For purposes of the French-Italian double tax treaty, Italy’s Supreme Court has rendered an important decision re: holding companies and the level of substance required to determine beneficial ownership. This decision is fact specific, although is significant as it applies to pure holding companies and the subjective interpretations of beneficial ownership that are being applied globally.
The Supreme Court held that the status of beneficial owner is ultimately to be determined, as a matter of fact, based on the particular nature of the recipient holding company and the functions typically performed in its operations.
For a pure holding company, a level of organizational structure able to carry out an activity of mere coordination and control over the subsidiary, attend the shareholders’ meetings and collect dividends, should be deemed as adequate. The analysis should instead be based on the actual capability of retaining the dividends received as opposed to having the obligation to repay them to another entity.
In particular, the Supreme Court did not find any merit to the proposition that the French company should be regarded asa conduit, concluding that a holding company that does not have the same organizational structure (premises, personnel, etc.) as an operating company does not necessarily mean that it would be regarded as not being the beneficial owner of dividends.
This case is very interesting as it does not rely on the regular substance of a regular operating company, and thoughtfully distinguishes the legal rights of a holding company to receive and hold dividends without an intertwined obligation to distribute such monies as one may find in a tax-driven conduit structure.
EY’s Global Tax Alert, provided for reference, is an interesting and refreshing insight into this subjective issue that merits no consistency on a global basis.
Russia has introduced legislation defining a “beneficial owner” and the introduction of CFC rules, expected to be effective 1/1/2015. PwC has provided a summary of the changes, referenced herein.
Treaty benefits will not apply if the foreign person has limited powers to dispose of the income or fulfill intermediary functions and do not perform any other duties or undertake any risks, or the income is subsequently transferred to another person who would not be entitled to treaty benefits if they had directly received the income.
Foreign corporations, trusts, partnerships and funds which hold property subject to Russian property tax are required to notify the Russian tax authorities of their shareholders and founders, beneficiaries and managers. A 100% penalty tax may apply for noncompliance.
A legal entity may now be a Russian tax resident based on its place of management.
Russian tax individuals and legal entities must pay Russian tax on a CFC’s retained earnings if the CFC has not paid a dividend, subject to thresholds. No penalty is applicable for 2015-2107.
Persons with Russian property and legal interests should review this important legislation to understand the new reporting rules and regime for CFC’s and beneficial ownership. The law follows the intent of the OECD’s BEPS provisions to prevent tax avoidance via tax havens and low-tax jurisdictions.
The G20 has provided a set of guiding principles re: definition of “beneficial owner” in its efforts to improve transparency and address abuse. A link to the principles is provided:
The principles are a proactive effort by the G20 to identify the ultimate ownership / control of legal entities, provide such information in a mechanism that allows sharing by tax authorities and competent authorities, as well as assessing risk of legal structures and designing actions to fight abuse.
The principles should be compared to the new definition and guidance re: “beneficial owner” provided for the update to the 2014 OECD Model Convention (refer to 22 July 2014 post), which conveyed that the term should be understood in its context and in light of the object and purposes of the Convention including avoiding double taxation and prevention of fiscal evasion and avoidance.
The focus on “Beneficial Ownership” is increasing, thereby increased diligence re: documentation to address transparency and benefits of current legal structures should be a top priority for MNE’s.
The 2014 Update, as adopted by the OECD Council on 15 July 2014, includes changes that were previously released for comments, including the meaning of “beneficial owner.” Numerous additions and deletions to Commentaries on various Articles, including positions of non-member countries, are also included. A link to the Update is provided for reference:
Article 5 Commentary: new views by Germany, Estonia, and Israel.
Article 9 Commentary: Hungary (newly added) and Slovenia reserve the right to specify that a correlative (i.e., offsetting) adjustment will be made only if they consider that the primary adjustment is satisfied.
The term “beneficial owner” does not have reference to any technical meaning under domestic law, thus it should not be used in a narrow technical sense, rather, it should be understood in its context and in light of the object and purposes of the Convention including avoiding double taxation and the prevention of fiscal evasion and avoidance.
The term “beneficial owner” does not deal with other cases of treaty shopping, which can be addressed in specific anti-abuse treaty provisions, general anti-abuse rules (GAAR), substance-over-form or economic substance approaches.
Article 13 Commentary: With respect to paragraph 3.1, Austria and Germany hold the view that when a new tax treaty enters into force, these countries cannot be deprived of the right to tax the capital appreciation which was generated in these countries before the date when the new treaty became applicable.
Article 26 Commentary: The Commentary was expanded to develop the interpretation of the standard of “foreseeable relevance” and the term “fishing expeditions,” i.e. speculative requests that have no apparent nexus to an open inquiry or investigation. The Commentary further provides for an optional default standard of time limits within which the information is required to be provided unless a different agreement has been made by the competent authorities. The examples provided are to demonstrate the overarching purpose of Article 26 not to restrict the scope of exchange of information but to allow information exchange “to the widest possible extent.”
The Update requires a comprehensive review to determine potential implications, including beneficial ownership restrictions and ways of working by competent authorities. Such review should distinguish changes to the Articles versus additions or deletions to the Commentary interpreting such Articles. Note that the OECD BEPS changes will be an addition to this Update.
A draft circular, released by the Ministry of Finance, introduces rules that would enable Vietnamese tax authorities to deny tax treaty benefits. A substance-over-form principle would be used for those transactions concluded solely to achieve a tax benefit (i.e. the main purpose of an agreement is to obtain treaty benefits) and for which the benefit is not received by the beneficial owner.
Beneficial ownership benefits may be challenged if the applicant:
Has the obligation to distribute more than 50% of the income to another entity,
Only has business activities consisting of asset ownership or the right to generate income,
Has an amount of assets, business scale or employees not commensurate with the income received,
Does not have control or power over the assets of has low risks for such assets or income,
Has a back-to-back arrangement for lending, royalties or technical services with a third party,
Is resident of a country which has no, or a low, income tax, or
Is an intermediary solely for the purpose of accessing treaty benefits.
The Circular is presently in draft form, although the concept of “Beneficial Ownership” should be reviewed in every legal structure to determine potential risks and consequences. This action in Vietnam is also mirrored by efforts of the OECD and other countries to restrict treaty benefits for certain activities. For example, the UK has recently released rules enabling public disclosure of beneficial owners having ultimate ownership of the respective entity (refer to 1 Nov. post).
Note that the proposed tests for beneficial ownership are primarily objective, thus holding company structures, and their respective Articles of Association, should be reviewed in preparation for revised rules of “Beneficial Ownership.”