ABC shares from M Co M Co 34% Transaction 2: Purchase of M Co shares from US Co Mauritius I Co 1 33% ABC 33% I Co 2 India 18

20 CASE STUDY 1 2/4 Facts: ABC Co, a company incorporated in India, was held by three shareholders ICo 1, ICo 2 and M Co; where ICo 1 and ICo 2 are Indian companies and M Co is a Mauritius based company M Co is a wholly owned subsidiary of US Co, a company incorporated in United States ( US ) The Joint Venture Agreement ( JVA ) entered for establishing ABC was executed by US Co; US Co had an option to hold shares in ABC through a permitted transferee; M Co was designated as the permitted transferee Transaction 1: ICo 1 acquired shares in the ABC from M Co a Mauritius based company Transaction 2: Post Transaction 1, ICo 2 acquired shares of M Co from its US Co 19

21 CASE STUDY 1 3/4 Facts: ICo 2 did not withhold tax on the payment made to US Co based on the argument that the transaction is of sale of Mauritius company shares being effected between two non-residents and hence, not liable to tax in India Indian Revenue authorities contended that M Co was not the beneficial owner of the shares in ABC and it was really US Co that beneficially held the shares in ABC It was therefore argued that both the sale of shares under Transaction 1 and Transaction 2 are chargeable to tax in India as the real transfer was the transfer of the shares in ABC by US Co 20

22 CASE STUDY 1 4/4 Ruling: The Mumbai High Court made the following observations: it is the US Co, and not M Co, that is the beneficial owner of the shares in ABC; it is evident from the JVA that M Co is holding shares in ABC as a permitted transferee on behalf of US Co; there is sufficient merit in the conclusion of the Revenue that what was transferred under Transaction 2 was effectively 50 percent of the interest in shareholding of US Co in ABC; Based on the above observations, Mumbai High Court ruled that both the sale of shares by M Co to I Co 1 and the sale of the M Co shares to I Co 2 are taxable transactions in India as the real transfer was the transfer of the shares in ABC by US Co 21

23 CASE STUDY 2 1/2 Facts: KSPG Netherlands Holding BV ( KSPG Netherlands ), incorporated in Netherlands, had its registered office in Amsterdam Pieburg India ( PG India ) was a private limited company incorporated in India and was the wholly owned subsidiary of KSPG Netherlands Kolbenschmidt Pieburg AG was the ultimate holding company in Germany Benefits of the India-Netherlands tax treaty ( treaty ) were claimed for the capital gains earned by KSPG Netherlands on transfer of shares in PG India to another non-resident Under Article 13(5) of the treaty, where the recipient is the beneficial owner, the gains from the alienation of any property (which includes shares) are liable to be taxed only in the State of which the alienator is resident Who is the beneficial owner of the shares held in PG India: KSPG Netherlands or the ultimate holding company? 22

24 CASE STUDY 2 2/2 Ruling: The Authority for Advance Rulings ( AAR ) held that KSPG Netherlands was a beneficial owner of income because: KSPG Netherlands was a distinct legal entity having its own board of directors and management system KSPG Netherlands acquired the shares of the Indian Company from the German parent at a price determined as per the guidelines under the Foreign Exchange Management Act, 2000 KSPG Netherlands made significant direct investments to broaden the Indian company s capital base Implied suggestion of the Revenue that KSPG Netherlands was a sham entity deliberately set up to avoid tax liability relating to capital gains was wholly misconceived Not possible to assume that KSPG Netherlands was a conduit set up to siphon off the gains to the ultimate holding company by means of a colourable device contrary to its corporate status and stake in Indian company However, it was open for the tax authorities to examine the facts at the time when the proposed transaction was actually undertaken by the Applicant 23

25 International Case Studies Quality tax advice, globally

26 CASE STUDY 3 1/4 Facts: The shareholders of Prevost transferred their shareholding to PHB.V, a Netherlands resident company which was owned by Volvo and Henlys Volvo Henlys The shareholders agreement provided that at least 80 percent profits of Prevost, PHB.V and their subsidiaries were to be distributed to Volvo and Henlys Payment of dividend 51% 49% Payment of dividend Consequently, dividends were distributed by PHB.V to Volvo and Henlys in accordance with the above agreement Prevost applied a beneficial withholding rate of 5 percent under the Canadian Dutch treaty on dividend payments made to PHB.V During the year under appeal, PHB.V had no employees in Netherlands nor did it have any investments other than the shares in Prevost Payment of dividend PHB.V 100% Prevost Netherlands Canada Further, PHB.V from time to time represented that the beneficial owners of the shares of Prevost were Volvo and Henlys in the KYC documentation provided to its bankers 25

