25Beneficial Ownership under Articles 10, 11 and 12 of the 2014 OECD Model Convention

Felipe Vallada

I. Introduction

A. History

B. Main issues

II. Interpretation of the 2014 Update to the OECD Model

III. Wording Clarification Amendments

IV. Domestic vs. Contextual Meaning

V. Trusts

VI. Concept Definition

A. Preliminary remarks

B. Right to use and enjoy

C. "Safe" obligations

D. To pass on income

E. Facts and circumstances

F. Beneficial owners, individuals and other instruments

G. Beneficial ownership and anti-avoidance/abuse clauses

H. Additional changes

VII. Conclusion

I. 26Introduction

A. History

The concept of beneficial ownership has been used extensively by tax legislation in Australia, Canada and the United Kingdom for a long time in a domestic context, usually addressing implied covenants given regarding the sale of land in English law. 97 Although a distinction could be made between a beneficial legal owner and a non-beneficial legal owner, 98 there was no discussion related to the beneficiary's interest. 99 Several questions arise in this context, including whether this non-beneficial ownership by a bare trustee, e.g. could be considered ownership to start with. 100 However, there are too many variants - such as companies in liquidation or an overly detailed trust discussion - that are rather complex issues the discussion of which is beyond the scope of this chapter, and consequently will not be focused upon.

Beneficially ownership was addressed in 1942 by the Canada-United States income tax treaty, but still referring to the beneficial ownership of shares of a company and allowing for some tax relief for "real" subsidiaries. The exchange of information provision in this 1942 treaty also used the concept of beneficial ownership, this time to provide treaty benefits to beneficial owners and not to agents/nominees. A similar provision was also included in the 1945 United Kingdom-United States treaty on estate taxes, which expressly mentions the holding of shares or stock by nominees.

The first use of the concept of beneficial ownership in a treaty context related to income seems to have arisen in the United Kingdom-United States tax treaty protocol of 1966, covering nominees, agents and trusts. 101 It was adopted by other treaties from that date on, such as the 1968 United Kingdom-Netherlands treaty, the 1969 Australia-Japan treaty, the 1968 Ireland-France treaty and the 1975 United Kingdom-Spain treaty, among others. 102

However, the UK archives were made public not long ago, and a note from 1966 that addresses beneficial ownership on the negotiations with the treaty with Australia was found:

The expression "beneficial owner" is not defined in our statute law. It has, however, from time to time been considered by the Courts, particularly with respect to the ownership of real property and shares in companies. The precise meaning of the words 27must depend on the context in which they appear, but, generally speaking, a beneficial owner of property may be said to be one who has the right to use and enjoyment of the property, including, on a sale, the right to the proceeds. A person who holds property for the use of another would not be the beneficial owner of it; and if a person so deals with his property that it ceases to be at his disposal, as by entering into a contract to sell it, he ceases to be its beneficial owner. Thus the beneficial owner of a dividend is the person who has the ultimate right to receive the dividend and do with it as he wishes.

The beneficial owner is not, therefore, necessarily the same person as the legal owner. This is illustrated by the example of trusts. A trust has been defined as an equitable obligation binding a person (the trustee) to deal with property over which he has control (the trust property) for the benefit of persons (the beneficiaries) of whom he himself may be one, and any of whom have the power to enforce the trust obligation. In its simplest form, the trustee is the mere repository of the trust property and is then often called a bare trustee. A common example is the nominee holder of shares who is no more than a "dummy" for the true owner. The nominee is the legal, but not the beneficial, owner; the title to the exemption and reliefs given by the agreement will depend on the status of the beneficial or true owner. Another simple example of a trust is that of the man who in his will leaves his estate to trustees, requiring them to pay the income from it to his widow for so long as she lives and on her death to distribute the property forming the estate to specified beneficiaries. For tax purposes we would regard the widow as the beneficial owner of the income payable to her during her life - though not of the property of the estate - and she would be the person entitled to the benefits of the agreement, assuming she satisfies the other conditions. 103

Although its information does not solve all the problems and issues surrounding beneficial ownership, this material is appreciated and helps to shed light on this topic. For what is pertinent to this study, the most relevant practical example - apart from the parallel beneficial ownership of property versus beneficial ownership of income - addresses beneficial ownership and trusts. According to this note, then, one of the first uses for the concept of beneficial ownership in an international treaty context is that the status of beneficial owner would not be granted to the trustee (who could hold the legal title), but rather to the beneficiary.

Understanding the view of the United Kingdom on beneficial ownership is particularly important because that country is known for having suggested this rule's inclusion in the OECD Model. In 1966, the OECD asked for comments from delegates to identify problems that could arise from the application of the 1963 draft, and the United Kingdom responded that the concept of beneficial ownership would be applicable for the dividends, interests and royalties articles:

If a "subject to tax" test is not included in these Articles we think that the drafting is defective. The items of income which qualify for relief in the country of source are those which are paid to a resident of the other contracting State. In our view the relief provided for under these Articles ought to apply only if the beneficial owner of the income in question is resident in the other contracting State, for otherwise the Articles are open to abuse by taxpayers who are resident in third countries and who could, for instance, 28put their income into the hands of bare nominees who are resident in the other contracting State. You will no doubt have noticed that in our recent protocols with the United States and with Switzerland we have introduced this test of beneficial ownership which clearly reflects what was intended by the Committee when the Model Convention was prepared. 104

It is clear from the two above-cited excerpts that the United Kingdom was unsatisfied with the current drafting of treaties and sought something extra that would counter certain specific unwanted situations, namely the deliberate interposition of nominees in order to obtain treaty benefits.

Working Party 27 responded to the United Kingdom, stating that determining the true recipient was merely an administrative issue and that:

If it is the desire of the United Kingdom Delegation to make relief in the country of source dependent on effective liability to tax in the recipient's country of residence, then the suggestion would be contrary to the spirit and the general arrangement of the Draft Convention. On the other hand, it is evident that relief in the country of source applies only if the recipient is actually resident in the...