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TAX MANAGEMENTINTERNATIONALFORUMComparative Tax Law for the International Practitioner>>>>>>>>>>>>>>>>>>>>>>>>>>>VOLUME 33, NUMBER 4 >>> DECEMBER 2012www.bna.comBENEFICIAL OWNERSHIPFactsH Co is a Host Country corporation all of the stock in which is owned by F Holdco, a CountryX corporation that serves as a holding company for a group of operating companies within themultinational group of which H Co and F Holdco are members. All of the stock in F Holdco isin turn owned by Parent, a Country Y corporation that is the ultimate parent company of thegroup. H Co manufactures and distributes widgets under sublicenses from FIPCo, a CountryQ subsidiary of Parent that licenses the relevant intellectual property from Parent, which ownssuch property. FIPCo oversees the registration of the intellectual property it licenses fromParent and manages efforts by outside lawyers and other third party contractors to ensurethat such property retains its legally protected status and that such status is enforced againstpotential infringers, but employs only three people to do so. Host Country does not have anydomestic legislation or income tax treaty with Country Y that provides relief from any HostCountry withholding tax on dividends, interest or royalties paid to residents of Country Y.H Co regularly pays dividends to F Holdco. F Holdco generally redistributes to Parentall of such dividends (less an amount to cover its modest administrative costs) within 90days of receiving them. Under its domestic legislation or income tax treaty with Country X,H Co imposes a substantially reduced withholding tax on dividends paid by Host Countrycorporations to corporate residents of Country X that own a substantial interest in the dividendpayingcorporation, but only if such residents are the benefi cial owners of the dividendsin question. Country X imposes a 10 percent rate of tax on dividends paid to Country Xcorporations by subsidiaries in which the recipient owns at least a 25 percent interest, and doesnot impose withholding tax on dividends paid by Country X corporations to foreign corporateshareholders that own at least an 80 percent interest in the dividend-paying corporation.H Co fi nances a substantial part of its capital needs through loans from F FinCo, a Country Zsubsidiary of Parent that fi nances the capital needs of many of the Parent group through thirdparty bank borrowings. Based on H Co’s needs, F FinCo borrows from third party banks,supported by H Co’s guarantee and pledges of H Co assets, and relends the funds to H Co onparallel terms at an interest rate that is 10 percent higher than the rate charged to F FinCo bythe relevant bank or bank syndicate (e.g., F FinCo would charge H Co. interest at 6.6 percentif the bank rate were 6.0 percent). F FinCo has a staff of experienced fi nancial personnel thatnegotiates third party fi nancing arrangements and performs risk management functions withrespect to the group’s fi nancial position. However, most of the Parent group’s capital needsare obtained through long-term (fi ve years or longer) loans, the currency risks with respect towhich are generally fully hedged up front. The Host Country income tax treaty with Country Zprovides for a 0 percent source country tax on interest paid to residents of the other country,but only if that resident is the benefi cial owner of the interest.Under its sublicense with FIPCo, H Co pays royalties equal to 11.0 percent of its sales (whichhave averaged approximately $100 million/year) to FIPCo. Under its license with Parent, FIPCopays Parent royalties equal to 10.0 percent of H Co’s sales, which royalties FIPCo is entitled todeduct in calculating its Country Q taxable income. Under its income tax treaty with Country Q,Host Country imposes no withholding tax on royalties paid to residents of Country Q, providedthat such residents are the benefi cial owners of such royalties. Country Q does not impose awithholding tax on royalties paid by FIPCo to Parent.The Questions may be found on page 4.

BeneficialOwnershipFACTSHCo is aHost Country corporation all of thestock in which is owned by F Holdco, aCountry Xcorporation that serves as aholdingcompany for a group of operating companieswithin the multinational group of which HCoand FHoldco are members. All of the stock in FHoldco is inturn owned by Parent, aCountry Ycorporation that isthe ultimate parent company of the group. H Comanufactures and distributes widgets under sublicensesfrom FIPCo, aCountry Qsubsidiary of Parentthat licenses the relevant intellectual property fromParent, which owns such property.FIPCo oversees theregistration of the intellectual property it licensesfrom Parent and manages efforts by outside lawyersand other third party contractors to ensure that suchproperty retains its legally protected status and thatsuch status is enforced against potential infringers,but employs only three people to do so. Host Countrydoes not have any domestic legislation or income taxtreaty with Country Ythat provides relief from anyHost Country withholding tax on dividends, interestor royalties paid to residents of Country Y.H Co regularly pays dividends to F Holdco. FHoldco generally redistributes to Parent all of suchdividends (less an amount to cover its modest administrativecosts) within 90 days of receiving them.Under its domestic legislation or income tax treatywith Country X, HCoimposes asubstantially reducedwithholding tax on dividends paid by Host Countrycorporations to corporate residents of Country Xthatown asubstantial interest in the dividend-paying corporation,but only if such residents are the beneficialowners of the dividends in question. Country Ximposesa10percent rate of tax on dividends paid toCountry Xcorporations by subsidiaries in which therecipient owns at least a25percent interest, and doesnot impose withholding tax on dividends paid byCountry Xcorporations to foreign corporate shareholdersthat own at least an 80 percent interest in thedividend-paying corporation.HCofinances asubstantial part of its capital needsthrough loans from FFinCo, aCountry Zsubsidiaryof Parent that finances the capital needs of many ofthe Parent group through third party bank borrowings.Based on HCo’s needs, FFinCo borrows fromthird party banks, supported by HCo’s guarantee andpledges of HCoassets, and relends the funds to HCoon parallel terms at an interest rate that is 10 percenthigher than the rate charged to FFinCo by the relevantbank or bank syndicate (e.g., FFinCo wouldcharge HCo. interest at 6.6 percent if the bank ratewere 6.0 percent). FFinCo has astaff ofexperiencedfinancial personnel that negotiates third party financingarrangements and performs risk managementfunctions with respect to the group’s financial position.However, most of the Parent group’s capitalneeds are obtained through long-term (five years orlonger) loans, the currency risks with respect to whichare generally fully hedged up front. The Host Countryincome tax treaty with Country Zprovides for a0percentsource country tax on interest paid to residents ofthe other country, but only if that resident is the beneficialowner of the interest.Under its sublicense with FIPCo, HCopays royaltiesequal to 11.0 percent of its sales (which have averagedapproximately $100 million/year) to FIPCo.Under its license with Parent, FIPCo pays Parent royaltiesequal to 10.0 percent of HCo’s sales, which royaltiesFIPCo is entitled to deduct in calculating itsCountry Q taxable income. Under its income taxtreaty with Country Q, Host Country imposes no withholdingtax on royalties paid to residents of CountryQ, provided that such residents are the beneficialowners of such royalties. Country Qdoes not imposea withholding tax on royalties paid by FIPCo toParent.QUESTIONSHCo’smanagement is interested in the answers to thefollowing questions:1. Under Host Country law and/or Host Country interpretationof the Host Country-Country X Treaty,would FHoldco be considered the beneficial ownerof the dividends paid by HCo? Assume for purposesof the answer that FHoldco qualifies as aresidentof Country Xunder the relevant law or treaty provisionand that it satisfies the requirements of a‘‘qualified resident’’ (or equivalent designation)under any residence and limitation on benefits articlesin the Host Country-Country XTreaty.2. Under Host Country law and Host Country interpretationof the Host Country-Country Z Treaty,would FFinco be considered the beneficial ownerof the interest paid by HCo? Assume for purposesof the answer that FFinco qualifies as aresident ofCountry Zunder and satisfies the requirements of a‘‘qualified resident’’ (or equivalent designation)under limitation on benefits articles in the HostCountry-Country ZTreaty.3. Under Host Country law and/or Host Country interpretationof the Host Country-Country Q Treaty,would FIPCo be considered the beneficial owner ofthe royalties paid by HCo? Assume for purposes ofthe answer that FIPCo qualifies as a resident ofCountry Qunder the relevant law or treaty provisionand that it satisfies the requirements of a‘‘qualified resident’’ (or equivalent designation)under any residence and limitation on benefits articlesof the Host Country-Country QTreaty.4 12/12 Copyright 2012 by The Bureau of National Affairs, Inc. TM FORUM ISSN 0143-7941

DateSignature of the beneficiary/recipient of the income,or in the case of acompany, its legal representative.e) Certification of the competent authority of ....Idohereby certify that the beneficiary/recipient ofthe aforementioned income is aresident in ......asregards the agreement for the avoidance of doubletaxation between the Argentina Republic and. .....Likewise, as regards the above subsection, this competentauthority ratifies/denies/cannot verify the statementof the beneficiary/recipient to the effect he/she/the company does not have a permanentestablishment or fixed base in the Argentine Republic.DateSeal of the TaxOfficeThe Argentine tax authorities thus require not onlyacertificate evidencing that the taxpayer is aresidentunder the laws of the treaty partner country for taxpurposes, but also other information that might beconsidered to go beyond what is strictly required forpurposes of applying the treaty. For example, the taxpayeris required to state that it does not have apermanentestablishment (PE) in Argentina, while whatactually matters is that there should be no PE withwhich the item of income with respect to which thecertificate is granted is effectively connected (Argentinadoes not employ aforce of attraction principle inapplying its tax treaties). Furthermore, the fact thatthe resident of the treaty partner country has to indicatethe appropriate characterisation of the relevantincome under the treaty and that this is one of thematters to be covered by the foreign tax authorities’certification means that the foreign authorities areimplicitly required to review that characterisation. Ittherefore seems reasonable to suggest that, in askingthem to certify the information included in the taxpayer’sswornstatement, the Argentine tax authoritiesare, in some sense, relying on the treaty partner country’stax authorities’ analysis of whether the requirementsfor applying the treaty are met. 1 It should alsobe noted that paragraph a) of the sample certificate requiresthe ‘‘Beneficiary/Recipient’’ to be stated andthat the signature section requires the ‘‘signature ofthe beneficiary,’’ which might lead to the further conclusionthat, in completing these parts of the certificate,some analysis was made of the nature of thetreaty partner country resident.While the receipt of acomplete sworn statementmight be considered to constitute clear evidence ofentitlement to treaty benefits, some doubt arises inthose circumstances in which the certificate providedby the party claiming treaty benefits is less complete.While the administrative precedent of the tax authoritieshas been uncompromising in this context, 2 the judicialcourts have relaxed the strict application of therequirements and have given priority to the substanceof the matter when the taxpayer is able to prove insome other way that it is atax resident of the treatypartner country. 3B. General anti-avoidance rule and its impact ontreaty application —administrative case lawArgentina’s general anti-avoidance rule (GAAR) iscontained in Article 2ofthe Federal TaxProceduralLaw: 4In order to ascertain the actual nature of ataxableevent, the acts, situations and economic relations effectivelycarried out, pursued or established by taxpayersmust be taken into account. When taxpayersapply those acts, situations and economic relations toforms or legal structures that evidently are not thosethat are offered or authorized by private law for carryingout the actual economic and effective purpose ofthe taxpayers, in order to determine the tax treatment,inadequate forms or legal structures will be disregardedand the actual economic situation as framedunder the forms or legal structures that the privatelaw would apply will be applied, without taking intoaccount the forms chosen by the taxpayers or theforms the private law would allow the taxpayers toapply as the most suitable to their real intention.It will be clear from the above that the GAAR entailsthe possibility of disregarding the legal form or structurethat was adopted in aparticular transaction, butonly where the chosen legal form or structure is evidentlyinappropriate. One of the enduring tendenciesof the Argentine tax authorities is the overuse (evenabuse) of the economic reality principle in an attemptto give an economic interpretation to aparticular situationby disregarding the legal structure chosen by thetaxpayer from those available. However, itisnot onlythe use of inappropriate legal structures that isagainst the rule of law, but also the abusive applicationof the GAAR to prevent taxpayers using valid legalstructures that entail areduced tax burden.In contrast to the position in OECD member countries,where the international transactions amongthose countries have given rise to an important bodyof material relating to the interpretation and applicationof tax treaties, there are only afew Argentinecases dealing with tax treaty issues. Though the currentcase concerns inbound investment, there is an interestingcase on outbound investment where thepoint at issue was the application of the Argentina–Austria tax treaty (when it was still in force andeffect). 5In an earlier Forum issue, 6 this author described aninteresting application of the economic reality principle,which was analysed in acompetent authorityruling of January 1, 2009. The ruling reviewed the applicationof the provisions of the then effectiveArgentina–Austria tax treaty in the case of an Argentinetaxpayer that held amajor participation in anAustrian company that, in turn, wholly-owned aBritishVirgin Islands (BVI) company.Unlike other Argentinetax treaties, the Argentina–Austria treatyprovided taxpayers with anumber of benefits in termsof the restrictions it imposed on Argentina’s taxingrights:The tax authorities made atax assessment and, becausetax treaty issues were involved, the proceedingswere turned over to the Argentine competent authority(which is adifferent government agency from thetax authorities) for its opinion and the National Directorateof Taxes issued Memorandum 64/09. The underlyingissue was whether the Austrian company wasinterposed in order to avoid the application of the Argentinecontrolled foreign company (CFC) rules,6 12/12 Copyright 2012 by The Bureau of National Affairs, Inc. TM FORUM ISSN 0143-7941

which otherwise would have had the effect that thepassive income derived by the BVI company wouldhave been subject to tax in the hands of the Argentinecompany,irrespective of whether that income was distributed.As quoted in Memorandum 64/2009, the view of thelegal department of the tax authorities was that:There is no other reason worth considering, apartfrom the obtaining of the tax advantages of the taxtreaty, for the interposition of the Austrian company....once the necessary elements are gathered toqualify the Austrian company, according to economicreality,asaconduit entity,itseems feasible to deny thetax treaty benefits....regarding the possibility of framing the maneuvercarried out by the taxpayer as treaty abuse, itshould be noticed that as, in theory, there is no antiabuseregulation allowing the prevention of such taxartifice, it is extremely important that the concernedauthority should evaluate the incorporation of suitableregulations for this case....acontrariosensu,performing acunning tax planningactivity consisting of interposing entities withdirect or indirect privileged regimes would certainlyfavor the intention of damaging the national taxregime. Therefore, it would be advisable to promotethe introduction of amendments to the regulatorysystem to contemplate similar situations to the onesdiscussed herein....The result would be prima facie that the taxpayerimproperly used the Double Taxation Agreement tendingto distort the economic reality of the facts, withthe intention of causing atax damage, using it as aneffective means to organize business, administer themanagement of assets and carry out transactions inplaces where the sovereign taxing power of Argentinamay not intervene.After analysing the case, the National Directorate ofTaxes concluded that it shared the opinion of the taxauthorities and that the treaty benefits should not begranted because the Austrian company had the characteristicsof acompany that had been interposed inorder to allow the tax treaty benefits to be enjoyed.The National Directorate of Taxes based its conclusionmainly on the following considerations:s the sub-committee on inappropriate use of treatiesof the committee of experts on international cooperationin tax-related matters of the United Nationshas prepared adraft comment on Article 1oftheU.N. Model Convention, which, though it expressessome doubts regarding the application of domesticgeneral anti-avoidance measures (as opposed tospecific anti-avoidance measures) that might be inconflict with the provisions of tax treaties, nonethelessshows that there is aconsensus in the Committeeto the effect that, if the application of suchgeneral anti-avoidance measures is limited to casesof abuse, no such conflict should arise;s general anti-avoidance rules providing that substanceprevails over form and the rule of the economicreality are not considered by the OECD to bein conflict with the provisions of tax treaties whenthere is an abusive use of the treaty concerned, i.e.,when one of the main purposes of atransaction isto secure amore favorable tax position; ands in the case under analysis, it appeared from theavailable evidence that there was no other motivationfor the structure apart from tax avoidance.The ruling does not, however, provide clear and concretearguments in support of the application of alegal rule that is sufficient to allow the existence of theAustrian company to be challenged, and thus theavailability of treaty benefits, not to be recognized.The fact that this is an administrativeruling and therehave been no court cases in which all the proofs andarguments were discussed points up the limitations ofthe analysis. There is something of acontradiction between,on the one hand, the position of the tax authoritiesthat it is advisable to provide alegal rule toprevent this type of arrangement because otherwisethere is no rule to counteract it and, on the other hand,the conclusion that a general anti-avoidance ruleshould be sufficient for the existence of the Austriancompany to be challenged, without even areview ofhow the legal rule would actually work. Nor does adraft Comment of the Committee of Experts on Article1ofthe UN Model Convention appear to be avalidlegal tool for interpretation purposes. As discussedabove, the risk of infringing the legality principle issomething that needs to be borne in mind when theeconomic reality principle is used to deny the applicabilityof a particular legal structure. The analysisshould be even more rigorous when atax treaty is involved.It would seem that the arguments debated andthe conclusions drawn in this administrative proceedingare just aprelude to the full exploration of acomplicatedmatter such as treaty abuse and itsinteraction with the constitutional right to carry onbusiness in away that is not prohibited by law.Recently, the Argentine tax authorities have begunto look into certain situations in which Spanish companiesare the shareholders of Argentine companies.Argentina has anet wealth tax that obliges an Argentinecompany with shares held by anonresident to payatax equal to 0.5 percent of the value of those shares.The payment has to be made by the Argentine companyas substitute obligor and the Argentine companyis then legally permitted to request arepayment fromthe nonresident shareholder.The tax is payable on thebasis of apresumption that behind the nonresidentcorporate shareholder there lies an individual forwhom the tax has to be paid. The issue is that theArgentina–Spain tax treaty does not grant Argentinathe right to levy net wealth/net worth taxes on sharesin an Argentine company held by aSpanish resident.On June 29, 2012, Argentina gave notice of its intentionto terminate the treaty and the treaty will cease tobe effective, generally, onJanuary 1, 2013. The reasonfor the termination is the benefit granted to Spanishshareholders in that, under the treaty,such shareholdersare not subject to Argentine net wealth tax. The Argentinetax authorities are now reviewing anumber ofsituations to determine whether the Spanish shareholdersconcerned were actually entitled to treatybenefits. Since Spain has an attractive holding companyregime, the authorities’ examination wouldmainly be focused on Spanish holding companies.II. Application of the Argentine approachIt should be emphasised that the lack of guidelinesunder Argentine law and case law on the subject of taxtreaty interpretation makes it difficult to provide definitiveanswers to the questions posed in relation tothe given fact pattern. In the absence of such guidanceand case law, the particular situations envisaged andthe rules that do exist would have to be carefully considered.The following sections give some idea of thegeneral interpretation approaches that might come12/12 TaxManagement International Forum BNA ISSN 0143-7941 7

into play if the beneficial owner status of the relevantincome recipient were to be challenged in the scenariosenvisaged.A. Dividends paid by HCo to FHoldCoAs to the question of whether HCo would be able toapply the tax treaty between Argentina and Country Xgiven the beneficial owner requirement, the first (positive)answer would probably lie in the tax residencecertificate, which, as explained in I.A., above, requiresthe issuer to include astatement to the effect that therecipient of the income concerned is the beneficiary ofthat income. The requirement that the tax authoritiesof the residence country certify the statements madeby the taxpayer in the certificate is initial evidence ofthe taxpayer’s entitlement to treaty benefits. ThatFHoldCo is acompany that not only has the status ofatax resident of Country Xbut also full legal disposalof the dividends is also an important argument forFHoldCo being deemed the beneficial owner of thedividends for treaty purposes. The fact that the shareholdersof FHoldCo then decide to distribute (or notto distribute) the after-tax profits of FHoldCo as dividendsdoes not mean that FHoldCo is not the beneficialowner of the dividends it receives from HCo. Thisdecision is taken independently of FHoldCo, since it ismade by third parties, i.e., the shareholders ofFHoldCo, who must make adecision on what to dowith the after tax profits. Nor is the fact that the dividendsreceived by FHoldCo are subject to tax adefinitiverequirement for FHoldCo’sbeing considered theirbeneficial owner —this may be acondition in tax treatiesthat employ the ‘‘subject to tax approach,’’but it isnot a condition in the case of Argentina’s treaties.There are many other factors (commercial considerations,political environment, governmental restrictions,etc.) that determine why the business of acorporate group may be structured in various ways inanumber of countries and these may also constitutevalid business reasons that may be of assistance inmeeting abeneficial owner challenge.B. Interest paid by HCo to FFinCoThe situation with regard to the application of theArgentina–Country Z tax treaty with respect toFFinCo is in some ways rather different from the situationwith regard to the application of the relevanttreaties with respect to FHoldCo and FIPCo (see II.A.,above and II.C., below,respectively). On the one hand,FFinCo has astaff ofexperienced financial personnelthat negotiates third-party financing arrangementsand performs risk management functions with respectto the group’sfinancial position, which might bedeemed sufficient justification for the existence ofFFinCo in the financing of the group and its status asthe beneficial owner of the interest paid to it by HCo.On the other hand, HCo has granted guarantees andpledged its own assets to the third-party banks withrespect to the loans obtained from the banks byFFinCo and not with respect to its own financing withFFinCo, which might be considered an argument fordenying FFinCo beneficial owner status. There arethus ‘‘pro’’ and ‘‘con’’ arguments that would have to bethoroughly reviewed and supplemented with otherspecific data that might be applicable in any particularcase.C. Royalties paid by HCo to FIPCoArrangements like that under which Parent (theowner of the intangibles concerned) licenses therights to the intangibles to FIPCo, which in turn sublicensesthem to HCo are normal legal structures usedby companies wishing to separate the exploitation ofintangibles from their legal ownership. In the caseunder consideration, the fact that there is no automaticpass-through of the royalties in athree-way relationship(i.e., FIPCo is the only legal party withcontrol over the royalties received and the power todecide whether or not aroyalty will be actually paid toParent), that FIPCo derives again from this businessand that that there are personnel of FIPCo who dealwith the monitoring of the intangibles may well besolid grounds for maintaining that FIPCo is indeedthe beneficial owner of the royalties.NOTES1 Alejandro E. Messineo, ‘‘The viability of Treaty Shoppingwith Respect to Host Country,’’ Tax Management InternationalForum, Vol. 29, No. 9, Sept. 2008, BBNAInternational.2 See, e.g., ruling 81//1995 of July 27, 1995.3 Aerolíneas Argentinas, Federal TaxCourt, May 12, 2004.4 Law 11,683 as atended.5 The 1979 Argentina–Austria tax treaty was terminatedwith effect from Jan. 1, 2009.6 Alejandro E. Messineo, ‘‘Host Country Taxation of Tax-Motivated Transactions: the Economic Substance Doctrine,’’Tax Management International Forum, Vol. 31,No. 2, June 2010, BBNA International.8 12/12 Copyright 2012 by The Bureau of National Affairs, Inc. TM FORUM ISSN 0143-7941

