Selected issues on beneficial ownership from the OECD and the EU

Institute for Austrian and International Tax Law www.wu.ac.at/taxlaw 1

Selected issues on beneficial ownership from the OECD and the EU

Prof. dr. Pasquale Pistone WU Vienna & University of Salerno

Moscow, 4 June 2013 [email protected]

mailto:[email protected]�


Outline

1. Beneficial ownership: current developments on the OECD MC and its Commentary

2. Some case law from the European Union on beneficial ownership

1. Finland (2013) – beneficial ownership of discretionary trust

2. Denmark (2012) – beneficial ownership of dividends and the EU Parent-Subsidiary Directive

3. Beneficial ownership and the EU Tax Directives 4. Expected developments


1. Beneficial ownership: current developments on the OECD MC and its

Commentary


1. OECD developments on beneficial ownership

29 April 2011, released of discussion draft on “Clarification of the meaning of ‘beneficial owner’ in the OECD Model Tax Convention (paras. 12.1 to 12.6 of Comm. On Art. 10 and eqv.) 19 October 2012, revised discussion draft ⇒Changes on Commentary on Arts. 10, 11, 12 ⇒Changes on wording of Article: from “immediately

received by” to “paid to”



Main features: Autonomous treaty meaning prevails over technical

meaning under domestic law Trustees of a discretionary trust not distributing dividends

could be beneficial owners for purpose of tax treaties regardless of domestic law

Specific clarifications on agents, nominees, conduits acting as fiduciary or administrators not being beneficial owners

Key element to exclude beneficial ownership: the recipient’s right to use and enjoy dividend is

constrained by a contractual legal obligation to pass on the payment

NB - The application of this Article does not prevent other treaty or domestic anti-abuse provisions (para. 12.1)



• Para. 12.6 to the Commentary on Art. 10 OECD MC (…) The meaning of “beneficial owner” in the context of

the Article must be distinguished from the different meaning that has been given to that term in the context of other instruments* that concern the determination of the persons (typically the individuals) that exercise ultimate control over entities or assets. That different meaning of “beneficial owner” cannot be applied in the context of the Article. (…)

* “See, for example, Financial Action Task Force, International Standards on Combating Money Laundering and the Financing of Terrorism & Proliferation – The FATF Recommendations (OECD-FATF, Paris, 2012) …”


2. Case-law from the European Union

National Court judgments Finland (2013)

Denmark (2012)


2.1 FINLAND

KHO 2013/1061 (51) 27 March 2013

Who is the beneficial owner of the assets in a trust?

=> Case started from an advance ruling


2.1 Finland - the facts of the case

1. In 1955 A’s grandmother (settlor) set up a discretionary trust in US - the US trustee bank has the discretion to distribute the trust funds to the

beneficiaries for the purposes mentioned in the trust rules, based on an application of the beneficiaries

- the trustee can decide whether, when and how much funds are distributed from the trust to the beneficiaries

2. Grandmother died => Trust became irrevocable and was divided into six sub-trusts to the

grandchildren in accordance with the trust rules (1/6) =>A’s father (and children) = benefciary in one of theses trusts 3. A’s dad died in 1988 => part divided into three sub-trusts to his three children (including A) (1/6 x

1/3) => A = beneficiary together with wife and children in one of these sub-trusts => When does ownerhip of trust assets transfer for gift tax purposes?


2.1 Finland - tax authorities and judgment

Tax Office - set up of a trust = settlor transfers fund without consideration in

benefit of the beneficiaries = gift - The gift realised for tax purposes when the trustee bank was

informed of the death of the father (1988) ⇒ did not give advance ruling, because the gift had already been

received Administrative Court agrees Because of the authority and discretion of the trustee - Beneficiary A could not use rights as an owner and could not

receive the assets of the trust in his possession in 1988 when his father died

- Mr. A receives ownership status (= gift for tax purposes) only when the assets from the turst are actually alienated to him and when he has received the assets into his possession

=> case back to tax office, which will have to give an advance ruling


2.2 DENMARK

SKM 2012.26 LSR

Beneficial ownership of dividends and eligibility to the

EU Parent-Subsidiary Directive


USA Inc.