27 CASE STUDY 3 2/4 Issue involved: Under Netherlands-Canada tax treaty, the source state can subject the dividends to withholding tax, however, if the recipient is the beneficial owner, tax shall not exceed 5 percent, domestic rate of tax for withholding of dividends being 25 percent under Canadian tax law The tax authorities argued that the treaty provisions did not apply as PHB.V. was not the beneficial owner of the dividends; Volvo and Henlys beneficially owned the dividends Whether PHB.V or its shareholders being Volvo and Henlys were the beneficial owner of the dividends under the Netherlands-Canada tax treaty? 26

28 CASE STUDY 3 3/4 Federal Court of Appeal decision: The Federal Court of Appeal agreed with the Tax Court judge that the beneficial owner of dividends is the person who receives the dividends for his or her own use and enjoyment and assumes the risk and control of the dividend he or she received The Crown s view, that beneficial owner mean the person who can, in fact, ultimately benefit from the dividend, does not appear anywhere in the OECD documents and the very use of the word can opens up a myriad of possibilities that would jeopardize the relative degree of certainty and stability that a tax treaty seeks to achieve The Federal Court of Appeal ruled that the beneficial owner of the dividends was PHB.V based on the following findings: The relationship between PHB.V and its shareholders is not one of agency, or mandate nor one where the property is in the name of a nominee The corporate veil should not be pierced because PHB.V is not a conduit for another person, cannot be said to have absolutely no discretion as to the use or application of funds put through it as a conduit and has not agreed to act on someone else s behalf pursuant to that person s instructions without any right to do other than what that person instructs it 27

29 CASE STUDY 3 4/4 PHB.V was a statutory entity carrying on business operations and corporate activity in accordance with the Netherlands law under which it was constituted Neither Volvo nor Henlys could take action against PHB.V for failure to follow the dividend policy described in the Shareholders Agreement PHB.V was the registered owner of Prevost shares, paid for the shares and owned the shares for itself; when dividends are received by PHB.V in respect of shares it owns, the dividends are the property of PHB.V and are available to its creditors, if any, until such time as the management board declares a dividend and the dividend is approved by the shareholders This ruling has been affirmed by the Tax Court of Canada in Velcro Canada Inc ruling released in February,

30 CASE STUDY 4 1/3 Facts: Indofoods, an Indonesian resident company set up a SPV, resident in Mauritius which issued loan notes to the lenders and subsequently lent the proceeds to Indofoods. This allowed access to a reduced withholding tax rate of 10 percent under the Mauritius-Indonesia tax treaty Under the terms of the loan issue, the SPV could redeem the notes early if the withholding tax exceeded 10 percent, consequently, due to the revocation of the Mauritius-Indonesia tax treaty, the SPV sought to redeem the note However, the holders resisted the redemption arguing that a Netherlands company ( Dutch Co ) interposed between the parent and the SPV would benefit from a 10 percent rate of withholding tax under the Netherlands-Indonesia tax treaty Lending of loan proceeds Lending of loan proceeds Issue of loan notes Indofoods 100% Dutch Co 100% SPV Lenders Indonesia Payment of interest Netherlands Payment of interest Mauritius Payment of interest 29

31 CASE STUDY 4 2/3 Issue involved: Under the Netherlands-Indonesia tax treaty, the source state can subject the dividends to withholding tax, however, if the recipient is the beneficial owner, tax shall not exceed 10 percent, domestic rate of tax for withholding of dividends paid to non-residents being 20 percent under Indonesian tax law Whether Dutch Co would be beneficial owner of the interest payable by the parent guarantor under the Netherlands-Indonesia tax treaty? Whether or not Dutch Co would be resident in Netherlands under the Netherlands-Indonesia tax treaty? 30

32 CASE STUDY 4 3/3 Court of Appeal decision: The Court of Appeal ruled that the Dutch Co could not be a beneficial owner and therefore treaty relief would not be available As per the Court of Appeal, the term beneficial owner has to be given an international fiscal meaning not derived from the domestic laws of contracting states The Court of Appeal held that beneficial ownership does not vest with a formal owner that does not have full privilege to directly benefit from the income The Court of Appeal held that a beneficial owner is to be interpreted based on substance of the matter and the position of the Dutch Co equates to that of an administrator of the income As regards, the question pertaining to the residency of Dutch Co, the Court of Appeal ruled that given the facts of the case, the place of effective management of the issuer was Indonesia and that the place of effective management of Dutch Co, if interposed between the parent guarantor and the issuer would be Indonesia too 31