Host CountryBELGIUMHoward Liebman and Marilyn JonckheereJones Day, BrusselsIntroductionFor aterm that is supposed to play such an importantrole in the allocation of treaty benefitsand that is used in so many bilateral tax treaties,there is remarkably little jurisprudence on themeaning to be given to ‘‘beneficial ownership’’ underinternational tax law. 1 Indeed, even though Belgiumincludes the concept in many of its tax treaties, adefinitionor even acomprehensive clarification is stillmissing. When faced with the need to interpret theterm in aspecific context, Belgium typically seems toopt for astrict (one might even say, hyper-formalistic)legal approach to interpreting beneficial ownership,in contrast to an economic (or substantive) approach.Following from the latter and as further discussedbelow,itmight be concluded that Belgium does not —at least at present —seem to consider tax treaty abuseto be one of the primary concerns in its developmentof international tax policy. M.Bourgeois and E. Traversaconfirm this by stating that:Belgian authorities seem indeed to put more emphasison the development of their tax treaty network,i.e. even by concluding conventions with low-tax jurisdictions,in order to attract foreign investments and toencourage businesses to structure their internationalactivities so as to use Belgium as abase or aconduitcountry. 2I. Belgian approach to Beneficial OwnershipA. Formalistic approach to Beneficial OwnershipAs most of Belgium’s tax treaties follow the OECDModel Convention, 3 the concept of ‘‘beneficial owner’’appears in many if not most of the tax treaties enteredinto by Belgium after 1977, as well as in Belgium’sown Draft Model Convention of June 2007. 4 However,no clear-cut definition or explanation of the expressionhas yet to be provided by the Belgian tax authorities.Nor does domestic case law answer many of thecritical questions surrounding the concept.Because Belgium lacks any legal definition of beneficialownership as well as definitive regulatory clarificationby the TaxAdministration, the interpretationof the term remains unclear. Consequently, both asubstantive and aformalistic interpretation remainpossible. However, most Belgian scholars share theview that aformalistic legal interpretation is to be appliedto the expression, at least for the time being. Asthe concept of beneficial ownership has no meaningin Belgian private law, commentators tend to applythe classical interpretation of the concept of ‘‘legalownership’’ ofproperty under the Belgian Civil Code.They thereby conclude that the beneficial owner ofincome is the person holding title or another right inrem to property, allowing that person to claim the receiptof the income produced by that property on thebasis of such title. 5 Thus, one of the foremost Belgianauthorities, Professor Luc Hinnekens —after referringto those Belgian authors who have concludedthat the notion of beneficial ownership generally excludesconduit companies from treaty benefits —hasstated:We disagree with such economic interpretation ofthe concept and believe that it is rightfully not sharedby the Belgian Administration. The OECD commentarieson this concept only refer to the case of anomineeor agent, i.e. aperson who is not the beneficiary ofthe income in atrue legal sense. 6Moreover, even the Belgian Administrative Commentaryon Double TaxTreaties, as well as Article 117,§6bis of the Royal Decree implementing the BelgianIncome TaxCode 1992 (RD/BITC), shares this point ofview by defining the beneficial owner as ‘‘the owner orusufructholder of the shares, securities, assets andrights,’’ 7 thereby focusing more on the legal dimensionof pure ownership of title rather than adoptingthe broader economic or substantive (substance-overform)interpretation that tends to characterise theview of Common Law tax authorities. In addition, thisformal approach has been confirmed by Belgian caselaw, which has held that aperson or company canonly be arecipient of income if aright in rem (ownershipor usufruct) exists with respect to the assetsgiving rise to the income. 8Some Belgian scholars, such as Professor Luc DeBroe, feel that this approach, as generally adopted bythe Belgian Government, facilitates treaty abuse andis therefore not in accordance with the object and purposeof the concept of ‘‘beneficial ownership.’’ ProfessorDe Broe, for example, argues that Belgian Courtsshould ‘‘find the autonomous treaty meaning of theterm and not construe it in accordance with Belgian12/12 TaxManagement International Forum BNA ISSN 0143-7941 912/12 TaxManagement International Forum BNA ISSN 0143-7941 9

domestic law.’’ 9 But until they do so on aregular basis,then regardless of whether it makes for good publicpolicy, one can still state that, under Belgian tax law,legal form prevails over what can be viewed as the economicsubstance of a transaction. Indeed, leavingaside some very recent legislative changes to be discussedbelow and still to be fleshed out, BelgianCourts are not even allowed or supposed to give priorityto or take into account an economic or substantivereality that might be different from the legal form ofthe contracts entered into by the parties, unless thesecontracts are asham and they, ortheir consequences,are not adhered to. 10As aresult of this formalistic approach to the conceptof beneficial ownership, withholding tax exemptionsor reductions provided for in tax treaties aregranted to conduit companies rather more easily andreadily by Belgium than one might expect to see elsewhere.B. Taxtreaties and tax avoidance in Belgium1. The taxpayer’s freedom to choose the ‘‘leasttaxed route’’Until very recently, one of the cornerstones of Belgiantax law was the concept enunciated back in 1961, in aseminal decision of the Belgian Supreme Court in theBrepols case, that taxpayers have the right to structuretheir affairs in ‘‘the least taxed way’’ possible: 11There is no sham, or, therefore, tax fraud, where, inorder to enjoy amore favorable tax treatment, andusing the freedom to contract, without however violatingany legal obligation, the parties enter into actsof which they accept all the consequences, even if theform they give thereto is not the most usual one. 12With this statement, the Court affirmed the principlethat there is no ‘‘simulation,’’ and hence no taxfraud, when taxpayers exercise their freedom to conducttheir affairs in such fashion as to benefit from amore favourable tax regime, as long as they accept allthe legal consequences that arise as aresult. 13 In 1990,the Belgian Supreme Court, in the Vieux Saint Martincase, not only confirmed this principle, but broadenedits scope by stating that alegal construction would beupheld even if it appeared from the facts that the legalform had been chosen by the parties for the sole purposeof avoiding tax. 14After many, many years, and many, often fruitless,attempts by the tax authorities to challenge certainconstructions in the courts, the absence of ageneralanti-abuse rule (GAAR) in the law finally promptedlegislators to adopt one in July 1993, namely Article344, §1of the BITC, which is discussed in the followingsection.2. Compatibility of the GAAR with tax treatiesArticle 344, §1of the BITC provides as follows:The legal characterisation given by the parties to anact or to separate acts which together realise the sameoperation may not be opposed to the tax authoritieswhen those authorities determine, by presumptionsor other proof, that this characterisation aims atavoiding taxes, unless the taxpayer proves that thischaracterisation is justified by legitimate needs of afinancialor economic nature. 15Effectively, this general anti-abuse provision meansthat the formalistic legal characterisation of atransactionwill not be binding on the tax authorities if itspurpose is to ‘‘avoid’’ tax. The rule does not apply,however, when the taxpayer can prove that the transactionconcerned is justified by ‘‘legitimate financialor economic’’ reasons. As this provision may alsoapply to cross-border transactions, 16 it can also beused by the tax authorities in situations in which taxpayersenter into genuine transactions, but with aspecificlegal characterisation that avoids or minimisestaxation in connection with the application of one ormore tax treaty provisions.Both the tax authorities and the taxpayer must supporttheir own respective burdens of proof under theGAAR. As ageneral matter,the tax authorities have, ofcourse, the burden of going forward with the file andbasically take the view that they have met their burdenof proof that there has been aviolation of the GAARwhenever two or more legal routes are available toreach acertain economic objective and the taxpayerhas chosen the most tax-efficient one without givingany apparent economic justification for it. The taxpayermust then meet its burden of proof that it hasnot violated the GAAR by showing that the transactionis justified by legitimate economic or financialneeds, even if tax-motivated. 17Despite the extra armament of this anti-abuse provision,as it has —inpractice —been interpretedrather restrictively by Belgian Courts, 18 it is still rarefor it to be successfully applied. Nevertheless, even ifits successful application remains the exceptionrather than the rule, it does have an in terrorem effectand can never be overlooked by taxpayers and theiradvisors. For example, a recent judgment by onelower court stated that the existence of sound businessneeds (other than tax planning motives) is decisivein determining whether an interposed holdingcompany can be disregarded by the application of Article344, §1 of the BITC. 19 As one commentatoradded, although not explicitly stated in the judgment,it appears that the Brussels Tribunal’s view was thatthe GAAR could in fact be invoked in connection withthe interposition of an intermediary company forwithholding tax planning purposes. 20This rather unsuccessful trend in the jurisprudencemight very well be subject to change in the nearfuture, as the legislator amended the text of Article344, §1 of the BITC earlier this year. 21 Indeed, theamendment had the express purpose of making theGAAR more effective and easier for the tax authoritiesto apply.Now,actions taken or legal characterisationsadopted by ataxpayer may not be utilized in supportof the taxpayer’s position vis-à-vis the authorities ifsuch actions constitute ‘‘tax abuse.’’ The amended Article344 makes it clear that ‘‘tax abuse’’includes thoseinstances in which: the taxpayer (1) places itself outsidethe scope of aprovision in the BITC; or (2) claimsatax benefit provided for in the BITC in acircumstancethat runs contrary to the objectives of the law.In other words, ataxpayer’s choice of the ‘‘least taxedroute’’can now,inand of itself, constitute ‘‘tax abuse,’’although the tax authorities must still prove that the10 12/12 Copyright 2012 by The Bureau of National Affairs, Inc. 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legal characterisation adopted by the taxpayer meetsthe definition of ‘‘tax abuse.’’Thereafter,ofcourse, thetaxpayer can still counter such an assertion by showingthat the legal characterisation is justified by legitimateneeds other than tax avoidance. In sum, actscarried out by the taxpayer solely for the purpose ofenjoying tax benefits, or with limited non-tax drivenmotives, can fall under the definition of ‘‘tax abuse’’referredto above.Although how these recent changes will be appliedin practice has yet to be determined, this new GAARshould have important implications for tax planningin the future. The amended Article 344, §1 of theBITC becomes effective as of 2013, and is also applicablewith regard to acts performed during the taxyear concluded as from the date of publication of thelaw in the Belgian Official Gazette (April 6, 2012).The position of the Belgian tax authorities as regardsthe relationship between domestic anti-abusemeasures and tax treaties is relatively straightforward.In their official Commentary on Belgium’s taxtreaties, they have emphasised that no provision of atax treaty restricts the rights of Belgium to apply itsdomestic anti-avoidance provisions. 22 Belgiumthereby, ineffect, equates or conflates treaty abusewith an abuse of domestic law. 23 However, given thefact that Article 344, §1of the BITC has so far rarelybeen successfully applied, its compatibility with taxtreaty provisions has not yet been the subject of anychallenge. Obviously, this state of affairs may changein view of the amendments made to Article 344 of theBITC discussed above.Last but not least, it should be noted that Belgiumdoes not include any explicit general anti-abuse provisionsin its tax treaties, although Belgium’s DraftModel Convention does contain such aprovision forcases in which ‘‘the main purpose or one of the mainpurposes of aresident or aperson connected withsuch resident was to obtain the benefits of the Convention.’’24 It is yet to be determined whether this provisionwill remain in place if and when the ModelConvention is finalised 25 but, as it does to an extenttrack the latest revisions to Article 344 §1of the BITC,it is likely to be used in treaty negotiations in activepractice.II. Application of Belgian rulesA. Dividends paid by HCo to FHoldCoBy adopting aRoyal Decree in 2006 26 implementingthe EC Parent-Subsidiary TaxDirective, 27 Belgium extendedthe application of its domestic withholding taxexemption: (1) to companies resident in adifferent EUMember State; and (2) even to companies resident innon-EU States (such as the United States and Japan)that have concluded atax treaty with Belgium containingan exchange of information clause sufficientto allow for the execution of the domestic tax laws ofboth States. This new, broad, 0percent withholdingtax regime entered into effect for dividends distributedor made available for payment as from January1, 2007. 28 In order for companies to benefit from thiscomplex withholding tax exemption, certain additionalcriteria must be met. These requirements arelisted below, set out in the format to be applied to thecase at hand, namely with respect to the dividendspaid by HCo to FHoldCo:s the dividends must relate to aparticipation of atleast 10 percent in the capital of the Belgian distributingcompany, with regard to dividends distributedor made available for payment as of January 1,2009 (the threshold was 15 percent from January 1,2007 until January 1, 2009). Since all of the stock ofHCo is owned by FHoldCo, this requirement is met.s the minimum participation referred to in the previousbullet point must be held for aperiod of at least12 months, without interruption. Presumably,FHoldCo’sparticipation in HCo has been held for atleast 12 months, although this is not explicitly mentionedin the fact pattern;s the Belgian distributing company, HCo, must haveone of the corporate legal forms listed in the Annexto the EC Parent-Subsidiary TaxDirective. The beneficiarycompany, FHoldCo, if resident in an EUMember State, must also take one of those legalforms. If, instead, FHoldCo is anon-EU MemberState company, but is nevertheless resident in aState with which Belgium has concluded aqualifyingtax treaty, itwill suffice that it has alegal form‘‘similar to’’ one of those listed in that Annex. Thiswould, for example, be the case if FHoldCo were an‘‘Inc.’’ resident in one of the states of the UnitedStates of America; 29s HCo and FHoldCo must have their fiscal residencein, respectively, Belgium and Country X;s HCo must be subject to Belgian corporate incometax, while FHoldCo must be subject to corporateincome tax or asimilar tax in Country Xand maynot benefit from aspecial tax regime. 30Under the EC Parent-Subsidiary TaxDirective, it isnot required that FHoldCo be the beneficial owner ofthe dividends distributed. Whereas some EU MemberStates, such as Spain and France, opted to add such acondition in their domestic legislation, the Belgianlegislator did not. Hence, Belgium cannot refuse thebenefit of the exemption from dividend withholdingtax to conduit or intermediate companies, except incases of fraud or where it can apply (successfully) itsdomestic GAAR provision. 31All that being said, the option to rely on the Belgiandomestic withholding tax exemption might notalways be available. Assuming that the tax treaty betweenBelgium and non-EU Country Xdoes not includea(qualified) exchange of information clause, thetransactions between HCo and FHoldCo will not fallwithin the scope of the dividend withholding tax exemption.In that case, the question of whetherFHoldCo qualifies as the beneficial owner of the dividendspaid by HCo may in fact prove to be of more relevance.However, ifone takes into account the factthat FHoldCo does not act as amere nominee, agentor fiduciary for the receipt of funds (but instead servesas aholding company for agroup of operating companieswithin amultinational group), combined with the‘‘legal reality’’ approach of Belgian tax law discussedabove, it is fair to conclude that, on balance, FHoldCowill most likely be considered the beneficial owner ofthe dividends paid by HCo for these purposes. And ofcourse, if there is no tax treaty in force and effect inthe specific circumstances, then the issue will be of no12/12 TaxManagement International Forum BNA ISSN 0143-7941 11

elevance, as full Belgian withholding tax will apply,regardless of who is the beneficial owner of the dividends.Indeed, in his reply to aParliamentary Question,the former Belgian Minister of Finance (Mr. D.Reynders) confirmed the point of view set out above. 32Specifically, the former Minister was asked severalquestions regarding the tax treaty concluded betweenBelgium and Hong Kong in 2003. Given the fact thatthe Belgium–Hong Kong tax treaty is consideredhighly beneficial for taxpayers and includes no antiabuseprovisions, several Parliamentarians expressedtheir concern that it might open the door to treatyshopping. In addition, clarification was requested asto the meaning of ‘‘beneficial ownership.’’ More specifically,reference was made to apotential structurewhereby Belgian dividends were distributed by aBelgiancompany first to an intermediate Hong Kongcompany and thereafter to aChinese (grand)parentcompany. 33 The then-Finance Minister replied by statingthat if the Hong Kong company were the legalowner of the Belgian shares, it would qualify as thebeneficial owner and would be entitled to full taxtreaty benefits. By contrast, aperson operating solelyas arepresentative or agent for the account of thelegal owner of the shares would not qualify as the beneficialowner. This is therefore the de facto dividingline that has been established and it has not yet beenmoved as of the date this article was written. The factthat companies might use such tax treaties as ameansof minimising withholding tax on dividends by establishingintermediary companies was apparently not ofconcern to the policy makers in Belgium, who rathersought to take a pragmatic approach in order torender Belgium an attractive jurisdiction from whichto conduct business, in part due to its tax treaty networkand policy.B. Interest paid by HCo to FFinCoWith regard to the international taxation of interest,Belgium, in its Draft Model Convention, provides forthe sharing of tax revenue rather than reserving exclusivetaxation for one or the other Contracting State.Based on Article 11 of the OECD Model Convention,this means that both the source State and the residenceState are entitled to tax interest, subject to certainrestrictions.Article 11 of the Belgian Model provides as follows:1. Interest arising in aContracting State and paid to aresident of the other Contracting State may betaxed in that other State.2. However, such interest may also be taxed in theContracting State in which it arises ...but if thebeneficial owner of the interest is aresident of theother Contracting State, the tax so charged shall notexceed 10 per cent of the gross amount of the interest.3. a) Interest shall be exempted from tax in the ContractingState in which it arises if it is ...interestpaid in respect of acredit or loan of any naturegranted or extended by an enterprise to another enterprise....[Emphasis added.]Leaving aside the tax treaty envisaged in the factpattern, Article 11(3)(a) of the Belgian Draft ModelConvention specifically addresses the situation describedin relation to the intercompany loans betweenHCo and FFinCo. It is also noteworthy that the OECDCommentary lists several examples of interest paymentsthat may be exempted from source-countrytaxation, but does not include intercompany loans. 34Even though the purpose of the OECD Commentarywas not to provide an exhaustive list, the fact that Belgiumchose to adopt this specific form of exemption ispresumably illustrative of its view regarding intercompanyloans and its unstated policy of continuingto encourage the use of Belgium as acorporate headquartersor treasury center,even after the demise of itscoordination center regime (which links in with theopportunities afforded by its innovative Notional InterestDeduction regime). This is buttressed by thefact that the Belgian Model Convention provisiondoes not even contain abeneficial ownership requirement.Unfortunately, the tax treaty mentioned in the factpattern prescribes a0percent source-country tax oninterest paid to aresident of the other country, butonly if that resident is the beneficial owner of the interest.This provision resembles Article 11 of theBelgium–United States tax treaty, which referencesthe beneficial ownership concept as well. As onemight expect in view of the ambiguity already surroundingthis term, the Belgium–United States treatydoes not provide for adefinition of ‘‘beneficial ownership,’’soits precise implications are, once again, subjectto debate. As previously mentioned, the positiontraditionally adopted by Belgium in this regard is thatundefined terms should be interpreted in accordancewith the tax laws of the country applying the particulartreaty provision. 35As discussed in I., above, Belgium chooses to adopta legal rather than an economic approach in thisregard, which is of course to the benefit of the transactionscarried out between HCo and FFinCo. Thusunder apurely Belgian approach, FFinCo will mostlikely be considered the beneficial owner of the interestreceived, despite the presence of abeneficial ownershipconcept in the relevant tax treaty. Ashas alsobeen noted, the Belgian Supreme Court has, on severaloccasions, respected transactions in which taxpayershave sought to take advantage of a morebeneficial tax regime as long as they, inturn, have respectedall the legal consequences of the structure andsteps they have chosen. 36 Whether that view will continueto prevail in light of the new GAAR as opposedto Belgium’s implicit policy goals remain to be tested.In addition, there is always the possibility that thetransactions between HCo and FFinCo may eventuallybe subjected to interpretations more closelyaligned to those of the OECD. Several Belgian scholars,such as Professor De Broe, are in favour of thisapproach. In that regard, the following OECD Commentarycould be considered of relevance with respectto the circumstances described in the Forumfact pattern:Aconduit company cannot normally be regarded asthe beneficial owner if, though the formal owner, ithas, as apractical matter, very narrow powers whichrender it, in relation to the income concerned, amerefiduciary or administrator acting on account of the interestedparties. 3712 12/12 Copyright 2012 by The Bureau of National Affairs, Inc. TM FORUM ISSN 0143-7941

FFinCo serves as an intermediary company betweenHCo (and many of the Parent group companies)and third party banks. The facts state that it hasastaff ofexperienced financial personnel that negotiatesthird-party financing arrangements and performsrisk management functions, even though most of theParent group’s capital needs are obtained from longtermloans, with currency risks being fully hedged upfront.Based on these facts, it could be discussedwhether the real powers of FFinCo are narrow orwhether the risk management functions performed byan experienced staff are sufficient to constitute asubstantiveactivity that is more than that of amere fiduciaryor more than merely administrative in nature.Of course, the funds borrowed by FFinCo are supportedby HCo’s guarantee and the pledge of HCoassets, and the interest rate payable to FFinCo dependson the interest rate charged by the banks. Objectively,FFinCo is completely controlled by anddependant on HCo and the banks.However, asindicated earlier, the current Belgiumtax system intentionally grants priority to legal realityover economic substance. Thus, on balance, it mightvery well be the case that the Belgian TaxAdministrationwould not seek to deny treaty benefits to FFinCowith regard to the transactions concerned, as long asboth parties accepted the legal consequences of theirtransactions, or if it did (for example, under theamended GAAR), that any such attack would not survivejudicial review in view of the substantive and substantial,real economic activities being performed byFFinCo, which should enable HCo to adduce sufficientlegitimate non-tax avoidance purposes in supportof the structure.C. Royalties paid by HCo to FIPCoThe treaty provision referred to in the Forum fact patternresembles the provision on royalties in Article12(1) of the Belgian Draft Model Convention:Royalties arising in aContracting State and paid to aresident of the other Contracting State shall be taxableonly in that other State if such resident is the beneficialowner of the royalties.This exclusive right for the residence State to taxroyalties is provided for in the Belgium–United Statestax treaty as well as in the tax treaties concluded byBelgium with other EU Member States. Although thisis not specified in relation to the treaty in the fact pattern,the tax treaties concluded by Belgium generallydo not condition aroyalty withholding tax exemptionon the royalties being subject to tax in the residenceState. 38 Thus, the fact that Country Qdoes not imposeawithholding tax on royalties paid by FIPCo to Parentshould not create an issue.The question of whether FIPCo qualifies as the beneficialowner of the royalties paid by HCo leads to adiscussion similar to that concerning interest. In thecurrent context, it would be highly unlikely for FIPCoto be challenged by the Belgian authorities as the beneficialowner under the Belgium–Country Qtax treaty.Given the fact that FIPCo fulfills acertain role by overseeingthe registration of the intellectual property (IP)and that it manages the efforts to ensure that such IPrights are enforced against potential infringers, FIPCoshould not be subject to attack, in the context of thecurrent Belgian standards for adjudging tax treatyabuse. Indeed, it should not even fall afoul of the threecategories of persons to be expressly considered nonbeneficialowners: (1) intermediaries receivingincome in the name and for the account of athirdparty (such as agents); (2) mere fiduciaries; and (3) administratorsacting on account of third parties. 39 FIP-Co’s qualification as the beneficial owner of theroyalties is further supported by the fact that it earnsasubstantial profit under the sublicense agreement, aprofit that appears from the fact pattern to be inexcess of what an independent third party would bewilling to pay to amere agent, fiduciary or administrator.Of course, all bets are off under the amendedGAAR discussed above. Still, the fact pattern is suchas to lead the authors to believe that the taxpayer inthis situation could mount astrong defence and meetits burden of proving that there is no ‘‘tax abuse’’ atstake in the structure it has chosen to use.NOTES1 C. Du Toit, Beneficial Ownership of Royalties in BilateralTaxTreaties 145 (1999).2 M. Bourgeois and E. Traversa, Tax Treaties and TaxAvoidance: Application of Anti-avoidance Provisions —Belgium, 95a Cahiers de Droit Fiscal Int’l (InternationalFiscal Association) 127, 128 (2010).3 OECD Model Convention, Art. 10(2) of refers to ‘‘beneficialownership’’.4 M. Bourgeois and E. Traversa, fn. 2, above, at 145.5 L. De Broe, International TaxPlanning and Prevention ofAbuse, 14IBFD Doctoral Series 669 (2008).6 L. Hinnekens, The Application of Anti-Treaty ShoppingProvisions to Belgium Co-ordination Centres, [1989/8-9]Intertax 359.7 Belgian Com. DTC, at paras. nos. 10/204 &231, 11/204,226/5 &231; 12/203 &231.8 See, e.g.,Judgement of June 29, 1982 (Brussels Ct. App.),FJF 1982, 202, as referred to in IBFD, Country Survey –Belgium 62, 81 (Dec. 2005), at http://ec.europa.eu/taxation_customs/resources/documents/common/publications/studies/ir_dir_be_en.pdf.9 L. De Broe, fn.5, above, at 715.10 J. Kirkpatrick, Le régime fiscal des societies en Belgique,1995, §§ 1.23-1.26.11 Judgment of June 6, 1961 (S. Ct.), Pas., 1961, I, at 1082.12 Informal translation provided in M. Bourgeois and E.Traversa, fn. 2, above, at 129.13 H. Liebman and A. Gabriel, Anti-Abuse and Anti-Avoidance Doctrines —Host Country: Belgium, 16TaxManagement Int’l F. 3, 4(Sept. 1995).14 Judgment of March 22, 1990 (S. Ct.), Pas., 1990, I, at853.15 Informal translation provided in L. De Broe, fn. 5,above, at 158.16 P. Faes, Het Rechtsmisbruik in Fiscale Zaken: Artikel344 §1WIB –15jaar later 243 (2008).17 H. Liebman and A. Gabriel, fn. 13, above, at 5.18 Judgment of Nov.22, 2007 (S. Ct.), T.B.O., 67-72 (2008);Judgment of May 11, 2006 (S. Ct.), T.F.R., 556-561 (2007);Judgment of Nov. 4,2005 (S. Ct.), FJF, afl. 1, 64 (2006).19 Brussels Court of First Instance, Dec. 2009.20 In point of fact, however, the taxpayer prevailed in thiscase by proving up the following justified and justifiablebusiness purposes: ‘‘(i) the need to shield personal liability,(ii) the need to ensure the liquidity and flexibility of12/12 TaxManagement International Forum BNA ISSN 0143-7941 13