Cyprus Ltd.

Bermuda Ltd.

Denmark ApS

Repayment of debt

Claim

Dividend

2.2 SKM 2012.26 LSR - Denmark


2.2 SKM 2012.26 LSR - Denmark

Reasoning of the Danish Tax Tribunal: Cyprus Ltd. not the beneficial owner of the dividends. Burden of proof for the status as beneficial owner rested on the companies Scope of the parent-/subsidiary directive: Article 1(2) of the directive grant the member states the opportunity to deny the

benefits of the directive in cases of abuse etc. Denmark has not introduced specific provisions with this aim, but legal basis to

disqualify formally legal and correct dispositions exists in the form of general legal principles including case law.

The Danish Supreme Court has, however, not allowed a reclassification of an existing company on the basis that the company was established to save tax.

Consequently, the Cyprus company of this case, which was legally established and operating, which also owns the shares of the Danish company, should be considered the rightful recipient of the dividends distributed from the Danish company.

Consequently, the dividends are exempt from Danish withholding tax according to article 5 of the directive.


3. BO and the EU Parent-Subsidiary Directive

No beneficial ownership requirement Vulnerable to interposition of companies Anti-abuse measures by domestic law of

Member States more likely to apply on the basis of Article 1.2 Parent-Subsidiary Directive in light of OECD current developments, if beneficial ownership rules equated to anti-avoidance rules


3. BO and the I/R Directive

Definition Art. 1.4 Any individual who receives an interest payment for

its own benefit and not as an intermediary, such as an agent, trustee or authorized signatory, for some other persons

PE clause Art. 1.5 PE as beneficial owner when effectively connected

and income is subject to tax

⇒anti-abuse provision in Article 5 ⇒No reference to tax treaty concept ⇒Conduit structures unlikely to be beneficial owners


3. BO and the Savings directive

Article 2 and 1.2 Any individual who receives an interest payment Unless the recipient provides evidence that the

interest payment was not received for his own benefit, or Unless the paying agent has reason to believe

that the recipient is not the final beneficial owner (e.g. based on the customer due diligence) => money laundering identification matters


3. Latest developments on the Savings Directive

DE, ES, FR, IT, UK have agreed to work on a pilot multilateral automatic exchange of information facility, based on the model agreed with the US under FATCA (Model 1), which would extend the scope of bank reporting for tax purposes.

On 14 May 2013 ECOFIN all Member States agreed unanimously to authorise the Commission to start negotiations with CH, FL, AND, RSM and MC.

The Commission has undertaken to start the negotiations as a matter of urgency.


4. Expected developments

Hardening of anti-abuse rules on beneficial ownership as a consequence of OECD interpretation

Further developments expected to restrict international tax planning use of cross-border disparities with elimination of inconsistencies on hybrid mismatching in the framework of base-erosion profit-shifting (BEPS) and the fight against aggressive tax planning

European Union Member States to tighten up its rules on anti-abuse (esp. with third countries), as a consequence of Recommendation of 6.12.2013

General shift towards automatic exchange of information within the EU can be approved by end of 2013 with effects from 2014-2015 (see June 2013 meeting of EU Council)

Similar developments expected with G-20 in Australia (October 2013)


INSTITUTE FOR AUSTRIAN AND INTERNATIONAL TAX LAW Althanstr. 39–45, 1090 Vienna, Austria UNIV.PROF. DR. Pasquale PISTONE T +43-1-313 36-4648 F +43-1-313 36-730 [email protected] [email protected] www.wu.ac.at/taxlaw

Grazie per l’attenzione! Спасибо за внимание! Thanks for your attention!



Selected issues on beneficial ownership from the OECD and the EU

Economy & Finance

Transcript of Selected issues on beneficial ownership from the OECD and the EU