Beneficial Owners and Taxation

The primary focus for resolving tax disputes for assesse with multi-jurisdictional presence is going to be the beneficial ownership and economic nexus.

Generally, the tax relief w.r.t. interest, dividend, capital gain, royalties and fee for technical services in the source country, can be claimed by the ‘beneficial owner’. Who is the beneficial owner? How is the beneficial owner distinguished from the legal owner.

A legal owner is the person whose name appear on the legal documents of an asset as the owner. The person who is entitled to the economic benefits of the asset is the beneficial or economic owner. The legal owner and the economic owner can be two separate and distinct persons. If it is so, the legal owner holds the economic interest in the asset on trust for the beneficial owner. For example, in case of land, its beneficial owner will have a right to the income from the property and a right to the proceeds of sale of the property. The benefits arising from the asset are enjoyed by the beneficial owner. As a corollary, the beneficial owner takes decisions related with manner of use and how the returns from the property should be utilized. Though the legal and beneficial owner may be the same person. But this is a question of fact in each case.

In a recent case (Case no. 2C_364/2012, Federal Tax Administration v. X. _____ Bank (Judgment dated May 05, 2015)), Swiss Supreme Court observed that the power of disposal is classified as the key element of beneficial ownership. Applying is to the facts of that case the Court observed that the dividend recipient is then the effective beneficial owner if it may fully dispose over the dividend and enjoy the full benefits thereof, without this use being restricted by statutory or contractual obligations. The Court framed that rule that greater the interdependence between the income and the obligation to pass it on, the weaker the beneficial ownership.

Such rulings are likely to become global trend where emphasis is put on substance over form to prevent treaty abuse and to implement OECD’s Base Erosion and Profit Shifting (BEPS) guidelines. India has committed to implement BEPS and its General Anti Avoidance Rules (GAAR) are going to be implemented from the financial year 2017-18. In view of this, it is critical to have business structures and relationships which are at arm’s length with commercial substance and are not likely to be characterized as abuse of domestic taxation provisions.

Yogesh Kumar

Yogesh_ub@hotmail.com