B. Beneficial Ownership and Brazil’s tax treatiesTo date, Brazil has signed 29 tax treaties and the term‘‘beneficial owner’’ isused in 21 of them (the treatieswith Argentina, Austria, Denmark, France, Japan,Luxembourg, Spain and Sweden do not use the term).Although the term ‘‘beneficial owner’’ isused in thesetreaties, following the model and practice of othercountries, none of Brazil’s tax treaties contain adefinitionof who/what is to be considered abeneficialowner.C. Beneficial Ownership —case lawThere is very little Brazilian case law that provides ananalysis of the term beneficial owner and its applicationin the context of Brazil’s tax treaties. There aretwo relevant cases still awaiting final decision thatconsider beneficial ownership (even though it is notthe main point at issue in either case).The first of these cases is the Volvo case, 1 in whichthe federal tax authorities requested payment of withholdingincome tax at arate of 15 percent or 25 percent(domestic rates) on amounts remitted abroad byway of interest payments to abranch of aJapaneseentity located in Panama. It was the opinion of the taxauthorities that, as the beneficiary of the paymentswas located in Panama (which does not have ataxtreaty with Brazil), the Brazil–Japan tax treaty shouldnot apply to limit the rate of Brazilian withholding taxon payments of interest to 12.5 percent.The facts of the case, in short, were that the taxpayer’simport operations were funded by a Japanesecompany with abranch (filial) inPanama. The taxpayercontended that, while remittances of interestpayable under the relevant loan agreement were madeto the Panamanian branch, because the branch wasan extension of the Japanese company,towhich Japaneselaw was applicable, the Brazil–Japan tax treatyshould apply to reduce the rate of Brazilian withholdingincome tax on the remittances of interest to thebranch.The Superior Court of Justice (STJ) rejected the taxpayer’scontention and held that the Brazil–Japan taxtreaty should not apply.The STJ did not, therefore, addressthe question of beneficial ownership and its applicationin atax treaty context. The Federal SupremeCourt (STF), which is Brazil’s highest court, has refusedto analyse the merits of the case on appeal,ruling that since it is aconstitutional court and noconstitutional provision is addressed in the case, thereare no grounds for the STF to provide such an analysis.The second of the two cases is the TIM Nordestecase, 2 an administrative case dealt with by the FederalAdministrative Court of TaxAppeals (CARF). In thiscase too, the main point at issue was the application ofthe Brazil–Japan tax treaty.Stated briefly, the facts were that the Brazilian taxpayerhad remitted to Japan interest payable on Eurobonds,but the creditors with respect to theEurobonds were not resident in Japan. It was thereforethe opinion of the tax authorities that the Brazil–Japan tax treaty should not apply and that the rate ofBrazilian income withholding tax imposed on the interestpayments should be the domestic law rate of 15percent instead of the reduced treaty rate of 12.5 percent.On the other hand, the taxpayer contended thatthe payments were made to banks located in Japanand that the banks were entitled to receive theamounts, so the Brazil–Japan tax treaty should applyto reduce the rate of withholding tax to 12.5 percent.The CARF decided that the Brazil–Japan tax treatyis applicable to interest remittances made to payingagents resident in Japan in accordance with exchangecontracts and certificates of foreign capital registeredwith the Brazilian Central Bank, irrespective ofwhether they are the beneficial owners of the incomeconcerned and that the position is the same under thetax treaties concluded by Brazil with other countries.Thus, the only criterion for applying the Brazil–Japantax treaty is that the recipient of the remittancesshould be resident in Japan.In addition, the CARF was of the opinion that thepaying agents had aclear function with regard to theissuance of the Eurobonds, so it was not possible tohold that they were only included in transaction inorder for the taxpayer to benefit from the terms of theBrazil–Japan tax treaty.The fact that the Brazil–Japantax treaty includes neither areference to ‘‘beneficialowner’’ nor alimitation on benefits provision was indicatedby the administrative judge in charge to be thelegal grounds for holding that there was entitlementto treaty benefits in the case at hand. An appeal hasbeen filed to the Superior Chamber of TaxAppeals andafinal administrative decision is still pending.D. ConclusionThere is no express definition of the term ‘‘beneficialowner’’ for purposes of the application of Brazil’s taxtreaties —either in those treaties in which the term isused or in Brazil’s domestic law. Furthermore, theanalysis and definitions provided by existing administrativeand judicial jurisprudence are somewhatvague. The lack of aclear definition of the term createsadegree of legal uncertainty, making it impossible toachieve any certainty as to how and when, if at all, thetax authorities are likely to challenge taxpayers on thegrounds that they are using Brazil’stax treaties —andparticularly those treaties that actually refer to beneficialownership —for treaty shopping purposes.II. Application of Brazilian rulesBased on the analysis set out above, the answers to theForum questions are as follows.If FHoldCo, FFinCo and FIPCo (i.e., the respectiverecipients of the dividend, interest and royalty incomepaid by the HCo) are located in Argentina, Austria,Denmark, France, Japan, Luxembourg, Spain orSweden, the provisions of the corresponding Braziliantax treaty would apply and the potential tax benefitsunder the treaty would be available because16 12/12 Copyright 2012 by The Bureau of National Affairs, Inc. TM FORUM ISSN 0143-7941

eneficial ownership is not acriterion for limiting potentialbenefits under any of these treaties and so theambiguity created by the lack of adefinition of theterm ‘‘beneficial owner’’ has no relevance. Nor doesBrazilian domestic law impose any limitation on thepotential tax benefits of the structure envisaged in theForum fact pattern based solely on who is the effectivebeneficial owner of the income concerned.If FHoldCo, FFinCo and FIPCo are located in any ofthe other 21 countries with which Brazil has concludedtax treaties containing the term ‘‘beneficialowner,’’ there will be two possible outcomes:s the provisions of the corresponding Brazilian taxtreaty would apply and the potential tax benefitsunder the treaty would be available because, eventhough the term ‘‘beneficial owner’’ isused in Brazil’stax treaties, none of them contains an expressdefinition of the term and Brazil’s domestic lawdoes not define the term for purposes of the interpretationof Brazil’s tax treaties and the consequentlimitation of the tax benefits potentially availableunder them; ors the provisions of the corresponding Brazilian taxtreaty would apply and the potential tax benefitsunder the treaty would be available because, as theterm ‘‘beneficial owner’’ —while used —isnot definedin Brazil’stax treaties, the definition in domesticlaw that applies in the context of Article 26 ofLaw 12.249/10 should be taken into account for purposesof the treaty and because that definition,which basically repeats the OECD Commentary onthe meaning of ‘‘beneficial owner,’’isbroad and subjective,it would not operate to limit the tax benefitspotentially available under the treaty.NOTES1 Recurso Extraordinário —RE450239 PR.2 Process No. 10680.004023/2005-58.Your complete tool-kiton international taxBloomberg BNAInternational Tax CentreTreatiesBackground AnalysisNews and insightsRatesTransfer PricingView onfree trialtoday atwww.bna.com/itax12/12 TaxManagement International Forum BNA ISSN 0143-7941 17

Host CountryCANADAJay Niederhoffer and Andrew Y.H. Lam 1Deloitte &Touche LLP, TorontoIntroductionCanada imposes a25percent domestic withholdingtax on, inter alia, dividends and royalties,and on interest to an arm’slength person,that is paid or credited from a person resident inCanada to anonresident person. 2 Such withholdingtax may be reduced by an applicable income taxtreaty. The availability of such relief and the applicablewithholding tax rates will vary,depending on theterms of the specific treaty.To prevent the inappropriate use of Canada’s broadnetwork of income tax treaties to reduce taxation, including,for example, by way of ‘‘treaty shopping,’’ anumber of safeguards are embedded in Canadian taxlaw. These include beneficial ownership 3 requirementsin tax treaties, residency requirements for domesticincome tax and treaty purposes, theintroduction of alimitation on benefits (LOB) articlein the Canada—United States tax treaty, 4 domestic taxdoctrines such as agency and sham, and the generalanti-avoidance rule (GAAR). 5The focus of this paper is on the meaning of beneficialownership in Canada, particularly as it applies toa reduction of domestic withholding tax under anincome tax treaty with respect to payments of dividends,interest and royalties by aCanadian residentcompany to anonresident person.I. Meaning of Beneficial Ownership underCanadian lawA. Applicable law and treaty interpretationCanada’s income tax treaties generally require that anonresident recipient of interest, dividend or royaltypayments be the beneficial owner of such income inorder to qualify for areduced withholding tax rateunder the applicable treaty. However, the term ‘‘beneficialowner’’ isnot defined in any of Canada’s treaties.6 The ‘‘General Definitions’’ Article 7 generallyprovides that, where aterm is not defined in the relevanttreaty, its meaning will be the same as thatunder domestic law relating to the taxes in question. 8Canada’s Income Tax Conventions InterpretationAct provides that where aterm is not defined or fullydefined in aCanadian tax treaty, orthe term is to bedefined by reference to the laws of Canada, the termwill have the same meaning as for purposes of the Act,unless the context otherwise requires. Further, itwillhave the meaning for purposes of the Act as amendedfrom time to time, rather than the meaning on thedate on which the particular treaty was entered into orbecame law. Thus, an ambulatory approach is requiredin applying the domestic meaning of aterm ininterpreting atreaty. 9Beneficial ownership is not defined in the Act. Whilethe term does appear in the Act, it is in acontext thatdiffers from that which is relevant to the taxation ofinterest, dividends or royalties under atax treaty. 10Recent Canadian jurisprudence has addressed thisissue and, consequently,acommon law interpretationof beneficial ownership has emerged.B. Canadian common law definition of Beneficial OwnerThere are currently two leading Canadian cases onbeneficial ownership: PrévostCar 11 and Velcro. 12 Asdiscussed in further detail below, both cases have adoptedthe general view that the beneficial owner ofproperty is the person having the usual incidents oftitle to the property, such as possession, use, risk andcontrol.1. Prévost CarPrévost Car dealt with the concept of beneficial ownershipin the context of dividend payments. In this case,the shares of Prévost Car, aCanadian corporation,were held by aDutch company, Prévost Holding BV(‘‘DutchCo’’). Volvo, a Swedish company (‘‘SwedishCo’’)held 51 percent of the shares of DutchCo andHenlys, an unrelated U.K. company (‘‘UKCo’’), heldthe remaining 49 percent. According to the shareholder’sagreement, not less than 80 percent of the profitsof Prévost Car and DutchCo were to be distributed tothe shareholders. 13Prévost Car made dividend payments to DutchCoand withheld Canadian tax at the reduced withholdingrate of 5percent under the Canada—Netherlandstax treaty. The Canada Revenue Agency (CRA) assessedPrévost Car on the basis that the beneficialowners of the dividend payments were SwedishCoand UKCo; accordingly, the assessed dividend withholdingtax rate was 15 percent with respect to thedividends that were viewed as being paid to Swed-18 12/12 Copyright 2012 by The Bureau of National Affairs, Inc. TM FORUM ISSN 0143-7941

ishCo and 10 percent with respect to the dividendsthat were considered to be paid to UKCo.The TaxCourt of Canada (TCC) found in favour ofthe taxpayer and concluded that DutchCo was thebeneficial owner of the dividends. In so finding, thecourt examined the domestic meaning of beneficialowner (as required by Article 3(2) of the Canada—Netherlands tax treaty), the OECD Commentary 14 andother external sources. The court concluded that ‘‘the‘beneficial owner’ of dividends is the person who receivesthe dividends for his or her own use and enjoymentand assumes the risk and control of the dividendhe or she received. The person who is beneficial ownerof the dividend is the person who enjoys and assumesall the attributes of ownership.’’ 15Although there was ashareholder agreement betweenSwedishCo and UKCo that contained adividendpayment policy, the court noted that thisagreement was not enforceable against DutchCo,given that DutchCo was not aparty to the agreement.DutchCo had discretion with respect to the paymentof dividends to its shareholders, and until it chose toexercise that discretion, any dividends received wereits property and available to its creditors. There wasno predetermined or automatic flow of funds to theshareholders that would otherwise render DutchCo aconduit of its shareholders.The court further noted that ‘‘when corporate entitiesare concerned, one does not pierce the corporateveil unless the corporation is aconduit for anotherperson and has absolutely no discretion as to the useor application of funds put through it as conduit, orhas agreed to act on someone else’sbehalf pursuant tothat person’s instructions without any right to doother than what that person instructs. ..’’ 16 Consequently,the court determined that DutchCo was thebeneficial owner of the dividends and, as such, wasentitled to the 5percent withholding tax rate underthe Canada—Netherlands tax treaty.Twonotable foreign cases on beneficial ownershipwere considered: Indofood, 17 aU.K. case, and RoyalDutch, 18 acase from the Netherlands. In Indofood,theU.K. Court of Appeal considered whether,under Indonesiantax law, interest paid by Indofood, an Indonesiancompany, to a Netherlands-incorporatedsubsidiary (‘‘NewCo’’) would be eligible for atreatyreducedIndonesian withholding tax rate of 10 percent.The U.K. Court of Appeal held that NewCo wasnot the beneficial owner of the interest because aback-to-back interest arrangement that requiredNewCo to pay out the interest it received from Indofoodto its creditors indicated that NewCo did nothave the ‘‘full privilege’’ tobenefit directly from theamount and qualify as the beneficial owner of the interestincome. Royal Dutch involved a stockbrokerresident in the United Kingdom who had acquireddividend coupons detached from the shares of aDutch company after the dividend had been declared.The stockbroker sought eligibility for atreaty-reduced15 percent withholding tax rate on dividends receivedunder the Netherlands—United Kingdom tax treaty.The Dutch Supreme Court found in favour of the taxpayerand held that aperson is the beneficial owner ofadividend if he or she is the owner of the dividendcoupon, can freely deal with the coupon, and canfreely avail himself or herself of the dividend distributed.The TCC in Prévost Car appears to have determinedbeneficial ownership on asomewhat similar but morefocused basis, having regard to legal form and lookingprimarily at the attributes of ownership.The Federal Court of Appeal (FCA) unanimouslyupheld the TCC decision that DutchCo was the beneficialowner of the dividends from Prévost Car. Thecourt also confirmed the qualified appropriateness ofthe use of the OECD Commentary, including commentariesthat were issued after the time that aparticulartreaty entered into force, in interpreting themeaning of beneficial ownership: ‘‘The worldwide recognitionof the provisions of the Model Conventionand their incorporation into amajority of bilateralconventions have made the Commentaries on the provisionsof the OECD Model Convention a widelyacceptedguide to the interpretation and applicationof the provisions of existing bilateral conventions. ..The same may be said with respect to later Commentaries,when they represent afair interpretation of thewords of the Model Convention and do not conflictwith Commentaries in existence at the time aspecifictreaty was entered and when, of course, neither treatypartner has registered an objection to the new Commentaries.’’192. Velcro CanadaVelcro dealt with royalty payments in the context ofthe tax treaty between Canada and the Netherlands.Velcro Industries BV (‘‘Industries’’), aresident of theNetherlands Antilles, was the owner of the Velcrobrand and other licensed intellectual property (IP).Velcro Holdings BV (‘‘Holdings’’), a Dutch residentsubsidiary of Industries, sublicensed the IP and VelcroCanada Inc. (‘‘Velcro Canada’’), aCanadian residentcompany, paid royalties to Holdings for the use of thelicensed IP. Within 30 days of receipt of these payments,per its agreement with Industries, Holdingspaid approximately 90 percent of the amounts receivedto Industries. The CRA assessed withholdingtax on the basis that Industries (rather than Holdings)was the beneficial owner of the royalties paid byVelcro Canada. Since there was no tax treaty betweenCanada and the Netherlands Antilles, the domesticwithholding tax rate of 25 percent was applied to theroyalty payments.The TCC applied afour-pronged test derived fromPrévost in determining the beneficial ownership of theroyalties: (1) possession; (2) use; (3) risk; and (4) control.Possession was exemplified by, inter alia: the contractualright of Holdings to receive the royalties;Holding’sexclusive control over the accounts in whichthe royalties from Velcro Canada were deposited; thecommingling of the royalties with other monies; theabsence of instructions given to Holdings in determiningthe flow of funds; and the fact that the royalties didnot flow into the account from Velcro Canada and outto Industries in an automated fashion.In considering the use of the royalties, the court determinedthat they were used by Holdings for avarietyof functions such as the payment of bills and otheramounts under legal obligations, the repayment ofloans, investment in new enterprises, and the earningof interest income.The court found that Holdings bore the risk of ownershipbased on the following facts: Holdings was ex-12/12 TaxManagement International Forum BNA ISSN 0143-7941 19

posed to fluctuations in currency; the royalties wereshown as assets on Holdings’ financial statements; theroyalties were at risk of seizure or availability to creditors;Industries had no priority as a creditor; andHoldings was not indemnified in any way.For many of the reasons noted above regarding possession,use and risk, the court found that Holdingshad control over the royalties as well.Applying these four criteria, the court held thatHoldings was the beneficial owner of the royaltiesand, therefore, eligible for treaty-reduced withholdingrates. The TaxCourt noted that it would pierce the corporateveil only if there had been acomplete lack ofdiscretion in the application of the funds (which wasnot the case).The approach taken by the courts in Canada providesadegree of predictability and is consistent withthe long entrenched principle in Canadian tax lawthat taxpayers are entitled to arrange their affairs in atax-efficient manner and that the law must providecertainty so as to enable taxpayers to achieve this objective.20C. The CRA’s response to Prévost Car and VelcroWhile the CRA has indicated that it will respect thetwo decisions, it is clear that it will do so guardedly.In 2009, after Prévost Car had been decided, theCRA stated that it would continue to ‘‘examine futureback-to-back dividend, interest and royalty cases thatit encounters with aview to whether an intermediarycould, on the facts, be considered amere conduit orfunnel.’’ 21In 2012, after both Prévost Car and Velcro were decided,the CRA stated that it would continue to reviewpayments to determine beneficial ownership. This determinationwill be aquestion of facts and circumstances.The key factor in determining the use,enjoyment, risk and control of a payment will bewhether the recipient has sufficient discretion with respectto the application of the payment. It is not clearthat the CRA is fully respecting the focus on legal forminherent in the cases. The CRA further noted thattreaty benefits are also subject to the GAAR and thatCanada is part of the OECD working party on changesto the OECD Commentary on beneficial ownership(discussed in I.D., below). 22D. OECD Discussion Draft on BeneficialOwnershipWhile Canadian courts have employed a relativelyclear test in determining a‘‘beneficial owner,’’ recentdevelopments from the OECD regarding the meaningof beneficial owner 23 may potentially muddy thewaters in Canada.It is well established 24 and has been confirmed inPrévost Car that the OECD Model Convention and theOECD Commentary are valuable tools for treaty interpretationin Canada. While reference to these resourcesis endorsed, Canadian jurisprudence does notpresent aunanimous view as to the appropriateness ofreference to revisions to the OECD Model Conventionor the OECD Commentary that were made after aparticulartreaty was negotiated. 25The term ‘‘beneficial owner’’ isnot defined in theOECD Model Convention. Consequently, inorder toestablish international uniformity of interpretationand application of this concept, the OECD issued aDiscussion Draft on the meaning of beneficial ownerin 2011 that was revised and re-released on October19, 2012. The Discussion Draft contains proposedchanges to the OECD Commentary on Articles 10, 11and 12 of the OECD Model Convention, with thestated intent of providing clarification on the meaningof the term ‘‘beneficial owner.’’The Discussion Draft proposes to amend the OECDCommentary on Article 10 by modifying paragraph12.1 to read as follows:12.1 Since the term ‘beneficial owner’ was added to addresspotential difficulties arising from the use of thewords ‘‘paid to. ..aresident’’inparagraph 1, it was intendedto be interpreted in this context and not torefer to any technical meaning that it could have hadunder the domestic law of aspecific country. ..Theterm ‘beneficial owner’ is therefore not used in anarrow technical sense. ..rather, itshould be understoodin its context, in particular in relation to thewords ‘‘paid. ..to aresident’’, and in light of the objectand purposes of the Convention, including avoidingdouble taxation and the prevention of fiscal evasionand avoidance. ... 26The Discussion Draft appears to be putting forth an‘‘autonomous’’ treaty meaning of beneficial owner.Another proposed addition to the OECD DiscussionDraft raises some uncertainty in that it is not entirelyclear whether it is expanding the types of arrangementsunder which beneficial ownership may arise orsimply clarifying the circumstances under which beneficialownership may arise:12.4 In these various examples (agent, nominee, conduitcompany acting as afiduciary or administrator),the recipient of the dividend is not the ‘‘beneficialowner’’ because that recipient’s right to use and enjoythe dividend is constrained by acontractual or legalobligation to pass on the payment received to anotherperson. Such an obligation will normally derive fromrelevant legal documents but may also be found toexist on the basis of facts and circumstances showingthat, in substance, the recipient clearly does not havethe right to use and enjoy the dividend unconstrainedby acontractual or legal obligation to pass on the paymentreceived to another person. This type of obligationmust be related to the payment received; it wouldtherefore not include contractual or legal obligationsunrelated to the payment received even if those obligationscould effectively result in the recipient usingthe payment received to satisfy those obligations. ..Where the recipient of adividend does have the rightto use and enjoy the dividend unconstrained by acontractualor legal obligation to pass on the payment receivedto another person, the recipient is the‘‘beneficial owner’’ ofthat dividend. .. 27While proposed paragraph 12.4 refers explicitly toagents, nominees and conduits, the discussion thatfollows in that paragraph could potentially be expansivelyinterpreted (arguably, misinterpreted) to applyto, for example, an intermediary company that receivesdividends or royalties in circumstances such asthose in Prévost Car or Velcro. Asthe Discussion Draftwas introduced as aclarification of the meaning ofbeneficial owner, rather than an expansion thereof,one would expect that the discussion in paragraph12.4 should be restricted to arrangements that involve,and entities that are, prima facie agents, nomineesor conduits. If not, then many standardcorporate group structures could be subject to unexpectedtax consequences, and, in Canada, the issue of20 12/12 Copyright 2012 by The Bureau of National Affairs, Inc. TM FORUM ISSN 0143-7941

the applicability of the proposed OECD Commentaryto existing tax treaties would require further consideration.This issue will be discussed further in II., below.It should be noted that the Discussion Draft introducesan anti-avoidance concept into the commentaryon beneficial owner that provides that, even where therecipient is the beneficial owner of apayment, treatybenefits will not be automatically granted in cases ofabuse of the relevant provision. ‘‘Whilst the concept of‘beneficial owner’ deals with some forms of tax avoidance(i.e. those involving the interposition of arecipientwho is obliged to pass on the dividend to someoneelse), it does not deal with other cases of treaty shoppingand must not, therefore, be considered as restrictingin any way the application of otherapproaches to addressing such cases.’’ 28As such, where an intermediary meets the requirementsfor beneficial ownership, atransaction may stillbe subject to challenge through another anti-abuserule such as an anti-treaty shopping rule. Such an outcomecould lead to much uncertainty in many internationalbusiness arrangements and may haveunintended effects on, for example, group holdingcorporations.II. Application of the Canadian rulesThe answers below focus on the topic of beneficialownership. It should be remembered that other antiavoidanceapproaches that are beyond the scope ofthis topic may be applicable to the scenarios contemplated.A. Dividends paid by HCo to FHoldCoFollowing the principles set out in Prévost Car andconfirmed in Velcro, ifFHoldCo satisfies the four factors(possession, use, risk and control) relating to thedividends, it should be considered the beneficialowner of the dividends paid by HCo.FHoldCo is under no contractual obligation to passon the dividends, even though it regularly distributesthe dividends to Parent. The dividends paid toFHoldCo are deposited into its bank account whereinterest is earned for its own benefit. FHoldCo’s directorswould be required to evaluate whether the companyis in aposition to pay adividend and would thenhave to approve and declare any dividend. It also hasthe rights and all risks associated with the ownershipof the dividends as these funds are available for use,for example, to pay any creditors or to make investments.Since FHoldCo would likely receive fundsfrom other group companies, the commingling ofHCo dividends and, for example, managing fluctuationsin currency,would further contribute to meetingthe test established under Prévost Car and Velcro, aswould reporting the dividends among the assets for financialstatement purposes.Consequently, with FHoldCo serving as aholdingcompany for agroup of operating companies within amultinational group and the various activities describedabove, FHoldCo should not be seen as anacting agent or nominee or as aconduit having absolutelyno discretion as to how to use the funds it receives.FHoldCo should be viewed as the beneficialowner of the dividend income.It is possible that the draft OECD Commentary onArticle 10 relating to beneficial ownership, when finalised,will empower the CRA to challenge the test asset out in Prévost Car and Velcro. Itisunclear how theCanadian courts will evaluate the revised OECD Commentaryin light of existing domestic jurisprudencethat has already considered this matter, particularlywith respect to tax treaties that had been entered intoprior to the finalisation of the revised OECD Commentary.One would hope that the courts would notintroduce greater uncertainty into the law by overturningexisting jurisprudence with, arguably, ambiguousguidance and what appears to be anexpansion of the concept of beneficial ownership.B. Interest paid by HCo to FFinCoInterest paid by a Canadian taxpayer to an arm’slength party is generally not subject to domestic withholdingtax. 29 Other than in the context of theCanada—United States tax treaty, 30 interposing arelatedintermediary in these circumstances is tax inefficientfrom aCanadian nonresident withholding taxperspective, as the most favourable treaty rate fornonresident withholding on related party financing is10 percent. Under the proposed back-to-back arrangement(i.e., aloan from bank to FFinCo to HCo), it isunlikely that the CRA would use its limited resourcesto challenge the beneficial ownership of FFinCo, asthe bank as beneficial owner of the interest would notbe subject to any withholding tax.The guiding principles established in PrévostCarand Velcro would apply in determining the beneficialowners of the interest under such afinancing structure,notwithstanding that Canadian courts have notdirectly addressed the concept of beneficial ownershipin the context of interest income.FFinCo is not legally required to funnel the interestincome earned from HCo directly to the third-partybank, nor does it require instructions from the bank inorder to determine the flow of its funds. On the contrary,FFinCo employs astaff ofexperienced financialpersonnel who negotiate third-party financing andperform certain risk management functions for thewhole corporate group, and FFinCo also pays its ownoperating expenses. The funds received from HCo arelikely comingled with FFinCo’s other funds. As well,FFinCo prepares its own financial statements, reflectingthe debt on its balance sheet. Further,the corporation,as the group finance company, also assumes andmanages foreign exchange risks (through an up-frontcurrency hedge arrangement) and the credit risk onloans it makes to related parties as well.The requirement that FFinCo pay afixed interestamount and principal sum to the third-party bank isnoteworthy. Tothe extent that the instruments havedifferent coupon rates, interest payment dates andloan repayment dates, current Canadian case lawwould support the company claiming that the fourfactors of beneficial ownership have been met.FFinCo should not be seen as an acting agent ornominee of the bank as there are no facts to suggestthat FFinCo is acting on behalf of the bank or thatFFinCo is effectively aconduit having absolutely nodiscretion as to how to use the funds it receives orbeing completely limited in its capacity to act basedon aset of contractual instructions imposed by thebank. FFinCo has discretion with respect to how ituses its funds.12/12 TaxManagement International Forum BNA ISSN 0143-7941 21

