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
Pasquale.pistone@wu.ac.at

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
 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
Pasquale.pistone@wu.ac.at
p.pistone@ibfd.org
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

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