33 CASE STUDY 5 1/3 Facts: Funds of a Japanese Pension Fund ( the Fund ) were managed by a Japanese Bank ( the Bank ) Japanese Pension Fund Japanese Bank The fund acquired participation in a US limited partnership (US LP) which was held by the bank, acting as an agent of the fund US LP purchased shares in Italian companies. Dividends paid by the Italian companies were subject to a high domestic withholding tax The fund claimed a reduced dividend withholding rate under the Italy-Japan tax treaty ( treaty ), which did not contain a beneficial ownership clause for dividends The tax court of first instance held in favour of the fund The tax court of second instance reversed the decision and ruled in favour of tax authorities US LP Dividends Italian companies Japan Limited partner US Italy Whether treaty benefits, with respect to dividends, could be granted to the fund or to the bank? 32

34 CASE STUDY 5 2/3 Ruling: The tax court of second instance held that the fund was not entitled to the reduced treaty withholding rate on the following facts: US LP invested its own resources and earned dividends for the same US LP could not be assimilated to a trustee or nominee The fact that the ultimate beneficiary of the dividends was the Japanese fund, was merely a consequence of the group structure The fund, by virtue of its relationships with both the bank and the US LP, was the ultimate beneficiary of the income could justify the application of Article 10 of the treaty However, Article 10 of the treaty did not contain a beneficial owner clause. It only referred to the recipient of the dividends Further, Article 10 of the treaty applied only to dividends received by a resident of the other contracting state ; in the present case, dividends were received by US LP, which was not a resident of Japan 33

35 CASE STUDY 5 3/3 Ruling: The fact that the US LP was treated as fiscally transparent in the United States was irrelevant because the US LP shares were held by the bank and not by the Japanese Fund The Court added that in such a situation, the bank, rather than the fund, might have claimed the treaty benefits (which it did not) 34

36 CASE STUDY 6 1/2 Facts: Spanish resident company ( S Co ) was wholly owned by its UK parent company ( UK Hold Co ) Shares and voting rights of UK Hold Co were in turn held by an individual resident in the United Arab Emirates ( UAE ) S Co distributed dividend to its UK Hold Co which subsequently distributed dividend to its UAE shareholder Benefits of the zero rate under the Parent-Subsidiary Directive were claimed for the dividend distributed by S Co to its UK Hold Co The tax authorities contended that withholding tax rate of 10 percent under Article 10 of the Spain-United Kingdom tax treaty be imposed on the dividend distribution Individual resident 100% Dividend UK Hold Co Dividend 100% S Co UAE UK Spain Who is the beneficial owner of the shares held in S Co: UK Hold Co or the ultimate individual resident of UAE? 35

37 CASE STUDY 6 2/2 Tribunal Economico Administrativo Central ( TEAC ) Court decision: TEAC held that the UK Hold Co was not the beneficial owner of the dividends on the basis of following facts: UK Hold Co was managed and effectively controlled by the individual resident in UAE UK Hold Co did not conduct any business and its only asset was the participation in S Co Neither the UK Hold Co have any employee nor was there any evidence whatsoever that the UK Hold Co managed the S Co S Co had entered into a participating loan with UK Hold Co controlled by the individual resident in the UAE with the sole purpose of reducing the taxable base of the capital gain obtained by S Co No tax was paid in Spain on the dividends paid to the UK Hold Co whereas the other amounts paid to the UK Hold Co were deductible in Spain and taxed in the UK at the very low rate of 7 percent UK Hold Co acted as an intermediary, a trustee or a person receiving income which belonged to someone else, the ultimate owner ie the individual shareholder in UAE 36

38 CASE STUDY 7 1/3 Facts: G1 Ltd, a company resident in Jersey ( JE Co ), acquired a Danish holding company ( DK Hold Co ) through two holding companies resident in Sweden ( SE Hold Co 1 and SE Hold Co 2 ) SE Hold Co 1 was the parent company of SE Hold Co 2 Interest payments JE Co Loan Jersey Swedish holding companies did not carry out real business activities except for the holding of the shares of SE Hold Co 2 and DK Hold Co respectively On the date of acquisition, loan was granted by JE Co to SE Hold Co 1 and by SE Hold Co 2 to DK Hold Co with same face values and interest rates SE Hold Co 1 Group contribution SE Hold Co 2 Sweden DK Hold Co paid interest to SE Hold Co 2 which the latter subsequently transferred to SE Hold Co 1 as group contribution. SE Hold Co 1 subsequently paid interest to JE Co Danish tax authorities required DK Hold Co to withhold tax on interest payments Who is the beneficial owner of the shares held in S Co: UK Hold Co or the ultimate individual resident of UAE? 37 Interest payments DK Hold Co Loan Denmark