Therefore, applying the four factor test establishedin PrévostCar and Velcro, FFinCo should be consideredto be the beneficial owner of the interest income.As noted in II.A., above, the draft OECD Commentaryon beneficial ownership, once finalised, may providethe CRA with fresh energy to relitigate the issueof beneficial ownership. It is far from clear that theCanadian courts would view such achallenge favourably.C. Royalties paid by HCo to FIPCoThe contractual royalty arrangement between HCoand FIPCo is similar to the fact pattern in the Velcrodecision. In Velcro,although the recipient of the royaltieswas contractually obligated to make payments tothe ultimate owner of the IP within aspecified time,the payments were not considered automatic or apredeterminedflow of funds. The same conclusionshould apply in this case.Further, FIPCo earns a1percent ‘‘spread’’ pursuantto its sublicensing arrangement with HCo that is usedto fund the company’s IPregistration and enforcementactivities and to remunerate its three full-timeemployees. Therefore, astrong argument can be madein support of FIPCo’s full privilege to enjoy, controland assume all risk of ownership of the royaltyincome.In this case, there are no identified facts to suggestthat FIPCo would be seen as an agent, anominee or aconduit of Parent. FIPCo is not denied the ability touse the funds it receives. As the court said in Velcro,‘‘Itis only when there is ‘absolutely no discretion’ that theCourts take the draconian step of piercing the corporateveil.’’ 31As noted, the draft OECD Commentary, once finalised,will create adegree of uncertainty until theCanadian courts comment on its importance and relevanceto situations already opined upon, particularlysince there is inconsistent jurisprudence on theweight to be given to revised or new OECD Commentaryin interpreting existing treaties.NOTES1 *The authors wish to thank Vasiliy Vorobiev and PaulaTrossman of Deloitte &Touche LLP, Toronto for theircontribution in the preparation of this paper.2 Income TaxAct (Canada), RSC 1985, c. 1(5th Supp.) asamended (the ‘‘Act’’), paras. 212(1)(b) and (d), and subsect.212(2).3 While Canada’s tax treaties generally refer to beneficial‘‘ownership,’’ the Canada—Australia tax treaty refers tobeneficial ‘‘entitlement.’’ While the wording differs, theunderlying concept of the terms — which will be reviewedbelow —appears to be the same.4 The LOB provision is contained Canada—United Statestax treaty, Art. XXIX-A.5 The GAAR is contained in Act, sect. 245. Areview of allof these approaches is beyond the topic of this paper. Forabrief discussion of the various tools available to preventperceived tax treaty abuse, reference should be had to‘‘Treaty-Related Pressures Facing Holding Companies’’byJack Bernstein, TaxNotes Int’l, Jan. 3, 2011, p. 43.6 Organisation for Economic Co-operation and Development(OECD) Model TaxConvention on Income and onCapital (Paris: OECD, July 2010) (the ‘‘OECD Model Convention’’),Art. 3(2) contains consistent guidance. In thispaper the accompanying Commentary on the OECDModel Convention will be referred to as the ‘‘OECD Commentary.’’7 E.g., Canada—United States tax treaty, Art. III.8 Consistent with OECD Model Convention, Art. 3(2).9 RSC 1985, c. I-4, as amended, sect. 3.10 Many of the provisions that use the term relate to trustprovisions. See, e.g., Act, sects. 104 and 107.11 Prévost Car Inc. v. Her Majesty the Queen, 2008 DTC3080 (TCC); aff’d 2009 DTC 5053 (FCA).12 Velcro Canada Inc. v. The Queen, 2012 TCC 57. TheCrown did not appeal the case.13 Subject to the condition that the company have sufficientfinancial resources available to meet working capitalrequirements.14 The OECD Commentary referred to was the Commentaryon the 1977 version of the OECD Model Convention.15 Prévost Car (TCC), fn. 9, above, para. 100.16 Ibid.17 Indofood International Finance Ltd. v. J.P. MorganChase Bank N.A. London Branch, [2006] EWCA Civ 158.18 Case no. 28 638, BNB 1994/217, April 6, 1994 (HogeRaad).19 PrévostCar (FCA), fn. 9, above, paras. 10 and 11.20 Commissioners of Inland Revenue v. Westminster(Duke), [1936] AC 1(HL).21 At the 2009 Conference of the Canadian branch of theInternational Fiscal Association (IFA), during the CRARoundtable, the CRA was asked about its views withregard to beneficial ownership as it relates to back-tobackdividends, interest and royalties, in light of the decisionin Prévost Car. The CRA response is summarised inthe CRA document no. 2009-0321451C6, Meaning of beneficialowner in Article 10, 11 and 12 of Canada’s Tax Conventions(May 21, 2009).22 This summary of the CRA’s comments is based on anunofficial summary of selected questions at the CRARoundtable during the 2012 Conference of the Canadianbranch of IFA (May 17, 2012).23 OECD Model Convention: Revised Proposals Concerningthe Meaning of ‘‘Beneficial Owner’’ inArticles 10, 11 and12, released Oct. 19, 2012. This revised discussion draftfollows the April 29, 2011 discussion draft entitled Clarificationof the meaning of ‘‘beneficial owner’’ inthe OECDModel TaxConvention.24 See, e.g., The Queen v. Crown Forest Industries Ltd., 95DTC 5389 (SCC), where the Supreme Court of Canadanoted the persuasive value of the OECD Model Conventionand OECD Commentary and relied on it in renderingits decision.25 As noted above, the FCA in Prévost Car indicated that,in certain cases, reference to subsequent commentarieswas appropriate. On the other hand, in MIL (Investments)SA v. The Queen, 2006 TCC 460; aff’d. 2007 FCA 236, forexample, the court notes that ‘‘one can only consult theOECD commentary in existence at the time the Treatywas negotiated without reference to subsequent revisions.’’[TCC para. 86.]26 Proposed para. 12.1 of the OECD Commentary onOECD Model Convention, Art. 10. The same position isproposed for OECD Model Convention, Art. 11.27 Proposed para. 12.4 of the OECD Commentary onOECD Model Convention, Art. 10. The same position isproposed for OECD Model Convention, Arts. 11 and 12.28 Proposed para. 12.5 of the OECD Commentary onOECD Model Convention, Art. 10. The same position isproposed for OECD Model Convention, Arts. 11 and 12.29 Act, para. 212(1)(b) (withholding tax on interest paid(that is not considered participating debt interest) to an22 12/12 Copyright 2012 by The Bureau of National Affairs, Inc. TM FORUM ISSN 0143-7941

arm’s length nonresident was eliminated under domesticlaw effective Jan. 1, 2008).30 Assuming that the recipient of the interest paymentwas eligible under the Canada—United States tax treaty,the rate of withholding tax would be 0 percent. SeeCanada—United States tax treaty, Arts. XXIX-A, IV(6)and (7) and XI(1).31 Fn. 10, above, para. 52.Keep updated every day with the latest international tax newsInternational Tax MonitorInternational Tax Monitor provides thorough daily news of all the important internationaltax developments.It is the most timely tax news service available and provides you with objective,authoritative updates.Here’s why International Tax Monitor is so useful:Filter news with ease and benefit from the timely updates.Use the expert reporting to advise clients and colleagues with confidence.Gain all the current news you need to plan international operations wisely.Benefit from the user-friendly format: Filter news by country and by topic.View on free trial todayat www.bna.com/itm12/12 TaxManagement International Forum BNA ISSN 0143-7941 23

Host CountryPEOPLE’SREPUBLIC OFCHINAPeng Taoand Alan GranwellDLA Piper, Hong Kong and Washington DCIntroductionThe term ‘‘beneficial owner’’ (or ‘‘beneficialownership’’) appears in various bilateralincome tax treaties that the People’s Republicof China (PRC or ‘‘China’’) has entered into with otherjurisdictions but is not otherwise used in China’s domesticstatutes. In the absence of alimitation on benefitsclause in most of China’stax treaties, the Chinesetax authorities utilise the ‘‘beneficial owner’’ conceptto limit the scope of those persons that can qualify fortreaty benefits. For this purpose, the term ‘‘beneficialowner’’ isinterpreted by reference to the PRC’s generalanti-avoidance rule (GAAR), which was formallyadopted in the PRC Enterprise Income TaxLaw in2008.I. PRC rules on Beneficial OwnershipA. In generalGuo Shui Han [2009] No. 601(‘‘Notice 601’’), 1 issuedby the State Administration of Taxation of China(SAT) on October 27, 2009, provides guidance on howto determine whether atreaty resident is a‘‘beneficialowner’’ soastoqualify to claim benefits under an applicabletax treaty. Public Announcement [2012] No.30, which was issued by the SAT onJuly 12, 2012,clarifies certain aspects of Notice 601. Since the term‘‘beneficial owner’’ isonly found in those articles ofChina’sbilateral income tax treaties that concern dividends,interest and royalties, Notice 601 applies onlyto those three articles.B. Beneficial ownerNotice 601 defines the ‘‘beneficial owner’’ofincome asthe person who has the ownership and control rightswith respect to the income concerned, or the rights orproperty from which the income is derived. The SAT,in its explanatory notes to Public Announcement[2012] No. 30, also suggested that, in addition to ownershipand control rights, the beneficial owner shouldhave the right of disposal with respect to the incomeconcerned. 2According to Notice 601, abeneficial owner generallyis aperson that engages in substantive operationalactivities and can be an individual, acompanyor any other entity, but agents and ‘‘conduit companies’’are excluded. Public Announcement [2012] No.30 provides, however, that if an agent receives theincome concerned on behalf of aprincipal and files astatement declaring that it (i.e., the agent) is not thebeneficial owner of the income, the principal’s beneficialowner status will be preserved. Public Announcement[2012] No. 30 also states that a ‘‘conduitcompany’’ isacompany that is established for purposesof avoiding or reducing taxes or allowing profitsto be transferred or accumulated. This type of companydoes not engage in substantive operational activities(such as manufacturing, distribution ormanagement) but is merely registered in the relevantjurisdiction to satisfy the organisational form requirementsunder the law of that jurisdiction.C. Substance over formNotice 601 provides that it is not sufficient to determinewho is the beneficial owner based on atechnicalinterpretation or merely from the perspective of domesticlaw. Rather, adetermination must be madethat comports with the purpose of tax treaties, i.e., theavoidance of double taxation and the prevention offiscal evasion. The principle of substance over formmust also be applied in analysing the facts of particularcases.The PRC statute itself does not provide for asubstanceover form principle. Rather,the principle is ad-24 12/12 Copyright 2012 by The Bureau of National Affairs, Inc. TM FORUM ISSN 0143-7941

opted by the PRC tax authorities in applying theGAAR under the PRC Enterprise Income TaxLaw. Toassist local tax authorities in applying the substanceover form principle, Notice 601 specifies seven factorsthat are adverse to aperson being recognised as thebeneficial owner of the income in question:(1) the person has the obligation to distribute orassign all or amajority (for example, more than60percent) of its income to athird country (jurisdiction)resident within aprescribed period (forexample, within 12 months of the receipt of theincome);(2) the person has little or no operational activitybeyond holding the property or rights from whichthe income is derived;(3) where the person is a company or other legalentity, ithas only modest assets, and asmall-scaleor low staffing level relative to the amount ofincome derived;(4) the person has little or no right to control or disposeof the income, or the property or rights fromwhich the income is derived, and bears little or norisk;(5) the other Contracting State (i.e., the state of residenceof the person paying the income to the PRCresident) imposes tax at alow effective tax rate orexempts the income from tax;(6) where the income relates to interest, in addition tothe loan contract with respect to which the interestis derived and paid, there exist between the personand third parties other loan or deposit contractsunder which the amounts, interest rates and contractsigning dates are similar; and(7) where the income concerned is royalties, in additionto the contract for the transfer of copyright,patent, technology, etc. use rights with respect towhich the royalties are derived and paid, thereexist between the person and third parties othercontracts for the transfer of use rights with respectto, or ownership of, the relevant copyright, patent,technology, etc.Both Notice 601 and Public Announcement [2012]No. 30 emphasise that the seven factors listed aboveare to be assessed in the context of the particulartransaction and that local tax authorities should neithersimply deny beneficial owner status to apersonbased on the presence of one of the above factors norconfirm beneficial owner status because there is nopurpose of avoiding or reducing taxes, or transferringor accumulating profits.D. Burden of proofNotice 601 requires that when applying for treaty benefits,taxpayers must provide information that provesthey are beneficial owners and that is relevant to theseven factors listed in I.C., above. In the explanatorynotes to Public Announcement [2012] No. 30, the SATindicates that whether any of the seven adverse factorsare taken into account in evaluating the transactionwill be determined based on the informationpresented by the taxpayer in making its applicationfor treaty benefits.Public Announcement [2012] No. 30 also identifiedthe following documents and information that may bereviewed in determining the presence of any of the adversefactors, depending on the type of income involved.The list of documents/information may be ofassistance to taxpayers in compiling their applicationmaterials:s Articles of Association;s financial statements;s records of fund flows;s minutes of board meetings;s board resolutions;s circumstances surrounding personnel and assets;s relevant expenditures;s functions performed and risks assumed;s loan contracts;s royalty contracts or IP transfer contracts;s patent registration certificates;s copyright certificates; ands agency contracts or entrustment contracts for receivingpayments, etc.To summarise, if the taxpayer can provide justificationto the effect that it has substance because it hasadequate assets and employees and assumes risks relatedto its undertakings, it is likely that the taxpayershould qualify as the beneficial owner of the incomeconcerned.II. Application of the PRC rulesA. Dividends paid by HCo to FHoldCoIt is not currently possible to conclude with certaintyfrom the assumed facts whether FHoldCo would beviewed as the beneficial owner of the dividends; theactual result might depend on the practice of the relevantlocal tax authority.On the one hand, anumber of the adverse factorsidentified in Notice 601 and Public Announcement[2012] No. 30 appear to be present in this case: (1)FHoldCo apparently re-distributes all of the dividends(less an amount to cover its modest administrativecosts) to Parent within 90 days of receiving them; and(2) since FHoldCo only has modest administrativecosts, it is highly likely that FHoldCo has: (a) little orno operational activity other than holding the equityfrom which the dividends are derived; (b) relativelymodest or few assets, and small-scale, low-level staffing;and (c) little or no right to control or dispose ofthe equity from which the dividends are derived.On the other hand, there are anumber of factorsthat may be viewed as favourable to the beneficialowner status of FHoldCo: (1) FHoldCo holds equityinvestments not only in HCo but also in anumber ofother group operating companies; and (2) Country Ximposes a10percent tax on dividends paid to aCountryXcorporation by asubsidiary in which the recipientowns an interest of at least 25percent. AlthoughCountry Xdoes not impose withholding tax on dividendspaid by aCountry Xcorporation to aforeigncorporate shareholder that owns an interest of at least80percent in the dividend-paying corporation, atax ofat least 10percent on dividends received by FHoldCofrom HCo should not be viewed as ‘‘extremely low.’’If there were additional evidence to prove thatFHoldCo has substance by virtue of assuming certainrisks and that its employees carry on activities commensuratewith FHoldCo’s holding company func-12/12 TaxManagement International Forum BNA ISSN 0143-7941 25

tions, it is more likely that FHoldCo would beregarded as the beneficial owner of the dividends it receivesfrom HCo.B. Interest paid by HCo to FFinCoIt is also not possible to say with certainty whetherFFinCo would be regarded as the beneficial owner ofthe interest it receives from HCo.The following adverse factors identified in Notice601 and Public Announcement [2012] No. 30 appearto be present in this case: (1) in addition to the loancontract under which the interest is derived and paid,FFinCo and the third party banks have entered intoparallel loan contracts under which the amounts andinterest rates are similar; and (2) while FFinCo hasemployees that negotiate the loan contracts and performrisk management functions, it is questionablewhether that staff could justify FFinCo charging areturn equivalent to a10percent higher interest ratethan that charged by the banks. Also, the facts indicatethat the currency risks concerning the Parentgroup’s capital needs are generally fully hedged upfront. Thus the question would be: ‘‘How much risk isactually managed by FFinCo’s staff?’’If there were some additional evidence indicatingthat FFinCo has assumed additional risk and performsthe corresponding functions, it is more likelythat FFinCo would be regarded as the beneficialowner of the interest it receives from HCo.C. Royalties paid by HCo to FIPCoAgain, it is not possible to determine with certaintywhether FIPCo would be regarded as the beneficialowner of the royalties it receives from HCo.The following adverse factors identified in Notice601 and Public Announcement [2012] No. 30 appearto be present in this case: (1) in addition to the royaltycontract under which the royalties are derived andpaid by HCo to FIPCo, there exists between FIPCo andParent aroyalty contract under which FIPCo will payroyalties to Parent in parallel; (2) Country Qdoes notimpose a withholding tax on the royalties paid byFIPCo to Parent; and (3) FIPCo employs only threepeople to perform administrative functions concerningthe registration of the intellectual property (IP) itlicenses from Parent and to manage IP protection effortsthrough outside lawyers.If FIPCo has no right to control or dispose of the IPrights with respect to which the royalties are derived,that may not reflect that it is the beneficial owner withrespect to the royalties it receives from HCo.NOTES1 Notice on How to Understand and Determine ‘‘BeneficialOwner’’under TaxTreaties (Guo Shui Han [2009] No.601).2 Explanatory notes to Public Announcement [2012] No.30, Art. 1.TAX TREATIES ANALYSISGain expert analysis and full textof key international tax treatiesTax Treaties Analysis provides expert analysis, summaries, full text and English translations of essentialinternational tax treaties.It helps you to quickly pinpoint the main elements of key tax treaties - and understand their effect andimpact. As well as the incisive analysis, Tax Treaties Analysis also contains the full text of over 2700international tax treaties.Here’s how Tax Treaties Analysishelps you: Pinpoint the main provisionsof core treaties quickly andaccurately – in a user-friendlyformat. Gain expert analysis clarifyinghow the treaties work inpractice. The authoritativeguidance allows you to easilyfind the most beneficial treatyfor a particular transaction. Understand all the essentialelements of the treaties. Theanalysis clarifies provisions ofeach treaty. Compare treaties quickly andwith ease. The unique treatycomparison chart allows youto compare against multipletreaties every article from eachtreaty.Tax Treaties Analysis providesyou with: Authoritative analysis of keytax treaties. What theirimplications are, how theywork in practice. Full text of over 2700 keyinternational tax treaties. Expert summaries of the majortax treaties. Official treaty documents innative languages plus Englishtranslations. A treaty comparison chartallowing you to compare andcontrast topics betweendifferent treaties. An “In the News” sectionproviding updates andamendments that have beenmade to the treaties. Summaries and full text of the3 Model Treaties (UN, US andOECD).Gain your free trial to Tax Treaties Analysis today by visitingwww.bna.com or emailing internationalmarketing@bna.com26 12/12 Copyright 2012 by The Bureau of National Affairs, Inc. TM FORUM ISSN 0143-7941

Host CountryDENMARKChristian EmmeluthCPH LEX Advokater, CopenhagenIntroductionUntil October 3, 2012 (see further at I.B.,below), the term ‘‘beneficial owner’’ was notused in the Danish tax legislation. Over theyears, the Danish courts have developed aprinciple ofthe ‘‘rightful recipient of an income stream,’’ but thatprinciple is not necessarily to be understood in thesame manner as the term ‘‘beneficial owner.’’ 1I. The Danish approach to Beneficial OwnershipA. Recent case lawThis section discusses two of the most importantrecent cases concerning the Danish understanding ofthe term ‘‘beneficial ownership.’’In acase of January 13, 2012, the TaxCourt foundthat aCyprus company was not the beneficial ownerof adividend distribution received from its whollyownedDanish subsidiary. 2 The Danish company wasoriginally established by aBermudan company thatwas owned by aU.S. parent company. Inconnectionwith areorganisation of the group, the shares in theDanish company were transferred by the Bermudancompany to the Cyprus company. The sale was financedby aloan from the U.S. parent company. TheCyprus company was established immediately beforethe acquisition of the Danish company,ithad no officeor employees and its operating expenses were verylimited. In 2006 and 2007, the Danish company madedistributions of DKK 566 million and DKK 92 million,respectively, to the Cyprus company, which thenrepaid the loan to the U.S. parent company.The tax court stated that the Danish company hadto prove that it was entitled to relief from Danish withholdingtax under the Denmark–Cyprus tax treaty.Thecourt further found that the distributions were repatriatedto the U.S. parent company. The court notedthat Article 10 of the Denmark–Cyprus treaty was inline with Article 10 of the OECD Model Conventionand was to be construed in accordance with the Commentaryon the OECD Model Convention. The courtconsequently held that the Cyprus company was notthe beneficial owner of the dividend distribution fromthe Danish company within the meaning of Article 10of the Denmark–Cyprus treaty.The court reasoned that the Cyprus company wasduly established according to Cyprus law. The companyshould therefore be considered the rightfulowner of the amount distributed. The issue concerningthe possible reduction of Danish withholding taxwas thus to be decided in accordance with the termsof the Cyprus-Denmark tax treaty. The court went onto observe that under Article 5 of the EC Parent-Subsidiary 3 Directive, dividend distributions madebetween companies resident in different EU MemberStates are exempt from withholding tax in the sourceState. However, inthe view of the court, the Parent-Subsidiary Directive cannot be construed as providinga general reservation that EU Member States mayinvoke in the case of alleged misuse. According to Article1subsection 2ofthe Directive, domestic antiabuseprovisions may be applied in this context —however,Denmark has not introduced any such provisions.It should be noted here that in two decisions, 4 theDanish Supreme Court refused to set aside for tax purposeslegally established companies simply becausethe main reason for setting up the companies was tosave tax. The TaxCourt in the case under discussionhere found that the Cyprus company was the rightfulowner of the dividend distribution. Based on anotherSupreme Court decision 5 the TaxCourt rejected theargument that the Cyprus company did not carry onany business activities even though the only activity ofthe Cyprus company was to hold shares in the Danishcompany. According to the Supreme Court decisioncited by the TaxCourt, it is aprerequisite for establishingand registering acompany under Danish corporatelaw that the company should carry on businessactivities. Thus according to the Supreme Court, thestarting point is that holding companies must be consideredto be carrying on abusiness for tax purposes.The distributions were thus held to be exemptunder the EC Parent-Subsidiary Directive and theDanish company was not required to withhold tax onthe distributions it made to the Cyprus company.The second decision was rendered on December 20,2011, by the Eastern Court of Appeals, 6 which performedan in-depth analysis of the term ‘‘beneficialownership.’’ The facts of the case were that aDanishcompany made adividend distribution to aLuxembourgholding company that was owned by invest-12/12 TaxManagement International Forum BNA ISSN 0143-7941 2712/12 TaxManagement International Forum BNA ISSN 0143-7941 27

ment funds established in Bermuda, Delaware,Germany and Guernsey. The amount of the distributionwas re-lent to the Danish company by the Luxembourgholding company immediately after thedistribution was made. The tax authorities arguedthat the Luxembourg holding company was not thebeneficial owner of the Danish company and consequentlythe dividend distribution should be subject toDanish withholding tax at the rate of 27 percent.The Eastern Court of Appeals noted in its decisionthat the term ‘‘beneficial ownership’’ was to be understoodin accordance with the guidelines laid down inthe OECD Commentary on Article 10 of the ModelConvention. The court further found that the termshould be construed in accordance with the internationallyaccepted understanding of the term and alsomade areference to an English decision on the subject.7On this basis, the court held that the Luxembourgholding company was the beneficial owner of the distributionas its board could manage the affairs of thecompany and actually decided to make aloan to theDanish company.The court added that this would alsobe the outcome if one or more intermediate holdingcompanies were established in acountry with whichDenmark has concluded atax treaty even if the topholding company were located in a country withwhich Denmark has not concluded atax treaty. Thecourt observed that an intermediate holding companycannot, however, beconsidered the beneficial ownerof income if the ultimate parent exercises adegree ofcontrol over the holding company that goes beyondthe planning and control commonly exercised in thecontext of an international group.B. Introduction of Beneficial Ownership ruleOn October 3, 2012, the Minister of Taxation submittedabill to the Danish parliament introducing theterm ‘‘beneficial ownership’’ into Danish law and limitingthe possibilities for using Danish holding companiesas pass-throughs. 8Under the bill, distributions from aDanish companywould be subject to awithholding tax of 27 percentif the amount distributed is aredistribution ofdividends received from asubsidiary or agroup companyas defined in sections 4A and Bofthe Act onTaxation of Capital Gains on Shares, 9 if the initial distributingcompany is a foreign company and theDanish redistributing company is not the beneficialowner of the dividends received. This rule does notapply if the distribution is exempt from tax under theEC Parent-Subsidiary Directive. Shares in asubsidiaryfor these purposes are defined as shares in acompanyof which the Danish corporate shareholder ownsat least 10 percent of the share capital. Shares in agroup company are defined as shares where theDanish shareholder and the company in which theshares are held are jointly taxed or may be jointlytaxed under the rules concerning domestic or internationaljoint taxation.Under current law,dividends received from qualifyingforeign companies are exempt from Danish withholdingtax on redistribution if the withholding taxrate on such dividends is reduced under the applicabletax treaty. Itisnot arequirement that the rightto taxation should be waived in its entirety. Under thebill, such distributions would now be subject toDanish withholding tax of 27 percent, as reducedunder any applicable treaty, ifthe amount redistributedis received by way of dividends from aforeigncompany and the Danish company is not the beneficialowner of the dividends received. The notes accompanyingthe bill do not make any direct referenceto the OECD Commentary on the Model Conventionconcerning the understanding of the term ‘‘beneficialowner,’’ but use the wording used in the decision ofthe Eastern Court of Appeals referred to in I.A., above.In deciding whether aDanish company is the beneficialowner of dividends for purposes of the proposedrule, account must thus therefore be taken of whetherthe Danish company has been established by aforeigncompany that would not have been able to enjoy thesame tax benefit had it owned the foreign subsidiaryof the Danish company directly. Further, aDanish interimholding company cannot be considered the beneficialowner of dividends if the ultimate parent canexercise adegree of control over it that goes beyondthe planning and control commonly exercised in aninternational group. Finally, ifthe Danish companycannot make any decisions with regard to the dividendsreceived, then the Danish company cannot beconsidered the beneficial owner of such dividends.II. Application of Danish rulesA. Dividends paid by HCo to FHoldCoFHoldCo appears to be amere conduit company as itdistributes all the dividends received from HCo less anamount to cover its modest administrative costs to theultimate parent company (Parent).Based on the decisions discussed in I.A., above, itwould seem that Denmark would not considerFHoldCo to be the beneficial owner of the dividendswithin the meaning of Article 10 of the OECD ModelConvention. The distributions made to it by HCowould thus be subject to withholding tax at the rate of27 percent unless Country XisanEUMember Stateand relief may, therefore, be invoked under the ECParent-Subsidiary Directive (see the Cyprus case discussedin I.A., above, where the court pointed to Denmark’slack of any anti-abuse rules in the Danishdomestic legislation that might have prevented the applicationof the Directive.)B. Interest paid by HCo to FFinCoIn general, Denmark does not impose withholding taxon interest paid to aforeign lender.Interest paid on ‘‘controlled debt’’ issubject to withholdingtax at the rate of 25 percent. 10 Controlled debtis defined as debt owed to acompany that directly orindirectly controls more than 50 percent of the votesor more than 50 percent of the shares in the borrowingcompany. The tax withheld is afinal tax. The provisiondoes not encompass the payment of interestfrom apermanent establishment (PE) in Denmark ifthe payment is related to the business conducted bythe PE. Anumber of exceptions to the limited tax liabilityon interest and, thus, the withholding tax,28 12/12 Copyright 2012 by The Bureau of National Affairs, Inc. TM FORUM ISSN 0143-7941

apply. The provision is not triggered with regard topayments of interest to aforeign company:s that has aPEinDenmark and, as such, is subject totaxation on the interest payments;s that falls within the scope of the EC Interest andRoyalties Directive 11 or is entitled to benefits underaDanish tax treaty, asaresult of which taxation iswaived or reduced if the paying and receiving companieshave been associated, as defined in the Directive,for aperiod of at least one year when thepayment is made;s that is controlled by a Danish company or overwhich aDanish company may exercise significantinfluence —control and significant influence beingdefined in accordance with Section 31C of the CorporateTaxAct, i.e., control of more than 50 percentof the votes; ors that is controlled by, orissubject to significant influencefrom, acompany in another country withwhich Denmark has concluded atax treaty, providedthat company is subject to controlled foreigncompany (CFC) taxation in that other country anddoes not pay the interest to another foreign companythat would fall within Section 32 of the CorporateTaxAct (i.e., Denmark’s CFC rules.) Interest isalso exempted if the receiving foreign company isable to demonstrate that the foreign tax imposed inits country of residence on the interest amounts toat least 3 / 4 of the Danish tax that would otherwise beimposed on the interest and that the interest is notpaid to another company that is subject to tax onthe interest that is less than 3 / 4 of the Danish taxthat would otherwise be imposed.It has not been proposed to change the exemptionlisted above in the second bullet in line with the Billintroduced on October 3, 2012 (see above), whichwould have limited the exemption to circumstances inwhich the EC Interest and Royalties Directive appliedor total exemption was granted under an applicabletax treaty.The debt owed to FFinCo will be considered controlleddebt as defined above. FFinCo has astaffofexperiencedfinancial personnel that negotiates thirdparty financing and performs risk management functionswith regard to the financial position of thegroup. Even though most of the capital needs of theParent group are obtained through long-term loansand the currency risk are generally fully hedged upfront, in light of the decisions discussed in I.A., aboveFFinCo would most likely be considered the beneficialowner of the interest.Danish withholding tax would thus only be triggeredif FFinCo were established in acountry that isboth anon-treaty country and outside the EU (whichis not the case here, because under the given fact patternthere is atreaty between Country Z, FFinCo’scountry of residence, and Denmark).C. Royalties paid by HCo to FIPCoRoyalty payments to nonresidents are subject to awithholding tax of 25 percent. 12 This tax is also afinaltax.This tax liability does not extend to royalties fallingwithin the EC Interest and Royalties Directive. 13 Thisexemption only applies if the paying and receivingcompanies have been associated, as defined in the Directive,for aperiod of at least one year when the royaltypayment is made.FIPCo oversees the registration of the intellectualproperty it licenses from Parent and manages effortsby outside lawyers and other third party contractorsto ensure that such property retains its legally protectedstatus and that such status is enforced againstpotential infringers, but has only three employees. Onthe basis of the same reasoning as applies under II.B.,above, FIPCo will most likely be considered the beneficialowner of the royalties.NOTES1 TaxCourt decisions SKM 2011.441LSR and 485LSR2 SKM 2012.26LSR3 Council Directive 90/435/EEC of July 23, 1990, on thecommon system of taxation applicable in the case ofparent companies and subsidiaries of different MemberStates.4 SKM2003 and SKM 2006.7495 TfS 2004.5426 SKM 2012.121Ø7 Court of Appeals judgment of March 2, 2006 in IndofoodInternational Finance Ltd. v. JP Morgan Chase Bank N.A.London Branch.8 Bill no. 10 of Oct. 3, 2012 concerning changes to the Taxat Source Act and the Corporate TaxAct (CTA).9 Act no. 796 of June 20, 201110 CTA, sec. 2d.11 Council Directive 2003/49/EC of June 3, 2003, on acommon system of taxation applicable to interest androyalty payments made between associated companies ofdifferent EU Member States.12 CTA, sec. 2g.13 See fn. 12, above.12/12 TaxManagement International Forum BNA ISSN 0143-7941 29

Host CountryFRANCEStéphane Gelin and Frédé ric RouxCMS Bureau Francis Lefebvre, ParisIntroductionThe concept of beneficial ownership is rarelyused by French domestic law, which reliesmore on aconcept of economic and legal ownershipas defined by common law. Asaresult, Frenchtax law has been more reluctant to adopt and use thisanti-avoidance tool that would permit the French taxadministration to challenge treaty shopping schemes.This and the lack of aclear definition of ‘‘beneficialownership’’ —despite the extensive use of the term intax treaties —could explain the lack of efficiency ofthe beneficial ownership concept and the developmentby France of other tools to challenge treatyshopping schemes.I. French approach to the Beneficial OwnershipconceptA. Introduction of the Beneficial Ownership concept inFrance’s tax treatiesFrance did not initiate this approach to preventing theimproper use of tax treaties by looking to the actualbeneficial owner of income rather than the intermediary(agent or nominee) in receipt of the income.France generally began to include the beneficial ownershipconcept in its tax treaties negotiated after theinclusion of the relevant provision in Articles 10, 11and 12 (respectively, the Dividends, Interest and RoyaltiesArticles) of the OECD Model Convention andthe respective Commentary in 1997. 1However, even before 1977, France had signed anumber of tax treaties incorporating asimilar concept.For instance, the 1966 France–Switzerland taxtreaty disregarded as residents for purposes of applyingany of the treaty’s provisions (and not just thosedealing with passive income) individuals or entitiesthat are not the ‘‘apparent beneficiaries’’ofthe incomeconcerned.From 1977 onwards, most of the tax treaties negotiatedand concluded by France require the beneficialownership of certain income for treaty benefits to beavailable with respect to that income in order to preventtreaty shopping. In some treaties, the beneficialownership condition is not specified in relation to allthe usual three types of passive income (i.e., dividends,interest and royalties) but only in relation toone such kind of income (for example, in relation onlyto dividends in the France–Malaysia tax treaty and inrelation only to royalties in the France–Morocco taxtreaty). In most of France’s tax treaties, the beneficialowner condition applies only with respect to passiveincome, but some treaties may apply the condition inrelation to other categories of income; for instance,the France–Spain tax treaty applies the condition inthe context of the Other Income Article.B. Use of the Beneficial Ownership concept in Frenchdomestic lawNeither French domestic tax law nor the guidelines ofthe French tax administration (FTA) provide for ageneralprinciple of beneficial ownership governing theconditions for the application of France’s tax treaties.However the beneficial ownership concept is employedto frame some domestic provisions as an antiabusemeasure in the context of tax situationsinvolving foreign residents or foreign structures.Article 155 Aofthe French TaxCode (FTC) is ananti-abuse measure directed at ‘‘rent-a-star companies,’’i.e.,schemes whereby compensation for the servicesprovided by an artist in France is paid to aforeign ad hoc company benefiting from afavourabletax regime in its state of residence, which in turn payson only alimited part of the compensation to theartist. Under Article 155 A, subject to the provisions ofan applicable tax treaty,France is entitled to assess theartist on the service fees paid to the foreign companyas the beneficial owner of the payments.Under Article 238 Aofthe FTC, aFrench companypaying aroyalty,interest or any type of service fee to anonresident located in alow-tax jurisdiction is subjectto additional constraints as regards evidence of the realityof the transaction. Anonresident is deemed to be‘‘located in alow-tax jurisdiction’’ where the effectivetaxation burden on the nonresident in its country ofresidence is at least 50 percent lower than the effectivetaxation burden on aFrench resident in similar circumstances.In this respect, the French debtor is entitledto deduct from its taxable basis theremuneration paid only where it is able to prove thatthe recipient of the income is its actual beneficialowner.Based on Article 238 A, French law reverses theburden of proof by presuming that the relationshipbetween the parties in these circumstances is ficti-30 12/12 Copyright 2012 by The Bureau of National Affairs, Inc. TM FORUM ISSN 0143-7941

tious. Thus, the French debtor must demonstrate thatnot only the services provided but also the foreignbeneficiary of the payment are real and that the paymentis not abnormal or exaggerated.For purposes of implementing the EC Parent-Subsidiary Directive 2 and Interest and Royalties Directive3 into its domestic law, French domestic lawintroduced acondition of beneficial ownership of passiveincome for entitlement to the benefit of the followingexemptions:s Article 119 ter of the FTC (which implements theParent-Subsidiary Directive by providing an exemptionfrom the domestic 30 percent withholdingtax on dividends paid by aFrench subsidiary to anEU parent company holding an interest of at least10 percent in the subsidiary for at least atwo yearperiod) requires the parent company to be the beneficialowner of the dividends. In this respect, theFTA are entitled to deny the exemption when theparent company is controlled by an individual orentity located outside the EU, unless the taxpayer(i.e., the French subsidiary) demonstrates that theprincipal or one of the principal objects of the ownershipchain is not to take advantage of the exemptionfrom withholding tax. According to the FTAguidelines, 4 this condition is satisfied when it isdemonstrated that the total sum of the withholdingtaxes triggered by the distribution of French-sourceincome up to the non-EU company is at least equalto the withholding tax that would have been leviedin France (pursuant to French domestic tax law orunder applicable tax treaties) on the direct distributionof the dividends by the French company to thenon-EU shareholder,orthat the interposition structurewas set up before the adoption of the Parent-Subsidiary Directive (i.e., before July 23, 1990). Thecondition should also be met when the taxpayerdemonstrates that the setting up of the intermediateholding company is not an artificial scheme, i.e.,the holding company has substance and effectivelymanages its subsidiaries.s Articles 182 B bis and 119 quater of the FTC for royaltiesand interest respectively (which implementthe Interest and Royalties Directive by providing anexemption from domestic withholding taxes on royaltiesand interest paid by aFrench subsidiary to anEU parent company holding directly an interest ofat least 25 percent in the subsidiary or to arelatedEU company where both the French subsidiary andthat related EU company are at least 25 percentheld by the same parent company for at least atwoyear period) imposes the same beneficial ownershipcondition but with areversed presumption: the exemptiondoes not apply when the FTA demonstratesthat the parent company in receipt of the royaltiesor interest is controlled by anon-EU shareholderand the main purpose or one of the main purposesof the chain of ownership is to take advantage of thewithholding exemption.In conclusion, it may be said that French domesticlaw does not ignore the beneficial ownership conceptaltogether, but it does not provide any uniform interpretationof the term nor does it contain ageneralprinciple for its application in atax treaty context.C. Recognition by French tax court of ageneral conceptwith application to tax treatiesMost of the tax treaties signed by France include abeneficial ownership condition. However, the questionarises as to whether there can exist in French domesticlaw ageneral principle of beneficial ownershipallowing the provisions of atax treaty to be disregardedin any case where the apparent recipient of apayment of income is not the beneficial owner of theincome, aprinciple that would apply in relation to allFrance’s treaties, even where the treaty concerneddoes not itself refer to the beneficial ownership concept.In any particular case, the FTA isentitled to restorethe exact legal characterisation of alegal act orsituation under the abuse of law approach in order toapply the appropriate tax treatment, but generally thisprocedure and its goal remain inappropriate in complextreaty shopping situations.In a1996 Ministerial response, 5 the FTAhighlightedacase in which aFrench company paid royalties fortrademarks and patents sublicensed to it by aDutchcompany, which in turn were licensed to the Dutchcompany by acompany located in Netherlands Antilles.The question submitted was whether the applicationof the exemption from withholding tax on theroyalty payments provided for in the 1973 France–Netherlands tax treaty could be challenged eventhough the Dutch company effectively managed the licensedintellectual property (IP). In its reply, the FTAstated that the Dutch company transferred to theNetherlands Antilles licensor up to 98 percent of theamount of the royalties it received from sublicensingthe IP to the French company.Noting that the schemecould potentially be characterised as an abusivescheme, the FTA considered that the application ofthe France–Netherlands treaty could be disregardedin this situation. Although the beneficial owner conceptwas not expressly referred to, the intimation thatthe France–Netherlands treaty could be set aside indetermining the tax treatment of the royalties meantthat the FTAconsidered the Netherlands Antilles companyto be the beneficial owner of the royalties, eventhough the treaty, which was signed before the 1977update of the OECD Model Convention, does notimpose abeneficial owner condition.The recognition that ageneral beneficial ownershipprinciple can be applied in the context of France’s taxtreaties, however, derives from case law of the FrenchSupreme tax court (Conseil d’Etat). In DieboldCourtage, 6 which again concerned the 1973 France–Netherlands tax treaty, aFrench company paid royaltiesfor the use of computer equipment to aDutchcompany, which in turn paid on 68 percent of theincome to aSwiss related company. The FTA contendedthat the treaty provisions pertaining to royaltiesshould be disregarded with respect to the Frenchsourceroyalty income paid to the Dutch company andthat French 33.33 percent domestic withholding taxrate 7 should apply, since the Swiss company was thebeneficial owner of the royalty income rather than theDutch company. In this situation, the France–Switzerland tax treaty could not be applied since theSwiss company was exempted from cantonal taxesand therefore did not meet the ‘‘subject to tax’’requirementfor qualifying as aresident of Switzerland fortreaty purposes. As previously noted, the France–Netherlands tax treaty, which was concluded before12/12 TaxManagement International Forum BNA ISSN 0143-7941 31

the 1977 update of the OECD Model Convention, doesnot impose any beneficial ownership condition. Nordoes the Royalties Article of the treaty use the term‘‘beneficiary’’. However, the French Supreme Courtdid not reject the principle underlying the FTA’spositionfor that reason, instead stating that the FTA hadfailed to prove that the Dutch company was not thebeneficial owner of the royalties. In this context, theargument based on the significance of the amount onpaidto the Swiss company was not considered to besufficiently compelling or, indeed, relevant. The importanceof this case law is that for the first time theSupreme Court indicated, based on an acontrario interpretation,that the concept of beneficial ownercould be applied in the context of tax treaties signedby France before 1977, even in the absence of an expressreference to the term in the treaty concerned.The beneficial ownership concept was thus espousedas ageneral principle for purposes of the interpretationof tax treaties signed by France.In the Bank of Scotland case, 8 which dates from2006, the French Administrative Supreme Court providedfurther guidance on the general principle ofbeneficial ownership. In this case, aU.S. corporationsold the usufruct with respect to preferred sharesissued by aFrench subsidiary to aU.K. bank for athree year period. The sale price was paid by way of alump sum payment. According to the sale contract,the transferred shares, which did not carry votingrights, allowed the U.K. bank to derive adividend tobe paid by the French subsidiary during the three yearperiod. The shareholder risk borne by the U.K. bankwas limited under the terms of the sale contract underwhich the U.S. corporation guaranteed the paymentof the dividend. This transaction allowed the U.K.bank to benefit from the reimbursement of the avoirfiscal (a refundable tax credit) on the amount of thedividend. The total amount of the dividend and theavoir fiscal derived by the U.K. bank exceeded the saleprice paid by the bank. Given the fact that the U.S.parent company would not have been entitled toobtain reimbursement of the avoir fiscal had it heldthe shares in the French company directly in the samecircumstances, the FTA challenged the availability ofthe benefit under the 1968 France–United Kingdomtax treaty with respect to dividends under the ‘‘frauslegis’’ approach (since the abuse of law concept appliesto tax avoidance, but not to tax refunds). TheCourt ruled that the U.S. corporation was the beneficialowner of the dividend and that the sole purpose ofthe scheme was to allow the reimbursement of theavoir fiscal, thus constituting fraus legis (fraude à laloi). The Court considered that the actual legal characterof the contract was aloan. This case confirmed theextension of the application of the beneficial ownershipconcept because the France–United Kingdom taxtreaty in force at the time (i.e., the 1968 treaty) imposeda beneficial ownership requirement for purposesof obtaining the reduced rate of withholding taxon dividends 9 but not for purposes of the reimbursementof the avoir fiscal. 10 By applying the beneficialownership condition for both purposes, the Court reaffirmedthe position adopted in Diebold Courtage,which recognised beneficial ownership as aconcept ofgeneral application. The import of the case law istherefore that there is ageneral principle of beneficialownership for purposes of applying France’s tax treatiessigned by France, even in the absence of an expressreference to such aconcept in the wording of thetreaty provisions. Consequently, for purposes of anyFrench tax treaty and in relation to any kind ofincome, it is required that the recipient of aFrenchsourcepayment be the beneficial owner of the payment—where that requirement is not met, the taxtreaty provision concerned should be disregarded. Inpractice, this principle means that France’s tax treatiesshould be consider to fall into three categories:s those treaties signed by France before the publicationof the 1977 OECD Model Convention with respectto which the beneficial ownership conceptmay be applied, even though the concept is not expresslyreferred to in the treaty text, based on theDiebold Courtage decision;s those treaties signed by France after the publicationof the 1977 OECD Model Convention that containan express beneficial ownership condition, whichmust be applied on aliteral basis; ands those treaties signed by France after the publicationof the 1977 OECD Model Convention that do notcontain any express reference to the beneficial ownershipcondition, which could be interpreted ashaving intentionally excluded the concept, in whichcase the principle emerging from Diebold Courtagewould not be able to be applied.D. Definition of and criteria for Beneficial Ownershipunder the French approachFrench law provides no uniform definition of the beneficialownership concept and the conditions for itsapplication remain unclear. Nor do France’s tax treatiescontain any definition of beneficial ownership.Thus, although the French legislature has incorporatedthe beneficial ownership concept into Frenchdomestic law as noted in I.B., above, the concept hasnot been clearly defined.In the absence of other guidance, the FTA tend tofollow the OECD Commentary. The FTA Guidelinesfor the application of the 1966 France–Switzerlandtax treaty 11 indicate that ‘‘real beneficiaries’’cannot be‘‘persons who do not truly enjoy income they receiveon behalf of another party,irrespective of the contractualrelationship between the intermediary and thebeneficial owner and of the means used to transfer theincome, whether direct or indirect.’’ Inaddition theAdministrative Guidelines applicable to the France–Algeria, –New Caledonia and –Uzbekistan tax treatiesendorse the definition given in the OECD Commentariesof 1977 and 2003. The Guidelines 12 applicable tothe 1999 France–Algeria tax treaty state that ‘‘thenotion of beneficial owner is not defined by the Treaty.It is indicated that aperson who would only act as anintermediary, for instance an agent, or anominee, interposedbetween the debtor and the real creditor ofthe income could not be considered to be the beneficialowner. The reference to the beneficial owner confirmsthat the State of source of the income does nothave to reduce its taxation pursuant to the Treaty,based on the sole fact that income would be materiallyreceived by aresident of aState with which the Stateof source has signed aTreaty, for instance, where theincome would transit through afinancial establishmentincluded in the payment flow.’’ The FTA Guidelines13 applicable to the 1996 France–Uzbekistan tax32 12/12 Copyright 2012 by The Bureau of National Affairs, Inc. TM FORUM ISSN 0143-7941

treaty refer to the OECD Commentary and supplementthis by adding that ‘‘the beneficial ownershipconcept should not be limited to arestrictive and technicalmeaning, but be analysed based on its contextand in the light of the purpose of the tax treaty.’’ TheGuideline also notes that ashell company cannot beconsidered abeneficial owner where its powers are inpractice very limited irrespective of the fact the companyis the owner of the income concerned. BothGuidelines are considered by FTA tobegeneral explanationsfor purposes of the interpretation and applicationof similar provisions in France’s tax treaties.It is clear from these technical explanations providedby the FTAthat they are primarily addressing fiduciaryand agency situations, as well as situationsinvolving abasic interposed base company that derivesfinancial flows on behalf athird party. This definitionwas applied by the Versailles Lower TaxCourtin acase in which aU.S. company acted as the nomineeof aPanama company holding shares of aFrenchcompany. Inthis regard, the court approved the FTA’sposition, which denied the benefit of Dividend Articleof the France–United States tax treaty with respect todividends paid by the French company to the U.S.company,onthe grounds that the latter was unable toprove that it had effectively purchased the Frenchcompany shares. 14 But the exact scope of the definitionprovided by these Guidelines remains vague, allowingthe FTA to bring many different situationswithin the scope of this anti-avoidance measure. Asresult the exact meaning of, and the issues surrounding,beneficial ownership, in the context of its applicationto France’s tax treaties still remain largelyunclear.In practice, FTA reassessments have concentratedon cases in which asignificant portion of the Frenchsource-income concerned was paid on by aforeigncompany to another non-French resident. In suchsituations, the FTA have characterised the beneficiaryof the ultimate payment as the beneficial owner, sothat they may disregard withholding tax rate reductionsor exemptions provided for in the tax treaty concludedbetween France and the state of residence ofthe original recipient.The French courts have challenged this position. InDiebold Courtage (see I.C., above), the FTA contendedthat the Swiss company was the beneficial owner ofthe French-source royalties based on the magnitudeof the amount paid on to the Swiss company (correspondingto 68 percent of the amount paid by theFrench company to the Dutch company). The Courtheld that, irrespective of the magnitude of the amountpaid, the FTA would have had to demonstrate that thepayment was not in line with the arm’s-length principle.The same conclusion was reached in anothercase 15 by the Lille Lower TaxCourt, in which between93 percent and 98 percent of the amount of aroyaltypaid by aFrench company to aDutch company was inturn paid on to aNetherlands Antilles company underalicensing agreement. The Lille TaxCourt stated thatthe existence of an agency was not demonstrated bythe magnitude of the financial flow alone, even thoughthe Netherlands Antilles company benefited from afavourabletax regime. The court pointed out that theDutch company carried on its own activity, acted onits own behalf and could not be considered the agentof the Netherlands Antilles company.The concept of beneficial ownership evolved in theBank of Scotland case (see I.C., above), in which theSupreme Court disregarded the benefit of the France–United Kingdom tax treaty with respect to the dividendpaid by the French company to the U.K. bank byqualifying the U.S. parent company as the beneficialowner of the dividend. However, the U.K. bank effectivelyreceived the payment on its behalf and as the ultimatebeneficiary, and could have been consideredthe ultimate recipient in the payment chain. In thiscase, for the first time the Supreme Court adopted anextensive interpretation of the beneficial ownershipconcept, including within its scope the fraus legis conceptin order to challenge an abusive scheme set upfor purposes of benefiting from tax treaty provisions.Following this decision, the application of the beneficialownership concept is no longer only limited tosituations involving the indirect transfer of income.The Supreme Court has expanded the beneficial ownershipconcept by extending its application to bothsituations in which income is on-paid in any mannerand situations in which an abusive scheme allows abeneficiary to be substituted in order to benefit from afavourable provisions in atax treaty with aparticularstate. It should be noted, however, that even thoughthe Supreme Court agreed to disregard the tax treatybased on the beneficial ownership condition, it combinedthis condition with the fraus legis concept, as ifthe beneficial ownership concept were insufficient ofand by itself to justify the denial of treaty benefits.E. Effectiveness of Beneficial Ownership concept for theFrench approach to the application of tax treatiesGiven the fact that the French courts are reluctant toapply it independently and the fact that agrowingnumber of other specific anti-avoidance provisionshave been agreed to in negotiating France’s recent taxtreaties that in practice cover the beneficial ownershipsituation, the question could be raised as to whetherbeneficial ownership is an effective concept.The combination of the beneficial ownership approachwith fraus legis that was used in Bank of Scotlandextended the concept’s scope of application butweakened its efficiency. This reluctance to apply theconcept independently is likely to force the FTA tochallenge the availability of tax treaty provisions bydemonstrating not only that the apparent recipient ofthe income concerned is not the beneficial owner ofthe income but also that the scheme constitutes anabusive application of the treaty provisions. In thesecircumstances, the question that arises is whether thebeneficial ownership concept stills remains relevantfor challenging treaty-shopping cases or whetherfraus legis (or the closely related concept of abuse oflaw) is sufficient in itself for challenging such cases. Inarecent case in which aLuxembourg company wasinterposed between a French company and a Seychellescompany in order to benefit from the provisionsof the France–Luxembourg TaxTreaty Articlesapplicable to dividends, the Paris Lower TaxCourt 16denied the application of the treaty provisions, statingthat the scheme constituted fraus legis since it was awholly artificial arrangement whose main purposewas to avoid tax liability and the Seychelles companywas the ‘‘actual beneficiary.’’The court did not refer tothe beneficial ownership concept, which suggests thatthe concept is weakened by the more systematic appli-12/12 TaxManagement International Forum BNA ISSN 0143-7941 33