39 CASE STUDY 7 2/3 Issues involved: Under Danish law, interest on controlled debt (ie debt by companies that directly or indirectly own more than 50 percent of the shares or the voting power of the debtor company) paid to non-resident companies were subject to withholding tax However, withholding tax was not levied if the withholding taxation was reduced or abolished by a tax treaty or by an applicable European Union ( EU ) directive Under Article 11(1) of the Nordic convention, interest paid to a recipient in the other contracting state was exclusively taxable in the recipient's residence state provided that the interest was paid to the beneficial owner of the interest Who is the beneficial owner of the interest received from DK Hold Co: SE Hold Co 2 or SE Hold Co 1 or JE Co? 38

40 CASE STUDY 7 3/3 Landsskatteretten Court (National Tax Tribunal) decision: The National Tax Tribunal held in favour of the tax authorities and concluded by referring to paras 8 and 8.1 in the OECD commentary on Article 11 and the Interest and Royalty Directive (2003/29), that SE Hold Co 2 or SE Hold Co 1 was not the beneficial owner of the interest payment, based on following observations: Group contributions between SE Hold Co 2 and SE Hold Co 1 did not result in taxable income as under the Swedish tax legislation group contribution was a deductible expense for the payer and taxable income for the recipient Swedish companies did not have the real power to act regarding the disposition of interest concerned and therefore, were to be regarded as conduit companies Under the Swedish tax legislation on group contributions, DK Hold Co s interest liability was in fact paid to JE Co through the two Swedish companies SE Hold Co 1 and SE Hold Co 2, together with identical loans were acquired with a view to avoid the withholding taxes on interest payments made by DK Hold Co without affecting the deductibility thereof Who is the beneficial owner of the interest received from DK Hold Co: SE Hold Co 2 or SE Hold Co 1 or JE Co? 39

41 CASE STUDY 8 1/2 Facts: Denmark Bank Swiss Companies Dividends TRS Counter-parties Switzerland Third countries Danish Bank entered into several Total Return Swaps (involving shares in Swiss companies) with counterparties in the EU and the US As a hedge, Danish Bank acquired the corresponding amount of the underlying Swiss shares Swiss domestic tax law - 35 percent Dividend Withholding Tax ( DWT ) Switzerland / Denmark treaty (at the relevant time), Article 10: Whether Danish Bank is the beneficial owner of the shares held in the Swiss Companies? 40 Nil DWT; No beneficial ownership condition Argued by Swiss tax authorities: Nil DWT rate should not apply because Danish Bank not beneficial owner of dividends (and beneficial ownership condition should be read into Article 10); Danish Bank committed treaty abuse

42 CASE STUDY 8 2/2 Federal Administrative Tribunal: Beneficial ownership condition might possibly be read into Article 10 Tribunal did not have to decide this point, as it concluded that Danish Bank is the beneficial owner of the dividends Danish Bank satisfies the beneficial ownership condition, because: Lack of interdependence between the dividends paid by the Swiss companies and the Danish Bank s obligations under the TRS: The Danish Bank was not obligated to acquire the shares in the Swiss companies it decided to do so in order to hedge its position Regardless of whether the Danish Bank received the dividends from the Swiss companies, it was obligated to make the relevant payments under the TRS Danish Bank did not commit treaty abuse, because: If there is no explicit treaty abuse provision in the treaty, then treaty abuse occurs only if the company engages in no genuine economic or commercial activity Danish Bank has premises, employees and a wide commercial activity, and thus there is no treaty abuse Whether Danish Bank is the beneficial owner of the shares held in the Swiss Companies? 41

43 42 Thank you 42

44 ANNEXURE 1 43 Article 26 (1a) of Republic of Indonesia Law No 36/2008 on Income Tax which took effect on January 1, 2009 stipulates that the country of domicile of a foreign taxpayer other than those carrying on business or conducting business activity through a permanent establishment in Indonesia as intended in paragraph (1) shall be the country of residence or domicile of the foreign taxpayer that actually received the benefits of the income (beneficial owner) The elucidation of the said article states that the country of domicile of the foreign taxpayer other than those carrying on business or conducting business activity through permanent establishment in Indonesia that receives income from Indonesia shall be determined based on the residence or domicile of the taxpayer that actually receives the benefit of the income (beneficial owner) Accordingly, the country of domicile shall not only be determined based on the Certificate of Domicile, but also on the residence or domicile of the beneficial owner of the said income In the event that the beneficial owner is an individual, the country of domicile shall be the country where the individual resides or lives, whereas if the beneficial owner is a corporate entity, then the country of domicile shall be the country where: the owner or more than fifty percent (50 percent) of shareholders both individually and jointly resides; or where the effective management of the company is located 43

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