cation of fraus legis,which allows the beneficiary to beidentified. The possibility of merging the beneficialownership with the fraus legis or the abuse of law approachcould be explored.The trend towards using the abuse of law or thefraus legis concept to challenge tax schemes in an internationalcontext was confirmed by a recent SupremeCourt case concerning abuse in the applicationof the EC Parent-Subsidiary Directive. 17 In this case,aLuxembourg company was set up in order to benefitfrom an exemption from French withholding tax ondividends. The Supreme Court identified an abuse oflaw and denied the application of the parentsubsidiaryexemption regime on the grounds that theLuxembourg company lacked any substance and thearrangement had no economic or financial motiveother than avoiding tax. Based on this decision relatingto aFrench domestic law regime, it is likely thatthe FTA could apply the same analysis with respect tothe economic justification for, and substance of, anentity for purposes of the application of atax treaty insimilar circumstances, and on that basis could disregardashell entity. This is in keeping with ageneralmovement in French domestic tax law espousing frauslegis as ageneral principle encompassed by the abuseof law approach. This idea, which derives from caselaw of the Supreme Court, was introduced in ArticleL.64 of the French Procedural Code (LPF) in 2008 andallows the FTA todisregard atransaction where thetransaction: (1) has afictitious character (fictivité); or(2) aims at obtaining aformal application of legal provisionsor decisions, violates the objectives of the authorsof those provisions or decisions, and wasexclusively motivated by the objective of reducing thetaxes that would ‘‘normally’’have applied to the actualtransaction (but exclusivement fiscal). The secondground of application mainly concerns transactionsthat are based on the diversion of legal provisions oradministrative decisions from the objectives pursuedby their authors and whose sole purpose is to avoid orreduce the tax burden on the taxpayer (which the taxpayerwould have borne in the absence of the transaction).Since such a qualification also triggers theimposition of an 80 percent penalty assessed on theamount of tax avoided, the FTA could be tempted touse this approach rather than solely the beneficialownership general principle approach.One of the consequences of and reasons for this decreasein efficiency is the development of new types ofanti-abuse provisions negotiated for inclusion inFrance’s more recent tax treaties. In practice, specificclauses are added to provide more strict and efficientlimitations on treaty shopping and to prevent theabuse of tax treaties. Generally these conditions orspecific Articles have abroader scope of coverage thanthe beneficial ownership condition. For instance,Limitation on Benefits (LOB) Articles are included inthe 1994 France–United States tax treaty and the 2007Protocol to the France–Japan tax treaty.These Articleslimit the availability of the benefits under the treatyprovisions to specific entities and individuals. In addition,other recent French tax treaties contain provisionsthat exclude their application in situationsresembling fraus legis. For instance, Article 11(6) ofthe 2008 France–United Kingdom tax treaty statesthat the Dividend Article ‘‘shall not apply if it was themain purpose or one of the main purposes of anyperson concerned with the creation or assignment ofthe shares or other rights in respect of which the dividendis paid to take advantage of this article by meansof that creation or assignment.’’ Asimilar provision isto be found in anumber of French tax treaties, includingthose with Albania, Azerbaijan, Chile, Croatia,Mexico, Nigeria and Uzbekistan. These new types ofprovisions have abroader scope than the beneficialownership approach and seem to be more efficienttools for countering cases of tax evasion.II. Application of the French approachA. Dividends paid by HCo to FHoldCoBased on current case law,itwould be difficult for theFTAtodemonstrate that FHoldCo is not the beneficialowner of the dividends: FHoldCo is indeed the fullowner of the HCo shares and does not receive the dividendsin the capacity of an agent or anominee; as indicatedin I.D., above, the mere fact that FHoldCopays on alarge portion of the dividends received toParent does not make Parent the beneficial owner ofthe dividends.Based on the Bank of Scotland case, apossible alternativefor the FTA would be to demonstrate, that theinterposition of FHoldCo between HCo and Parentconstitutes an abuse of law. Denying the validity ofthis scheme would entitle the FTA todesignate Parentas the beneficial owner or actual recipient of the dividendincome. Such acharacterisation would be admittedif the FTA were able to demonstrate that theparticipation structure set up by the group was onlydriven by the purpose of avoiding or mitigating the taxburden in France with respect to the dividends. Basedon case law of the French tax courts, the essential considerationwould be whether or not FHoldCo had sufficientsubstance to manage its participation in HCo,i.e., whether the holding activity (accounting, legal, financialservices, etc.) could be carried out in CountryXbyFHoldCo’s employees and whether the establishmentof FHoldCo in Country Xwas driven by economicreasons other than tax reasons (for instance,there would be evidence to support the fact that theestablishment of FHoldCo was for non-tax economicreasons if FHoldCo carried out aregional headquartersactivity by holding participations in other subsidiarieslocated in other European countries). IfFHoldCo were only ashell entity, there would be ahigh risk that the FTA would be successful in establishingan abuse of law: in that case FHoldCo wouldbe disregarded, and the domestic withholding tax ratewould apply as if Parent had received the dividends directly.IfCountryXwere an EU Member State but notCountry Y, the FTA would not need to resort to theabuse of law procedure, merely the anti-avoidancemeasure provided by Article 119 ter of the FTC. Inview of the above, the dividend withholding tax exemptionwould remain available only if it could bedemonstrated that FHoldCo has substance.B. Interest paid by HCo to FFinCoSince March 1, 2010, under French domestic law, thepayment of French-source interest to anonresidenthas been exempt from withholding tax. Withholdingtax applies, at arate of 50 percent, only where interest34 12/12 Copyright 2012 by The Bureau of National Affairs, Inc. TM FORUM ISSN 0143-7941

is paid to arecipient located in aState or territory thatunder French tax law is considered ‘‘non-cooperative’’for information exchange purposes. 118 8In the present case, interest is paid to FFinCo,which is aresident of atreaty country and thereforenot anon-cooperative country. The beneficial ownershipissue, if there is one, is only relevant if the beneficialowner is resident of anon-cooperative country.For the sake of discussion, it will be assumed that thethird party banks are established in anon-cooperativecountry.The situation is akin to that described in the administrativeguidelines on the France–Algeria tax treaty(see I.D., above), which indicate that an entity is notthe beneficial owner where afinancial flow merelypasses through the entity. However, the fact that theoriginal lenders are third party banks and that FFinCohas astaffofexperienced financial personnel who performarisk management function would make it difficultto demonstrate that FFinCo is amere conduit. Inaddition, the reduction of withholding tax makessense in the context of transactions within agroup;with third parties, the burden of the withholding tax isactually shifted outside the group, unless gross-upclauses have been negotiated. The same would holdtrue under an abuse of law approach.C. Royalties paid by HCo to FIPCoThe analysis proposed in I.A., above in relation to dividendpayments could also be applied in relation toroyalty payments. The FTAcould attempt to challengethe exemption from withholding tax on royalties paidby HCo to FIPCo by asserting that Parent is the beneficialowner of the royalties. In practice, the risk ofsuch achallenge would be increased by the availabilityof adouble exemption from withholding tax —inFrance and in Country Q—while the direct paymentof royalties from HCo to Parent would not be taxexempt. In addition this specific structure was identifiedby the FTAasopen to criticism in the 1996 Ministerialresponse (see I.C., above). In this particularsituation, the FTAcould assert that the licensing of theIP rights by Parent to FIPCo is actually an agencyagreement under which FIPCo manages the IP in thename and on behalf of Parent. In this case, FIPCowould be characterised as an intermediary with respectto the royalties paid by HCo. The FTAcould supportits argument by pointing to the fact that 91percent of the royalties derived from France is on-paidby FIPCo to Parent. However in the 1999 case referredto in I.D., above, the Lille Lower TaxCourt rejectedthe position of the FTA in a similar situation: theDutch company was granted alicense by aNetherlandsAntilles company and granted asublicense to aFrench company.The magnitude of the amount of theroyalty paid by the Dutch company to the NetherlandsAntilles company was not considered by the Court tobe arelevant argument for characterising the NetherlandsAntilles, rather than the Dutch, company as thebeneficial owner. Inthe present case, the same analysiscould be argued to challenge the FTA’sposition, tothe extent the margin derived by FIPCo correspondsto an arm’s length compensation.Alternatively, however, the FTA could attempt tocharacterise the arrangement as an abuse of law,especiallyif FIPCo does not have sufficient economic substanceand/or the setting up of FIPCo in Country Qwas not justified by economic or regulatory reasonsand was only tax-driven. The location of FIPCo inCountry Qwould have to be justified on economicgrounds and the company would have to be able toprove that the staff ofonly three employees is sufficientfor the efficient performance of the IP managementactivities. If the FTA were to succeed inchallenging the arrangement on the grounds of frauslegis, the application of the France–Country Q taxtreaty provisions could be disregarded.Where Country Q is an EU Member State, butCountry Yisnot, the FTAcould likely challenge the exemptionfrom French withholding tax on the royaltieson the basis of the EC Interest and Royalties Directive,119 9 because FIPCo is controlled by Parent, anon-EU holding company, bydemonstrating that themain purpose of the interposition of FIPCo is to takeadvantage of the withholding tax exemption. The FTAwould have the burden of proof, but the FTA wouldlikely be successful where there is no economic nontaxreason for the setting up of FIPCo in Country Q,especially where FIPCo lacks substance.NOTES1 1977 OECD Model Convention, Art. 1, Commentary,paras. 8, 9and 10; Art. 10, Commentary,para. 12; Art. 11,Commentary para. 8; and Art. 12, Commentary, para. 4.2 Directive 90/435 EEC.3 Directive 2003/49/EC.4 Administrative technical explanations [D. adm.] 4J-2-92 Nos.39 &40dated Aug. 3, 1992.5 Ministerial Response Legendre JO Sénat Dec. 19, 1996,p. 3403.6 Supreme Tax court (Conseil d’Etat) Oct. 13, 1999No.191191 Diebold Courtage RJF 12/99 No.1492.7 As provided for by FTC, Art. 182B.8 Supreme Tax court (Conseil d’Etat) Dec. 29, 2006,No.283314 Sté Bank of Scotland, RJF 3/07 No.322.9 1968 France–United Kingdom tax treaty, Art. 9(6).10 1968 France–United Kingdom tax treaty, Art. 9(7).11 Administrative technical explanations [D. adm.] 14B-221 No.6 Dec. 10, 1972.12 Guidelines dated May 22, 2003 BOI 14 B-3-03 No.70.13 Guidelines dated July 9, 2004 BOI 14 B-5-04 No.34.14 Versailles lower tax court (Tribunal administratif) July11, 2003 No.99-5645, Sté SCDM, RJF 1/04 No.79.15 Lille lower tax court (Tribunal administratif) March 18,1999 n°95-5403 Fountain Industries France, RJF 8-9/99n°961.16 Paris lower tax court (Tribunal administratif) June 23,2009 No.05-08263 Sté Innovation et Gestion financière,RJF 5/10 No.511.17 See fn. 2, above.18 18 Botswana, Brunei, Guatemala, Marshall Islands,Montserrat, Nauru, Niue, the Philippines.19 19 FTC, Art. 182 bis B.12/12 TaxManagement International Forum BNA ISSN 0143-7941 35

Host CountryGERMANYDr. Rosemarie Portner, LL. M.Deloitte &Touche GmbH, DüsseldorfIntroductionA. General Anti-Abuse provisionAs early as 1919, aprovision was introducedinto the German Fiscal Code to combat abuseof the tax law. 1 In connection with the introductionof this provision, tax abuse was defined as theachievement of a specific economic result throughavoidance of the legal criteria that the tax law wouldassume normally to be met and that the tax law thereforemade aprecondition for the arising of atax claim.It was subsequently explained that, for tax purposes,what is significant is economic substance; conversely,transactions that are valid according to German civilor commercial law but that have no economic substancemay be ignored for tax purposes.§42 of the Fiscal Code constitutes a general antiabuseprovision that implies the substance-over-formdoctrine and determines that atransaction that maybe regarded as unnecessary for achieving the non-taxlegal and economic objectives ultimately sought maybe disregarded if it conceals the true substance ofwhat is accomplished by the transaction. This generalrule does not apply where the taxpayer can prove thatthe design of the transaction is based on sound, nontax-relatedbusiness reasons that, taking into accountall the facts and circumstances of the case concerned,can be regarded as being the decisive reasons for thetransaction. Where the tax authorities assume atransactionto be abusive, the taxation of the transaction isbased on the legal treatment deemed generally applicableto the real transaction. In practice, however, thetax authorities find it difficult to apply the generalanti-abuse provision and to substitute atransactionthat is valid under civil law with adeemed transactionthat is more ‘‘realistic’’ and seems more appropriatefor taxation purposes.It is important to note that alegally valid transactionthat may be viewed as constituting an abuse oflaw is to be distinguished from asham transactionthat is not avalid transaction under the law and thereforecannot be an abuse of law. 2In addition to the general anti-abuse provision inthe Fiscal Code, anumber of particular tax laws (forexample, the Income TaxAct and the Act on ForeignTransactions) contain specific provisions designed tocombat the abuse of law. These specific anti-abuseprovisions also determine the tax consequences thatfollow when they apply (for example, that, in certaincircumstances, treaty benefits are denied). 3B. Beneficial Ownership conceptThe beneficial ownership concept may be regarded asbeing designed to ensure that the incidence of taxationis not determined solely by which person or entityreceives aparticular item of income, but must alsotake into account which person or entity enjoys thetrue economic benefits from, or control over, theincome, and which person or entity owns the property,performs the services or bears the risks that giverise to the income. Thus the beneficial ownership doctrineaddresses one specific aspect of abroad range ofpossible abusive transactions. Typically, the beneficialownership concept is used to determine whether theformal recipient of income is entitled to enjoy the benefitsthat a tax treaty confers with respect to theincome with aview to combating ‘‘treaty shopping.’’‘‘Treaty shopping’’refers to an arrangement whereby aperson that is not directly entitled to certain treatybenefits interposes another person that is entitled tosuch benefits, which are then passed on to the ‘‘principal’’inthe arrangement.The term ‘‘beneficial owner’’ (in German, ‘‘Nutzungsberechtigter’’)or‘‘beneficial ownership’’ isusedin Germany’s tax treaties but not in German domestictax law.C. True economic ownership versus formal receipt ofincomeWhile substance over form (and specifically the economicsubstance doctrine) is generally understood tocombat the abuse of law where it is applied to alegalform that is artificially adopted with aview to minimisingtaxation in an inappropriate manner, typicallyof acivil law country, Germany has long taken the positionthat assets that are generally allocated to theircivil law owner 4 may be allocated to another person,who exercises control over the assets in such awaythat for the life of the assets the legal owner is generallyexcluded from control over them. 5 Thus, aperson’seconomic ownership of an asset is assumed ifthe person has asecure legal position for acquiring36 12/12 Copyright 2012 by The Bureau of National Affairs, Inc. TM FORUM ISSN 0143-7941

the asset and acquires the principal legal rights attachingto the asset (for example, where the assettransferred is ashare, voting rights and dividends),and bears the risk of adecrease or the chance of an increasein the value of the asset. Alegal transactionmay therefore be accomplished where an arrangementis viewed from an economic perspective if thelaw itself is governed by an economic approach, in thesense that it applies criteria with an economic content.Such legal transactions are not viewed as beingabusive and must be distinguished from tax abuse.Civil law notions, such as agent versus principal(Vertreter), the anticipatory assignment of income(Nieszbrauch)and fiduciary (Treuhand)arrangements,have for along time played arole in the determinationof the ‘‘true taxpayer’’with respect to aparticular itemof income.1. Agent versus PrincipalIt is relevant to determining whether the nominal ordirect recipient of income is to be treated as the recipientof the income for German income and withholdingtax purposes that, in certain circumstances, aperson that directly receives an item of income may betreated as amere agent or nominee. To be an agent, aperson must: (1) operate in the name of and for the accountof its principal; (2) bind the principal by its actionsand transmit the relevant payments to theprincipal; and (3) hold itself out to third parties as anagent for its principal and have as its business purposethe carrying on of the normal duties of an agent.§13ofthe Fiscal Code defines the term ‘‘permanentagent’’ asaperson that, on asustainable basis, carrieson the business of an enterprise that is its principaland is bound by the principal’s instructions. In particular,apermanent agent is aperson that concludesor commissions contracts for the enterprise of whichit is an agent or maintains a stock of goods fromwhich it (the agent) makes deliveries.2. Anticipatory Assignment of Income doctrineUnder German civil law, the owner of incomeproducingproperty such as stock, debt instruments orleased immovable property, can avoid being taxed onthe income produced by entering into acontractualagreement with the effect that the income is to be allocatedto athird party. Thus, rights to income can betransferred separately from the underlying incomeproducingproperty. Of course, a legal contract byvirtue of which income is transferred separately fromthe underlying income-producing property must bedistinguished from asimple arrangement transferringincome to athird party for whatever reason (for example,the making of agift). Thus, for example, aperson that owns stock or debt instruments andsimply directs the issuer to pay dividends or interestto another person (and not to the person to whomsuch payments are due) remains the beneficial ownerof the income and is subject to tax under the Germantax rules. The efficacy of acontractual assignment ofincome is somewhat limited by the fact that the ‘‘intermediary’’isentitled to keep the income deriving fromthe income-producing property.3. Trust versus FiduciaryThe German ‘‘Treuhand’’ is to be distinguished fromthe trust concept familiar in Anglo-American jurisdictions.Under a Treuhand, aperson (Treugeber) transfersthe ownership in property to another person(Treuhãnder) who administers the property in his/herown name but under the absolute control of the transferorof the assets (i.e., Treugeber). The transferor ofthe assets (Treugeber) isthus treated for tax purposesas the economic owner and as taxable on income derivedfrom the property administered in the name ofthe civil law owner (Treuhãnder)but for the account ofthe transferor of the assets (Treugeber). 6 Such aformaltransfer of ownership, with the ongoing control overthe assets being retained by the transferor must beclearly documented, in order for it to be recognisedfor tax purposes.D. Entitlement to treaty benefits —treaty shoppingUnder the Income TaxAct, awithholding tax of 25 percentplus asolidarity surcharge of 5.5 percent (givingan overall rate of 26.375 percent) is levied on dividends(and certain types of profit participating interest)paid by aGerman resident corporation. In thecase of royalties paid by aGerman resident payor, theoverall rate of withholding tax is 15.825 percent. Thetax is levied by way of withholding at source. Relieffrom withholding tax under the EU Parent-Subsidiaryand Interest and Royalties Directives and under applicableGerman tax treaties is usually obtained either byapplying for awithholding tax exemption certificatebefore payment is made or by requesting arefundafter payment is made. However, both forms of relieffrom withholding tax are subject to an anti-treatyshopping rule contained in §50d (3) of the IncomeTaxAct (the ‘‘limitation on benefits provision’’).The standard treaty-shopping scenario involvesthree parties, two of which are affiliated or relatedthrough acommercial or other relationship where thedirect relationship between these two parties does notlead to the availability of the desired treaty benefits.To achieve the desired treaty benefits (for example, inrelation to withholding tax on dividends, interest orroyalties), a third party is interposed as a conduitcompany that transfers the income concerned to theultimate shareholder or party to the contract.For purposes of the application of atax treaty, theacceptance of alegal relationship for tax purposes isrestricted by virtue of the beneficial ownership requirementcontained in Articles 10, 11 and 12 of theOECD Model Convention. However, the term ‘‘beneficialowner’’ isgenerally not defined in treaties. Norcan the term be interpreted by reference to Germandomestic law,which also does not define the term. Theallocation of income to aperson other than its civillaw owner, however, should generally not be consideredto create beneficial ownership of that income ifthe civil law owner of the underlying property is in aposition to generate income from that property andthe use of the income is at his/her discretion andunder his/her control.According to German jurisprudence, a civil lawlegal transaction may be ignored and income allocatedto aperson indirectly involved in the transaction12/12 TaxManagement International Forum BNA ISSN 0143-7941 37

if the transaction is regarded as abusive, irrespectiveof whether atax treaty applies. The application ofGerman substance-over-form rules is deemed not tobe barred under the terms of Germany’s tax treaties(at least if the treaty concerned does not contain alimitation on benefits or similar anti-treaty-shoppingclause), because Germany’s treaties do not cover theallocation of income to aparticular person —the allocationof income is governed by national law. However,this approach is highly controversial.In the context of entitlement to tax treaty benefits,the German government has long sought — withmixed success —todeny treaty benefits with respectto payments made by aGerman taxpayer to apersonthat is aresident of atreaty partner country where theparticipation of the treaty country resident is regardedas having no substantive economic purposeother than the achievement of qualification for treatybenefits.The most relevant provision regarding whether thepayment of income to an intermediary will be giveneffect for German tax purposes is contained in §50d(3) of the Income TaxAct. This provision is based onthe substance-over-form doctrine, under which atransaction viewed as unnecessary for achieving thenon-tax legal and economic objectives ultimatelysought may be disregarded if it conceals the true substanceof what is accomplished by the transaction.The provision specifically addresses treaty and directiveshopping. It was first introduced as §50d (1a) ofthe Income Tax Act, which became effective as of1994, and was most recently amended by the TaxActfor the Implementation of the EU TaxRecovery Directiveand the amendment of certain tax provisions thatbecame effective on December 11, 2011. 7 The latestversion of the rule applies with general effect fromJanuary 1, 2012. It also applies to all previous periodsto the extent that the tax assessment or exemption certificateconcerned is still open to appeal and applyingthe new version of the rule leads to amore favourabletax result for the taxpayer.The most recent amendment became necessarywhen the European Commission formally requestedthat Germany amend its anti-abuse provision targetedat treaty shopping, which was regarded as incompatiblewith EU principles. The Commission emphasisedthat it was not challenging the objective of the antitreatyshopping provision in §50d (3) of the IncomeTax Act, but merely the disproportionate requirementsimposed on foreign companies for proving theexistence of a‘‘genuine economic activity’’ (gross receiptstest). Under the former version of §50d (3), aforeign company that received apayment subject toGerman withholding tax and that was owned byshareholders that would not have been entitled to acorresponding benefit under atax treaty or the EUParent-Subsidiary or Interest and Royalties Directivehad they received the payment directly was not entitledto areduced or zero rate of withholding tax ifone of the following three tests was passed: (1) therewere no economic or other relevant (i.e., non-tax) reasonsfor the interposition of the foreign company(business purpose test); (2) the foreign company didnot generate more than 10 percent of its income fromits own business activities (gross receipt test); or (3)the foreign company did not have adequate businesssubstance to engage in its trade or business and didnot participate in general trade and commerce (substancetest). The European Commission explainedthat the contested measure was disproportionate, inparticular as regards the gross receipts test, because acorporation would have no ability to produce evidenceto show that it did not pass the test.As aresult of the infringement procedure initiatedby the European Commission in 2010, §50d (3) of theIncome TaxAct was amended. Under the amendedprovision, which applies as of January 1, 2012, aforeigncompany that receives payments subject toGerman withholding tax is entitled to tax relief to theextent that:s the company is owned by shareholders that wouldbe entitled to acorresponding benefit under ataxtreaty or an EU Directive were they to receive theincome directly (shareholder test); ors the gross receipts generated by the foreign companyin the relevant year are derived from the company’sown genuine business activities (businessincome test).Aforeign company that fails to pass both the shareholderand business income tests is nevertheless entitledto relief from withholding tax if it passes both ofthe following additional tests:s there are economic or other relevant (i.e., non-tax)reasons for the interposition of the foreign companyin relation to the relevant income (businesspurpose test); ands the foreign company has adequate business substanceto engage in its trade or commercial businessand it participates in general trade orcommerce (substance test).Whether §50d (3) of the Income TaxAct is consistentwith Germany’s tax treaties and hence whether itis constitutional or infringes German constitutionallaw and the law of nations is the subject of dispute.1. Administrative Ordinance of January 24, 2012On January 24, 2012, the German Ministry of Finance(Bundesministerium der Finanzen or BMF) issued anadministrative ordinance that contains guidance onhow the tax authorities will interpret the amendedanti-treaty shopping rule. The guidance aims toclarify relevant terms and addresses some of the mostrelevant questions associated with the amended rule.The ordinance also states that the tax authoritiesapply the amended rule and the ordinance to all pre-2012 cases that are still pending if the application ofthe rule is favourable to the taxpayer.2. Shareholder testThe shareholder test determines personal entitlementto aclaim or relief from withholding tax under an EUDirective or one of Germany’s tax treaties (in contrastto the business income, or business purpose and substancetests, which lay down the factual preconditionsfor claiming withholding tax relief.) It is nonethelesspossible to look though interposed foreign companiesthat do not pass the anti-treaty shopping test to ahigher-tier company that is personally entitled towithholding tax relief. If, however, one of the interposedcompanies is only entitled to alower or no relieffrom withholding tax, the lower tax relief is decisive,38 12/12 Copyright 2012 by The Bureau of National Affairs, Inc. TM FORUM ISSN 0143-7941

irrespective of the entitlement of ahigher-tier shareholderto areduced withholding tax rate. The administrativeordinance explains that the look-throughapproach applies only to the extent the relevant foreignshareholder does not meet the criteria for factualentitlement. Unless each company in achain of shareholdersis personally entitled to relief, it is not possibleto look through interposed companies. In this contextGerman resident shareholders, which are not personallyentitled to withholding tax relief, are considered‘‘tainted’’ shareholders.3. Specific casesAforeign company in whose principal class of sharesthere is substantial and regular trading on arecognisedstock exchange is not covered by the limitationon benefits clause. This also applies to qualifying investmentvehicles. Such taxpayers are not required topass the business income, business purpose and substancetests if they are personally entitled to withholdingtax relief because they are protected by atax treatyor an EU Directive.Where aforeign holding company is held directly orindirectly by alisted company, the personal entitlementof each interposed company must be reviewed.Whether the additional business income, businesspurpose and substance criteria are met need not betested at each level provided each interposed companyis personally entitled to the same (or higher)withholding tax relief as the ultimate parent company.However, ifone of the interposed companies is onlyentitled to lower withholding tax relief than the ultimatelisted parent company,the factual entitlement atthe level of the lower-tier companies will have to be reviewedin order to determine whether one of thesecompanies is factually entitled to higher withholdingtax relief.4. Pro rata approach to determining entitlementto tax reliefThe administrative ordinance explains that where aforeign company does not pass the factual entitlementtest (i.e., business income, or business purpose andsubstance), if some of its shareholders are not entitledto withholding tax relief, the ‘‘fictitious’’entitlement towithholding tax relief must be determined for eachshareholder (this is known as the ‘‘apportionmentrule’’). Thus, acompany’s gross receipts are separatedinto ‘‘good’’ income and ‘‘bad’’ income, which will, inturn, determine whether the company is entitled tofull or only partial withholding tax relief. More specifically,this means that an analysis must be made, atthe level of the qualifying foreign shareholder companyor,ifthis company is looked through, at the levelof its shareholders, of the percentage of income theforeign company generates from its own genuinebusiness activities (good income).5. Business purpose and substanceWith regard to ‘‘bad’’income, it may still be possible toqualify for relief from withholding tax to the extent itcan be demonstrated that there are economic or otherrelevant non-tax reasons for the interposition of theforeign company in relation to the receipts, and thatthe foreign company has adequate business substanceto engage in its trade or business and it participates ingeneral commerce (‘‘good’’ income).Thus, ‘‘good’’income and ‘‘bad’’income are differentiatedand withholding tax relief with respect to dividendsor royalties is granted only in proportion to thepercentage of total income represented by goodincome. To the extent a company generates badincome, the analysis must be repeated at the next levelof shareholders provided the personal entitlement criteriaare met.6. Business income testThe business income test, together with the businesspurpose and substance tests, lays down the factualpreconditions for claiming withholding tax relief.Under the business income test, withholding tax reliefis granted insofar as the foreign company generatesgross income as aresult of its own genuine businessactivities. Acompany is deemed to engage in its owngenuine business activities if it participates in ageneraltrade in its host country and if its activities cannotbe viewed as mere asset management. The administrativeordinance explains that own genuine businessactivities may be presumed to be carried on where servicesare rendered to one or more subsidiaries of theforeign company and the terms and conditions for therendering of such services conform to the arm’slengthstandard. The carrying on of mere asset managementactivities ,i.e., the management of the company’sownor athird party’s assets, would not be sufficient. However,amanagement holding company is deemed toengage in its own genuine business activities if itsshareholding in the managed companies is substantialand the holding company manages at least two ormore subsidiaries. In this context, it is important forthe management holding company to be able to exerciseacertain degree of influence over the subsidiaries,and for long-term strategic decisions and certain fundamentaldecisions concerning the managed subsidiariesto be taken at the level of the managementholding company. The management arrangementsmust be entered into in writing and sufficiently documented.According to the administrative ordinance, where amanaged subsidiary of aforeign company is active inthe same line of business as the foreign company andthere is afunctional link between the activities of theforeign company and its subsidiary, any dividend/interest or royalty income from the subsidiary qualifiesas income from its own genuine businessactivities. Interest income received by the foreigncompany also qualifies as income from its own businessactivities if it results from the investment ofexcess liquidity deriving from aqualifying genuinebusiness activity. Anoutsourcing of management andother activities to athird party,for example, alaw firmor amanagement company, gives rise to ‘‘tainted’’ activities,income from which would not be accepted asincome from acompany’s own genuine business activities.7. Business purpose testWithholding tax relief is granted insofar as, eventhough the foreign company does not generate busi-12/12 TaxManagement International Forum BNA ISSN 0143-7941 39

ness income, it maintains an adequate business operationthrough which it participates in general tradeif there is abusiness purpose for the interposition ofthe foreign company.Abusiness purpose is assumed ifthere is an intention that the foreign company shouldcarry on its own genuine business activities and evidencecan be provided of the appropriate activities.According to the administrative ordinance, there isdeemed to be no business purpose, for example, if themain function of the foreign company is to protect domesticassets in times of crisis, or if the foreign companyis to be used for future succession arrangementsor to secure the retirement assets of its shareholders.In the same way, the existence of purposes attributableto the circumstances of the group of which theforeign company is apart, such as coordination, organisation,establishing customer relations, costs,local preferences and the overall corporate set up, thatdo not qualify as economic or other relevant purposesdoes not result in the business purpose test beingpassed.8. Substance testThe administrative ordinance provides some examplesthat illustrate when the foreign company canbe assumed to have sufficient business substance, i.e.,where there are sufficient management and other staffpersonnel; where the foreign company’s personnelhave adequate qualifications to allow them to engagein the company’s business in acompetent and independentmanner; or where transactions with relatedparties are consistent with the arm’s length principle.However, substance that exists at the level of othergroup companies (affiliated companies) cannot betaken into account for purposes of determining substanceat the level of the foreign company. This alsoapplies to integrated companies and other forms oftax consolidation and an economic approach cannotbe taken.9. Timing aspectsAforeign company’s factual entitlement to treaty benefitsmust be reviewed with respect to an applicationfor arefund of withholding tax for the year in whichthe dividends/royalties are received by the foreigncompany. Where an exemption is requested, factualentitlement must be determined for the year in whichthe application is filed. If the foreign company’sfinancialstatements for that year are not available at thetime when the application is made, the financial statementsfor the preceding year may be used.10. Notification requirementsTaxpayers generally must notify the tax authoritieswithout any delay if the conditions for withholdingtax relief are no longer fulfilled. However, ifthe percentageof ‘‘good’’income under the gross receipts testthat was the basis for the original application for anexemption certificate subsequently decreases within arange of less than 30 percent, or if ashareholder percentagein the corporate chain above the foreign companychanges within arange of less than 20 percent,no notification is required. Notification must be givenif ashareholding percentage falls short of aminimumpercentage provided for by atax treaty or an EU Directive.Notification is given to the German CentralTaxAgency (Bundeszentralamt fürSteuern or BZSt)11. Burden of proofAs aresult of the 2011 amendment, the burden ofproof in relation to the anti-treaty shopping rule isstatutorily defined for the first time: the foreign companybears the burden of proving that it passes thebusiness purpose and business substance tests. On thebasis of the statutory expanded obligation applicableto taxpayers involved in foreign factual relationships,the foreign company also bears the burden of proofwith respect to the additional ‘‘relief tests,’’ (i.e., personalentitlement to withholding tax relief or the generationof gross income from the company’s owngenuine business activities).I. Application of the (new) Limitation on BenefitsruleA. Dividends paid by HCo to FHoldCoUnder its domestic law, Germany levies a26.375 percentwithholding tax (including 5.5 percent solidaritysurcharge) on dividends. On the basis of the treaty betweenGermany and Country X, the German withholdingtax on dividends paid by HCo to FHoldCowould be substantially reduced. However, the treatybenefits would not be not granted if and to the extentthat the preconditions in §50d (3) of the Income TaxAct (Germany’s domestic law limitation on benefitsprovision) were fulfilled.The first step in determining whether and to whatextent §50d (3) of the Income TaxAct applies is toreview FHoldCo’s personal entitlement to the benefitsof the Germany–Country Xtax treaty.For FHoldCo to be entitled to relief from withholdingtax: (1) FHoldCo must be owned by ashareholderthat would be entitled to a corresponding benefitunder atax treaty or an EU Directive were it to receivethe income directly (shareholder test); or (2) the grossreceipts generated by FHoldCo in the relevant yearmust be derived from FHoldCo’s own genuine businessactivities (business income test). FHoldCo’s soleshareholder is Parent, aCountry Ycorporation that isthe ultimate parent company of the group. Germanydoes not have atax treaty with Country Ynor is CountryYanEUMember State.Since no tax treaty exists between Germany andCountry Y, the shareholder test is not passed. Again,since Germany does not have atax treaty with CountryY, of which Parent, the ultimate shareholder ofFHoldCo, is a resident, it is not possible to lookthrough Parent to determine whether a higher-tiercompany is personally entitled to the same level ofwithholding tax relief as FHoldCo generally would be.Where the shareholder test is not passed, the businessincome test must be applied at the level ofFHoldCo. The business income test would be passed ifFHoldCo’s gross receipts were derived from its owngenuine business activities. FHoldCo would bedeemed to engage in its own genuine business activitiesif it were to participate in ageneral trade in CountryXand if its activities were to go beyond mere asset40 12/12 Copyright 2012 by The Bureau of National Affairs, Inc. TM FORUM ISSN 0143-7941

management. Own genuine business activities wouldbe assumed if FHoldCo were to render services to oneor more subsidiaries for an arm’slength consideration—mere asset management activities would not be sufficient.The business income test is not passed becauseFHoldCo redistributes to Parent all of the dividends itreceives from HCo (less an amount to cover its modestadministrative costs) within 90 days of receivingthem. Nevertheless, were FHoldCo to be regarded as amanagement holding company,itwould be deemed tobe engaged in its own genuine business activities.However, the conditions for assuming FHoldCo to beamanagement holding company are not fulfilled: amanagement holding company is required to have ashareholding in at least two subsidiaries in addition toexercising acertain degree of influence over the subsidiariesand being involved in fundamental long-termstrategic decision-making. None of these requirementsare met by FHoldCo.According to the administrative ordinance, if HCois active in the same line of business as FHoldCo andthere is afunctional link between the activities of thetwo companies, dividends received by FHoldCo fromHCo would qualify as income from FHoldCo’s owngenuine business activities. However, this preconditionis not fulfilled, since FHoldCo is aholding companywhile HCo manufactures and distributeswidgets.According to the facts given, there seem to be nogood business reasons for the interposition ofFHoldCo other than the obtaining of treaty benefits towhich Parent would not be entitled were it to hold theshares in HCo directly. Finally, it appears thatFHoldCo does not pass the substance test, which requiresthe presence of sufficient management andother staff personnel with adequate qualifications toengage in the business of FHoldCo, which in any eventdoes not pass the business income test.From the above, it follows that FHoldCo is not entitledto the withholding tax relief granted under theGermany–Country Xtax treaty. FHoldCo, therefore,cannot apply for either the reimbursement of withholdingtax or an exemption certificate.B. Interest paid by HCo to FFinCoUnder German domestic law, interest paid by aGerman borrower to aforeign lender is subject toGerman tax within the framework of German limitedtax liability only if the interest payments are securedby German-situs real estate. For purposes of this discussion,it is assumed that HCo’s pledges of HCoassets meet the criterion that security is provided inthe form of German real estate. Germany levies a26.375 percent withholding tax (including 5.5 percentsolidarity surcharge) on such interest.Under the Germany–Country Z tax treaty, theGerman withholding tax on interest paid by HCo toFFinCo is reduced to zero. However, treaty benefitsare not granted if and to the extent that the preconditionsin §50d (3) of the Income TaxAct (Germany’sdomestic law limitation on benefits provision) are fulfilled.The first step in determining whether and to whatextent §50d (3) of the Income TaxAct applies is toreview FFinCo’spersonal entitlement to the benefits ofthe Germany–Country Ztax treaty.For FFinCo to be entitled to relief from withholdingtax: (1) FFinCo must be owned by ashareholder thatwould be entitled to acorresponding benefit under atax treaty or an EU Directive were it to receive theincome directly (shareholder test); or (2) the gross receiptsgenerated by FFinCo in the relevant year mustbe derived from FFinCo’s own genuine business activities(business income test). FFinCo’s sole shareholderis Parent, aCountry Ycorporation that is theultimate parent company of the group. Germany doesnot have atax treaty with Country Ynor is Country Yan EU Member State.Since no tax treaty exists between Germany andCountry Yand no EU Directive applies, the shareholdertest is not met. Since Country YParent is theultimate parent it is not possible to look throughParent to determine if ahigher-tier company is personallyentitled to the same level of withholding taxrelief as FFinCo generally would be.Where the shareholder test is not passed, the businessincome test must be applied at the level ofFFinCo. The business income test would be passed ifFFinCo’s gross receipts were to result from its owngenuine business activities. FFinCo would be deemedto be engaged in its own genuine business activities ifit were to participate in ageneral trade in Country Zand its activities were to go beyond mere asset management.Own genuine business activities would beassumed if FFinCo were to render services to one ormore subsidiaries for an arm’slength consideration. Itappears that FFinCo passes the business income test,assuming that the borrowing from third parties andthe relending of the funds to anumber of group companiesat a10percent mark-up is consistent with thearm’s length principle.The business purpose and substance tests need onlybe applied if and to the extent the business income testis not passed. Therefore, the business purpose andbusiness substance tests would only come into play if—contrary to the assumption made in the previousparagraph —the tax authorities were to deny thatFFinCo passed the business income test. While the circumstancesof the group, such as coordination, organisation,the establishment of customer relations,costs, local preferences and the overall corporate setup, do not qualify as economic or other relevant reasons,economic reasons for the interposition of thecompany will be assumed if Parent intends to carry onits own genuine business activities. FFinCo supportsHCo’sown genuine business activities through financingasubstantial part of HCo’s capital needs.To summarise, FFinCo should be entitled to thebenefits provided under the tax treaty between Germanyand Country Z, which provides for azero withholdingtax rate on interest payments. FFinCo should,therefore, not be subject to German tax on its interestincome.C. Royalties paid by HCo to FIPCoUnder its domestic law, Germany levies a15.825 percentwithholding tax (including 5.5 percent solidaritysurcharge) on royalties paid by aGerman licensee cor-12/12 TaxManagement International Forum BNA ISSN 0143-7941 41

poration to foreign shareholders or other recipientsthat are licensors.Under the Germany–Country Q tax treaty, theGerman withholding tax on royalties paid by HCo toFIPCo is reduced to zero. However, treaty benefits arenot granted if and to the extent that the preconditionsin §50d (3) of the Income TaxAct (Germany’s domesticlaw limitation on benefits provision) are fulfilled.The first step in determining whether and to whatextent §50d (3) of the Income TaxAct applies is toreview FIPCo’s personal entitlement to the benefits ofthe Germany–Country Qtax treaty.Entitlement to relief from withholding tax requiresthat FIPCo is owned by ashareholder that would beentitled to acorresponding benefit under atax treatyor an EU directive had it received the income directly(shareholder test); and that the gross receipts generatedby FIPCo in the relevant year are derived fromFIPCo’s genuine own business activities (businessincome test). FIPCo’s only shareholder is Parent, aCountry Y corporation that is the ultimate parentcompany of the group. Host Country does not have atax treaty with Country Qnor is Country QanEUMember State.For FIPCo to be entitled to relief from withholdingtax: (1) FIPCo must be owned by ashareholder thatwould be entitled to acorresponding benefit under atax treaty or an EU Directive were it to receive theincome directly (shareholder test); or (2) the gross receiptsgenerated by FIPCo in the relevant year must bederived from FIPCo’s own genuine business activities(business income test). FIPCo’s sole shareholder isParent, aCountry Ycorporation that is the ultimateparent company of the group. Germany does not haveatax treaty with Country Qnor is Country QanEUMember State.Since no tax treaty exists between Germany andCountry Y, the shareholder test is not passed. SinceCountry YParent is the ultimate parent it is not possibleto look through Parent to determine if ahighertiercompany is personally entitled to the same level ofwithholding tax relief as FIPCo generally would be.Where the shareholder test is not passed, the businessincome test must be applied at the level of FIPCo.The business income test would be passed if FIPCo’sgross receipts were to result from its own genuinebusiness activities. FIPCo would be deemed to be engagedin its own genuine business activities if it wereto participate in ageneral trade in Country Qand if itsactivities were to go beyond mere asset management.This condition does not seem to be met. FIPCo sublicensesintellectual property owned by Parent to HCoand retains a10percent mark-up. FIPCo oversees theregistration of the intellectual property and managesefforts by outside lawyers and other third party contractorsto ensure that such property retains its legallyprotected status and that such status is enforcedagainst potential infringers. FIPCo thus does not participatein ageneral trade in Country Qand appearsmerely to be performing asset management functions.It seems doubtful that a10percent mark-up could beregarded as being consistent with the arm’s lengthprinciple. Further there seems to be no room for arguingthat FIPCo and HCo are active in the same line ofbusiness because HCo manufactures and distributeswidgets while FIPCo sublicenses and manages intellectualproperty owned by Parent. In addition part ofFIPCo’s activity relating to the management of the intellectualproperty is outsourced to lawyers and thirdparty contractors.The business purpose and substance tests musttherefore be reviewed to determine whether FIPComay be entitled to treaty benefits under the tax treatybetween Germany and Country Q. However, thereseems to be no economic reason for the interpositionof FIPCo and FIPCo employs only three people tocarry on its activities.FIPCo is therefore not entitled to benefits under thetax treaty between Germany and Country Q andcannot claim for relief from the 15.825 percent withholdingtax on the gross royalties paid to it by HCo.NOTES1 Abgabenordnung (the ‘‘Fiscal Code’’), §42.2 Fiscal Code, §41.3 The limitation on benefits clause in Einkommensteuergesetz(the ‘‘Income TaxAct’’), §50d (3).4 Fiscal Code, §39(1).5 Fiscal Code, §39(2).6 Fiscal Code, §39(2) no. 12nd sentence.7 This represents the third time that the provision hasbeen amended. Earlier amendments were made by theTaxAmendment Act of Dec. 20, 2001, as aresult of whichthat provision took its place in Income TaxAct §50d (3),and by the Annual TaxAct 2007.42 12/12 Copyright 2012 by The Bureau of National Affairs, Inc. TM FORUM ISSN 0143-7941

Host CountryINDIAKVenkatachalam and Dinesh KhatorPricewaterhouseCoopers Private Limited, Chennai –PuneIntroductionThe concept of beneficial ownership was incorporatedinto the OECD Model Convention in1977 as an anti-avoidance measure. The termgenerally appears in the tax treaty articles relating tothe taxation of dividends, interest, royalties and feesfor technical services.The term ‘‘beneficial owner’’ makes alimited appearancein some sections of the Indian Income-TaxAct, 1961 (the ‘‘Act’’). The term is used in agenericsense and possibly as asubstitute for the term ‘‘registeredowner.’’ The specific sections that refer to theterm are:s section 2(22)(e), which provides that aloan to ashareholder (who is the beneficial owner of at least20 percent of the shares) should be treated as adeemed dividend; ands section 79, which deals with the carry-forward andset-off oflosses in the case of acompany, ifthere issubstantial change in the beneficial owners of theshares in the company.Generally, India follows the concept of taxingincome in the hands of the actual recipient of theincome. The term ‘‘beneficial owner’’ is extensivelyused in India’stax treaties with aview to ensuring thattreaty benefits are available only to the rightfulowners of income.Because different tax treaties can differ in theirtreatment of the same source of income, companiesacross the world resort to ‘‘treaty shopping’’inorder tobenefit from the most favourable tax treaty. Thosecountries that view this practice unfavourably have,as asafety measure, incorporated the concept of ‘‘beneficialowner’’ intheir tax treaties.A. Treaty shoppingCountries around the world have entered into bilateraltax agreements to mitigate the exposure of theirresidents to double taxation of their income earned inother jurisdictions. Since tax treaties are negotiatedagreements, they can provide differing rates or adifferingscope of taxation with respect to the samesource of income. Such differential tax treatment generallyaffords opportunities for tax arbitrage andpaves the way for taxpayers to engage in treaty shopping.It is in this context that the concept of beneficialownership achieves its significance. In the case oftreaty shopping, there is generally alegal owner, whohas the legal title to the income or property concerned,and abeneficial owner, who enjoys the benefitsof ownership even though he does not hold thetitle to or custody of the income or property.Under the beneficial ownership concept, the incomeearned is taxed in the hands of the rightful owner, i.e.the beneficial owner, and not in the hands of the recipient.The concept has been introduced to preventtreaty shopping involving the use of intermediaries,especially in cases where the beneficial owner is notentitled to treaty benefits.B. India’s position on treaty shoppingIn India, importance is generally given to the legalform, rather than the substance, of a transaction,unless the transaction is a‘‘colourable’’ transactionthat has been entered into solely for tax avoidancepurposes.In various judicial precedents, tax planning throughtreaty shopping has been regarded as valid. In AzadiBachao Andolan, 1 the Supreme Court described treatyshopping as an act of aresident of athird country whotakes advantage of atax treaty between two ContractingStates. Regarding the legality of treaty shopping,the Supreme Court held that, in the absence of alimitationon benefits clause in the treaty concerned, therewould be no disentitling or disabling conditions prohibitingthe third country resident from enjoying thebenefits of the treaty.In McDowells, 2 the Supreme Court declared that:Taxplanning may be legitimate provided it is withinthe framework of law. Colourable devices cannot bepart of tax planning and it is wrong to encourage orentertain the belief that it is honourable to avoid thepayment of tax by resorting to dubious methods.C. Meaning of Beneficial OwnershipUnder the treaty articles relating to dividends, interest,royalties and fees for technical services, the treatybenefit of lower withholding tax is available to residentsof the Contracting States only if they are thebeneficial owners of the income from dividends, interest,royalties and fees for technical services.12/12 TaxManagement International Forum BNA ISSN 0143-7941 4312/12 TaxManagement International Forum BNA ISSN 0143-7941 43

Article 11(2) of the OECD Model Convention, whichpertains to ‘‘interest,’’ reads as follows:However, such interest may also be taxed in the ContractingState in which it arises and according to thelaws of that State, but if the beneficial owner of the interestis aresident of the other Contracting State,the taxso charged shall not exceed 10 per cent of the grossamount of the interest.. ..[Emphasis added.]Article 11(2) of the UN Model Convention reads asfollows:However, such interest may also be taxed in the ContractingState in which it arises and according to thelaws of that State, but if the beneficial owner of the interestis aresident of the other Contracting State,the taxso charged shall not exceed ___ per cent ....of thegross amount of the interest.. ..[Emphasis added.]The term ‘‘beneficial owner’’ isnot defined in theModel Conventions or any of India’s tax treaties. Article3(2) of the OECD Model Convention suggeststhat, in applying any tax treaty, the local tax laws of aContracting State should be referred to interpret anyterm that is not defined in the treaty.Article 3(2) of theUN Model Convention is worded along the same lines.To assist in an understanding of the meaning of ‘‘beneficialownership,’’ this paper refers to the rules of interpretationfound in the Vienna Convention on theLaw of Treaties and to various commentaries.Article 31 of the Vienna Convention lays down theGeneral Rule of Interpretation as follows:Atreaty shall be interpreted in good faith in accordancewith the ordinary meaning to be given to theterms of the treaty in their context and in the light ofits object and purpose.References to the term ‘‘beneficial ownership’’are tobe found at various places in the OECD Commentaryon the Model Convention. 3 The 2003 4 OECD Commentaryon Article 10 states that:12. The requirement of beneficial ownership was introducedin paragraph 2ofArticle 10 to clarify themeaning of the words ‘‘paid ...to aresident’’ astheyare used in paragraph 1ofthe Article. It makes plainthat the State of source is not obliged to give up taxingrights over dividend income merely because thatincome was immediately received by aresident of aState with which the State of source had concluded aconvention. The term ‘‘beneficial owner’’ isnot used inanarrow technical sense; rather, itshould be understoodin its context and in light of the object and purposesof the Convention, including avoiding doubletaxation and the prevention of fiscal evasion and avoidance.12.1 Where an item of income is received by aresidentof aContracting State acting in the capacity ofagent or nominee, it would be inconsistent with theobject and purpose of the Convention for the State ofsource to grant relief or exemption merely on accountof the status of the immediate recipient of the incomeas aresident of the other Contracting State. The immediaterecipient of the income, in this situation,qualifies as aresident but no potential double taxationarises as aconsequence of that status since the recipientis not treated as the owner of the income for taxpurposes in the State of residence. It would be equallyinconsistent with the object and purpose of the Conventionfor the State of source to grant relief or exemptionwhere a resident of a Contracting State,otherwise than through an agency or nominee relationship,simply acts as aconduit for another personwho in fact receives the benefit of the income concerned.For these reasons, the report from the Committeeon Fiscal Affairs entitled ‘‘Double TaxationConventions and the Use of Conduit Companies’’ concludesthat aconduit company cannot normally be regardedas the beneficial owner if, though the formalowner, it has, as a practical matter, very narrowpowers which render it, in relation to the income concerned,amere fiduciary or administrator acting onaccount of the interested parties.12.2 Subject to other conditions imposed by the Article,the limitation of tax in the State of source remainsavailable when an intermediary, such as anagent or nominee located in aContracting State or inathird State, is interposed between the beneficiaryand the payer but the beneficial owner is aresident ofthe other Contracting State (the text of the Model wasamended in 1995 to clarify this point, which has beenthe consistent position of all member countries).States which wish to make this more explicit are freeto do so during bilateral negotiations. [Emphasisadded.]The corresponding commentaries on the Articles relatingto interest and royalties are broadly similar tothe commentary on Article 10 (Dividends) reproducedabove.In July 2011, the OECD released adiscussion draftentitled, ‘‘Clarification of the meaning of beneficialowner in the OECD Model TaxConvention’’ tolendclarity to the concept. Amendments are proposed tothe OECD Commentary relating to dividends, interestand royalties to suggest that a recipient of suchincome should be considered its ‘‘beneficial owner’’where he/she has the full right to use and enjoy theincome, unconstrained by any contractual or legal obligationto pass on the payment received to anotherperson. Such acontractual or legal obligation may beconstrued from relevant legal documents and/or onthe basis of facts and circumstances showing that, insubstance, the recipient clearly does not have the fullright to use and enjoy the income.Remarks on the meaning of ‘‘beneficial ownership’’may also be found in anumber of unofficial commentaries:s Professor Klaus Vogel’s Commentary: 5The beneficial owner is he who is free to decide: 1)Whether or not the capital or other assets should beused or made available for use by others; or 2) how theyields there from should be used; or 3) both. ...s Professor Philip Baker’s commentary: 6The essence of this commentary is to explain that the‘beneficial ownership’ limitation is intended to exclude:– mere nominees or agents, who are not treated asowners of the income in their country of residence;and– any other conduit who though the owner of theincome, has very narrow powers over the incomewhich renders the conduit amere fiduciary or administratorof the income on behalf of the beneficialowner.IBFD International TaxGlossary: 7 the glossary distinguishes‘‘beneficial owner’’ from ‘‘legal owner.’’ Theterm ‘‘beneficial ownership’’ isdefined as follows:s it is the right to enjoy the economic benefits overthe underlying property, aswell as control over thedisposition of that property.s beneficial ownership implies control over the capitalfrom which the income is derived and/or controlover the disposition of the income itself.44 12/12 Copyright 2012 by The Bureau of National Affairs, Inc. 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s [beneficial ownership implies that] the payment isreceived for the recipients’ own benefit.In summary, all the commentaries bring out theprinciple that the legal owner of income or property isregarded as the beneficial owner only if he is rightfullyand ultimately entitled to the income and/or exercisescontrol over the property. If the legal owner actsmerely in afiduciary or an administrative capacity onbehalf of the interested persons as aconduit, it willnot be considered the beneficial owner. Accordingly,the legal or registered owner of property or incomemay not always be the beneficial owner of the propertyor income.D. Conduit companiesMany companies around the world that would not beentitled to benefits under aparticular tax treaty structuretransactions in such amanner as to minimisetheir tax burden by claiming treaty protectionthrough interposed companies. Where such interposedcompanies act merely in afiduciary or an administrativecapacity, they are conduit companies.Aconduit company takes advantage of treaty provisionsunder its own name in the state of source; however,theeconomic benefit goes to persons that are notentitled to use that treaty.The result is anet tax advantagebecause little or no taxation occurs in the state ofresidence of the conduit. Aconduit company cannotnormally be regarded as the beneficial owner if, althoughit is the formal owner of assets, it has verynarrow powers that render it amere fiduciary or an administratoracting on account of interested persons. Inpractice, however, itwill usually be difficult for thecountry of source to show that aconduit company isnot abeneficial owner. The fact that its main functionis to hold assets or rights is not itself sufficient to allowit to be categorised as amere intermediary, althoughthis may indicate that further examination is necessary.This examination will in any case be highly burdensomefor the country of source. 8It follows from the above that the mere fact that acompany is a conduit does not disqualify it fromtreaty benefits. For acompany to be aconduit companythat may be denied treaty benefits it must satisfythe following two cumulative conditions:s it should have narrow powers; ands it should be acting in afiduciary or an administrativecapacity.In view of the above, the following question arises:is aholding company always the beneficial owner ofthe assets in its 100 percent subsidiary? It is interestingto note the commentary of Prof. Klaus Vogel inthis regard: 9But it may be of significance in cases of control undercompany law. Ofcourse, ajoint stock company whichreceives dividends, interest or royalties may very wellbe the beneficial owner of such payments. ..Even ifsuch acompany were obliged to distribute all of itsprofits to its shareholders. ..this would not affect itsbeneficial ownership, as would acommitment to passon such profits to third parties. If the company isbound by acontrolling shareholder’sdecision on whatshould be done with certain assets and the yields theygenerate. ..its ownership may be formal, but this dependson the factual situation. On the other hand,even one hundred per cent interest in asubsidiarydoes not necessarily preclude the latter’s ‘beneficialownership’ in the assets held by it. There would haveto be other indications of the fact that the subsidiary’smanagement is not in aposition to make decisions differingfrom the will of the controlling shareholder.Ifitwere so, the subsidiary’s power would be no morethan formal and the subsidiary would, therefore, notqualify as a‘beneficial owner’ within the meaning ofArticles 10 to 12 MC.Acompany is aseparate and distinct legal personfrom its shareholders. What needs to be established iswhether the subsidiary is entering into contracts onits own account and earning income in its own right.I. Beneficial Ownership: the Indian contextA. GeneralAs discussed above, the term ‘‘beneficial ownership’’makes only alimited appearance in the Act but iswidely used in India’s tax treaties. There is limitedguidance in judicial precedents on the interpretationof this term in the context of the treaty articles on interest,royalties and fees for technical services.As regards the dividends article in India’s tax treaties,the application of the beneficial ownership conceptis of merely academic interest, since there is nowithholding tax on dividend repatriation from India.With respect to any dividend distribution, India leviesadditional dividend distribution tax on the distributingcompany, but the dividend is exempt income inthe hands of the recipient.B. Relevance in the context of capital gainsThe concept of beneficial ownership has generallybeen transposed into the context of Article 13 (CapitalGains) in various Indian judicial precedents. Theavailability of treaty benefits in relation to capitalgains where aconduit company structure was put inplace has been the subject of debate in anumber ofsuch precedents.Often, companies investing in India do so by interposingconduit companies in jurisdictions such asMauritius, the Netherlands and Singapore to availthemselves of the benefit of the exemption for capitalgains provided for in India’s tax treaties with thesecountries. In such situations, the Indian revenue authoritieshave attempted to lift the corporate veil inorder to look at the substance of the transaction anddisregard its legal form to determine the beneficialowner of the income.This approach is contrary to the principle laid downby the Supreme Court in Azadi Bachao Andolan, 10which held that while the courts have powers to liftthe corporate veil in situations involving India’s domesticlaws, this is not the case when the provisions ofadouble taxation agreement are being applied. TheSupreme Court held that the purpose in this context isto ensure that the benefits under the relevant agreementare available even if they are inconsistent withthe provisions of the Act. Therefore, the SupremeCourt held that the principle of ‘‘piercing the corporateveil’’ cannot apply in such asituation.Recently, inVodafone Holdings B.V., 11 the SupremeCourt discussed the principle of substance versusform. The court held that the revenue authorities mayinvoke the principle of ‘‘substance over form’’ ortheprinciple of ‘‘piercing the corporate veil’’ only after12/12 TaxManagement International Forum BNA ISSN 0143-7941 45

they are able to establish, on the basis of the facts, thatthe impugned transaction is asham or constitutes taxavoidance.In view of the above, it is apparent that the Indianjudiciary gives priority to the legal form of atransaction.C. Legal identity of intermediary holding companyWith regard to the identity of an intermediary company,the Indian judiciary has held that asubsidiaryhas alegal existence of distinct from the existence ofits shareholder.1. AAR ruling in KSPG Netherlands Holding B.V.KSPG Netherlands Holding B.V., in Re 12 concerned aDutch subsidiary of a German company that heldshares in an Indian company. The Authority for AdvanceRulings (AAR) held that the Dutch company,althoughasubsidiary of the German company, was thebeneficial owner of the shares of the Indian companyand hence was entitled to the benefits of the India–Netherlands tax treaty with respect to gains on thesale of shares in the Indian company. Inexaminingthe beneficial ownership of the shares in the Indiancompany, the AAR made the following observations:s substantial investments were made by the Dutchcompany in the Indian company;s the transferor, i.e. the Dutch company, though asubsidiary of the German company, was adistinctlegal entity having its own board of directors andmanagement systems; ands it was not possible to assume that the applicantwould merely act as aconduit to siphon off thegains to the ultimate holding company by means ofacolourable device, contrary to its corporate statusand its stake in the Indian company.The AAR proceeded with its analysis on the assumptionthat beneficial ownership may even be relevant inthe context of capital gains, commenting as follows:Assuming that the concept of beneficial ownership,which finds specific mention in Articles 10 to 12 of thetreaty (relating to dividends, interest, royalty andFTS), can be transposed into Article 13. ..Based on the above, it was held that the Dutch companywas the beneficial owner of shares in the Indiancompany and was entitled to treaty benefits.2. AAR ruling in ETrade Mauritius Ltd.In ETrade Mauritius Ltd., in Re, 13 the applicant (i.e., Etrade Mauritius Ltd.) and acompany incorporated inMauritius sold shares held in an Indian company toanother company incorporated in Mauritius. Thesource of funds for the purchase of the shares wastraceable to the holding company,which had played arole in suggesting or negotiating the sale. Further, theconsideration received from the sale ultimately flowedto the holding company in the form of dividends orthe diminution of capital. The applicant approachedthe AAR to determine whether it was eligible for thebenefits of the India–Mauritius tax treaty, and hencenot liable to tax on the capital gains in India. In answeringthis specific question, the AAR discussed therelation between the holding company and the subsidiarycompany. The AAR upheld the separate legalidentity of the subsidiary in the absence of any compellingreasons diluting its separate legal identity andthis despite the fact that the holding company exercisedacts of control over the subsidiary.The AAR heldthat it was unrealistic to expect that a subsidiaryshould ‘‘keep offthe clutches of the holding company’’and conduct its business independent of any controland assistance from its parent company. The AARrelied on the Supreme Court decision in Azadi BachaoAndolan to conclude that making a distinction betweenlegal and beneficial ownership was not warranted.3. SummaryAs may be apparent, the AAR has given importance tolegal form in an Indian tax context. It may, therefore,be concluded that only where there is an overt legal arrangementrequiring anonresident to act in the capacityof an agent or administrator would it bepossible to question its beneficial ownership of aparticularitem of income.D. Investments through Mauritius: the Indian scenarioCompanies often invest in India through an intermediaryin Mauritius in order to avail themselves of thebenefits of the tax treaty between the two countries. Inseveral Indian judicial precedents, the judiciary hasanalysed whether the benefits of the tax treaty areavailable to the intermediary in Mauritius or whetherthe ultimate holding company should be consideredthe beneficial owner and the income be taxable in itshands.With a view to establishing when the India–Mauritius treaty applies, the Central Board of DirectTaxes (CBDT) issued Circular 789 dated April 13,2000, which makes it clear that whenever acertificateof residence is issued by the Mauritian authorities,this will constitute sufficient evidence for acceptingthe Mauritius residence status of the company concerned,as well as its status as beneficial owner forpurposes of applying the treaty.In E-Trade Mauritius,the AAR held that the tax residencecertificate issued by the authorities was presumptiveevidence of the beneficial ownership ofshares and the gains arising from them.In another case, 14 the AAR concluded that aU.S.company making investments in India through itssubsidiary in Mauritius and not directly from theUnited States would not be disqualified from obtainingaruling on the grounds of avoidance of Indian tax.The AAR held that there were anumber of relevant circumstancesthat led to the adoption of the arrangement,in particular, restrictions under Indian law andthe fact that the tax advantage was only one of the objectives.Hence, the subsidiary in Mauritius was not a‘‘dummy.’’ Inthe same case, multiple entities in variousjurisdictions were making investments in severaltranches in a Mauritius entity in order to channelfunds into India. The AAR observed that the test ofbeneficial ownership was satisfied, as avoidance ofIndian income tax was not the sole motive for the arrangement.Indeed, there were many commercial reasonsfor the arrangement including:s the desire to avoid having to obtain multiple approvalsand thus facilitate the investment approvalprocess in India;46 12/12 Copyright 2012 by The Bureau of National Affairs, Inc. TM FORUM ISSN 0143-7941

s the existence of restrictions on venture capitalfunds or companies in India (sectoral caps, etc.);ands the fact that the shareholders were organised in differentcountries, constituting a varied investorbase. It was necessary for the applicant to be domiciledon acost-effective, tax-neutral jurisdiction.However,where the sole purpose of an arrangementhas been determined to be tax avoidance or evasion,the benefits of the India–Mauritius tax treaty havebeen denied. The AAR rejected one application 115 6citing the fact that the arrangement concerned wasmade solely for purposes of obtaining tax treaty benefits.In the case concerned, the share capital of twoMauritius subsidiaries (the applicants) was held entirelyby aU.K. bank. The Mauritius subsidiaries heldshare capital in an Indian bank. The AAR observedthat, had the U.K. bank invested directly in India, itwould have been entitled to the relief provided by theIndia–United Kingdom tax treaty. Under Article 11(3)of the treaty,dividends paid to aresident of the UnitedKingdom by an Indian company are subject to Indianincome tax at arate of 15 percent. Under Article 14 ofthe treaty, capital gains arising as aresult of the alienationof shares are chargeable to tax in both India andthe United Kingdom. Aresident of Mauritius investingin Indian shares, on the other hand, is entitled toclaim complete exemption with respect to capitalgains. After performing adetailed analysis of the taxbenefits in this case, the AAR held that the purpose ofthe arrangement was solely to take advantage of thecapital gains article in the India–Mauritius tax treaty.The application was therefore rejected.E. The Vodafone rulingAt the beginning of 2012, the Supreme Court handeddown its judgment in Vodafone Holdings BV. 16 Themost important ramifications of the case are outlinedbelow.The court discussed the legality of holding and subsidiarystructures in the context of Indian tax laws andheld that in India, companies and other such entitiesare viewed as economic entities with legal independencevis-à-vis their shareholders and participants.Accordingly, holding and subsidiary companies aresubject to tax as distinct entities. Taxislevied on themas distinct entities irrespective of their actual degreeof economic independence and regardless of whetherprofits are reserved or distributed to shareholders andparticipants. In a holding and subsidiary companystructure, the parent company is generally involved ingiving the principal guidance to group companies byproviding general policy guidelines. However, thisdoes not imply that subsidiaries are to be deemed residentsof the state in which the parent company resides.The court explained that, only where itsdirectors act as ‘‘mere puppets,’’ can asubsidiary beconsidered aconduit, in which case the parent may betaxed as the beneficial owner of the subsidiary’sassets.The court went on to observe that the absence in theIndia–Mauritius tax treaty of alimitation on benefitsclause similar to that in the India–United States andIndia–Singapore tax treaties means that benefitsunder the India–Mauritius treaty cannot be denied toMauritius companies whose shareholders are noncitizensor nonresidents of Mauritius.The court’s ruling states that in examining atransaction,the ‘‘look-at’’ approach should be applied. 17While upholding the legality of tax planning withinthe framework of the law, the court laid down the followingfactors that need to be considered when analysingthe tax consequences of foreign investment inIndia using an intermediate holding company structure:s the concept of participation in the investment;s the duration of time during which the holdingstructure exists;s the period of business operations in India;s the generation of taxable revenues in India;s the timing of the exit from the investment; ands the continuity of the business on such exit.The ruling states that the onus is on the revenue authoritiesto identify the scheme and its main purpose.The fact that atransaction has acorporate businesspurpose and the fact that astructure has been in existencefor asignificant period of time are evidence tosuggest that the impugned transaction/structure wasnot undertaken/put in place as acolourable or artificialdevice. In these circumstances, the actual recipientof the income concerned will be the beneficialowner of the income.F. India’s changing approachThere have been recent instances of the judiciary liftingthe corporate veil and taxing the ultimate holdingcompany as the beneficial owner of the income concerned.An example is Aditya Birla Nuvo, 18 in whichthe Bombay High Court held that aMauritius entitywas aconduit introduced for purposes of taking advantageof the India–Mauritius tax treaty and the beneficialowner of the income concerned was aU.S.-based entity. The court reached its conclusion on thegrounds that the Mauritius entity, which was the permittedtransferee of the U.S. entity, was bound by ajoint venture agreement between the U.S. entity andthe Birla Group and could not independently exerciseany rights of ownership with respect to the income.Although this is in contradiction of various principleslaid down by the Supreme Court, the judgmentin Aditya Birla Nuvo is indicative of the new approachof the Indian judiciary. Furthermore, in Finance Act2012, in the aftermath of the Vodafone decision, thegovernment of India introduced a General Anti-Avoidance Rule (GAAR). 19 The Shome Committee hasrecommended that implementation of the GAAR bedeferred on administrative grounds. Since the GAARis an extremely advanced instrument of tax administration,the Shome Committee has recommended intensivetraining of tax officers to specialise in the fineraspects of international taxation prior to the implementationof the GAAR.The Shome Committee report explains that the purposeof the introduction of GAAR is that in interpretingtax legislation, substance should be givenpreference over form. The report states that:Transactions have to be real and are not to belooked at in isolation. The fact that they are legal doesnot imply that they are acceptable with reference tothe underlying meaning embedded in the fiscal statute.Thus, where there is no business purpose exceptto obtain atax benefit, GAAR provisions would notallow such atax benefit to be availed through the taxstatute. These propositions have comprised part of ju-12/12 TaxManagement International Forum BNA ISSN 0143-7941 47

isprudence in direct tax laws as reflected in variousjudicial decisions. The GAAR provisions codify this’substance over form’ basis of the tax law. Itis, therefore,necessary and desirable to introduce ageneralanti-avoidance rule which will serve as adeterrentagainst such practices.Considering the uncertainty surrounding the taxlegislation and the varying approach of the Indian judiciary,this is awelcome step. Examples of the circumstancesin which the GAAR provisions would beapplicable are given in Annexure 1tothe report. Someof the relevant examples in Annexure 1 are reproducedbelow. The examples demonstrate that the governmentis keen to tax all arrangements that areintended to avoid the payment of tax in India. However,wherean arrangement is justified by commercialsubstance, the benefits of the applicable tax treaty willnot be denied. Accordingly, where an intermediateholding company is located in atax-friendly jurisdiction,the test of beneficial ownership will be analysedbased on the functions performed by the holding companyand the commercial substance of the company.II. Application of Indian rulesA. Dividends paid by HCo to FHoldCoAs noted in I.A., above, the question of beneficial ownershipin relation to dividends is academic in theIndian context. This is because, under Indian domestictax law, the company distributing dividends is requiredto pay dividend distribution tax, while thedividend income is exempt in the hands of the recipientshareholder. However, assuming that dividendswere taxable in the hands of their recipient, the beneficialownership of the dividends would be determinedas follows.The Indian revenue authorities would wish toregard FHoldCo as not the beneficial owner of thedividends, in view of the fact that the dividends receivedby FHoldCo are redistributed by it to Parentwithin 90 days of receipt, The revenue authoritieswould assert that FHoldCo has been incorporatedsolely for purposes of obtaining benefits under theIndia–Country Xtax treaty, which would otherwisenot be available to the Parent. The Indian revenue authoritieswould therefore seek to treat Parent as thebeneficial owner of the dividends and tax the dividendsin its hands. The authorities would regardFHoldCo as purely a conduit acting with narrowpowers that render it amere fiduciary or administratoracting on behalf of Parent.The position of the revenue authorities could be rebuttedif FHoldCo were able to demonstrate that it hasadequate control over the funds received in the formof dividends and that their redistribution as dividendsis at its discretion. Adefense could be mounted on thegrounds that FHoldCo serves as an investment channelingintermediary company for Parent and that itreceives dividends from other investments as well. Inthis regard, it would be worth referring to the AAR decisionin E-Trade Mauritius discussed above. In thisdecision, the AAR considered the taxability of dividendsin the hands of an intermediary holding companywhen the holding company redistributes thedividends within ashort time of receiving them fromits subsidiary. The AAR held that, provided the holdingcompany has control over the dividends and canredistribute them at its discretion, it will be the beneficialowner of the dividends. In light of the above,FHoldCo should seek to demonstrate that it is the trueowner of the shares in its Indian subsidiary, HCo,which would have the consequence that the dividendswould be taxed in its (FHoldCo’s) hands.Further, inview of the introduction of GAAR provisions(as recommended by the Shome Committee),FHoldCo should seek to demonstrate that it satisfiesthe limitation on benefits clause in the India–CountryXtax treaty. Ifitisable to do so, then, relying on theSupreme Court decisions in Azadi Bachao Andolanand Vodafone International Holdings B.V. (for whichsee and I.B. and I.E, above, respectively) and the constraintson the application of the recently introducedGAAR provisions (read in conjunction with the recommendationsof the Shome Committee), it can becontended that FHoldCo is the beneficial owner of thedividends.B. Interest paid by HCo to FFinCoIn this case, it is likely that FFinCo would be consideredthe beneficial owner of the interest received fromIndia under the India–Country Ztax treaty. Itisindicatedthat FFinCo qualifies as aresident under theprovisions of the treaty and also satisfies the limitationon benefits provision in the treaty. Inview of thisand relying on the Supreme Court decisions in AzadiBachao Andolan and Vodafone International HoldingsB.V. (for which see and I.B. and I.E, above, respectively)and the constraints on the application of the recentlyintroduced GAAR provisions (read inconjunction with the recommendations of the ShomeCommittee), it can be contended that FFinCo is thebeneficial owner of the interest.Also, it can be demonstrated that FFinCo financesthe capital needs of many of the group companiesthrough third-party bank borrowings and is making aprofit via an interest margin. Accordingly, itappearsthat the arrangement has been made to channel theinvestments appropriately for administrative convenience.As Professor Klaus Vogel’s commentary notes, inconnection with a back-to-back loan transactionwhere the interposed entity does not bear economicrisk and effectively receives only afee for facilitatingthe transaction between the lender and the borrower,the interposed entity would not be considered thebeneficial owner of the interest paid to it. However,where the interposed entity has economic substanceand makes profits of its own via an interest marginlike abank, it would be recognised as the beneficialowner.Further analogy may be found in the AAR decisionin Application no P. 10 of 1996 (1997) 224 ITR 473(AAR) (see I.D., above), in which it was held that whenthere are anumber of circumstances relevant to theadoption of such an arrangement and tax avoidance isnot the sole or dominant objective, the beneficial ownershiptest is passed.In view of the above, it should be possible to arguesuccessfully that FFinCo is the beneficial owner of theinterest.48 12/12 Copyright 2012 by The Bureau of National Affairs, Inc. TM FORUM ISSN 0143-7941

C. Royalty paid by HCo to FIPCoFor reasons similar to those applying in the case of theinterest received by FFinCo (see II.B., above), FIPCoshould be considered the beneficial owner of the royaltiesreceived from HCo. In this regard, the SupremeCourt decisions in Azadi Bachao Andolan and VodafoneInternational Holdings BV (see ) and the constraintson the application of the recently introducedGAAR provisions (read in conjunction with the recommendationsof the Shome Committee) can berelied upon, i.e., if the intermediary company passesthe limitation on benefits test in the applicable taxtreaty, then the intermediary company should bedeemed to be the beneficial owner of the relevantproperty and income.It could also be argued that FIPCo has completecontrol over the funds represented by the royalties itreceives from HCo and does not remit to Parent exactlythe same amount as it receives as royalties. Inthis regard, reference can be made to the AAR decisionin ABC, in Re. 20 In this case, an Indian companyhad entered into an agreement with aFrench companyrequiring the latter to utilise all the expertise atits disposal, whether its own or acquired from others,in the execution of the contract with the Indian company.Under the agreement, the French company wasto receive royalties and fees for technical servicesfrom the Indian company. Further, the French companycould seek technical help from others to enableit to execute the contract and could pay them for suchhelp. The AAR held that this had no bearing on theownership of the royalties received by the Frenchcompany from the Indian company. Its conclusionwas based on the fact that the French company mightnot pass on the expertise acquired by it in the sameform, but might modify it to suit the requirements ofthe Indian company. Also, the expertise was not supplieddirectly to the Indian entity. The AAR furtherheld that it was because the French company had beneficialownership of the royalties that it was able toutilise the payments received from the Indian companyto make payments to its own suppliers. Also, theamount of the payments made to the suppliers mightnot be same as the amount of the royalties receivedfrom the Indian company.It should, however, benoted that FIPCo would haveto be able to demonstrate commercial substance,given the fact that it is asub-licensee with respect topatents owned by Parent and employs only threepeople. If FIPCo is not able to demonstrate commercialsubstance, the Indian revenue authorities wouldbe tempted to classify FIPCo as aconduit companyacting on behalf of Parent, especially since India andCountry Ydonot have atax treaty and had the Parentreceived the royalties directly from the Indian company,itwould have attracted withholding tax underIndia’s domestic law.Annexure 1:Examples quoted in the Shome Committee’sreport onGAAR.Example 11:FactsALtd is incorporated in country F1 as awholly-ownedsubsidiary of company YLtd., which is not aresidentof F1 or of India. The India–F1 tax treaty provides fornon-taxation of capital gains in India (the sourcecountry) and country F1 charges no capital gains taxin its domestic law. Some shares of XLtd., an Indiancompany, are acquired by ALtd .in the year after thedate of the coming into force of the GAAR provisions.The entire funding for investment by ALtd. in XLtd.was done by YLtd. These shares are subsequently disposedof by ALtd. after five years. This results in capitalgains which ALtd. claims as not being taxable inIndia by virtue of the India–F1 tax treaty. ALtd. hasnot made any other transaction during this period.Can GAAR be invoked?InterpretationThis is an arrangement created with the main purposeof avoiding capital gains tax in India by routing investmentsthrough afavorable jurisdiction. There is neitherany commercial purpose nor commercialsubstance in terms of business risks or cash flow to YLtd. in setting up ALtd. It should be immaterial herewhether ALtd. has an office, employees, etc. in countryF1. Both the purpose test and tainted element testsare satisfied for the purpose of invoking GAAR. Unlessit is acase where Circular 789 relating to the tax residencecertificate in the case of Mauritius, or the limitationof benefits clause in the India–Singapore treatyis applicable, the revenue authorities may invokeGAAR and consequently deny treaty benefit.Example 15:FactsUnder the provisions of atax treaty between India andcountry F4, any capital gains arising from the sale ofshares of Indco, an Indian company would be taxableonly in F4 if the transferor is aresident of F4 exceptwhere the transferor holds more than 10 percent interestin the capital stock of Indco. Acompany, ALtd.,being resident in F4, makes an investment in Indcothrough two wholly owned subsidiaries (K Ltd. and LLtd.) located in F4. Each subsidiary holds 9.95 percentshareholding in the Indian company, the totaladding to 19.9 percent of equity of Indco. The subsidiariessell the shares of Indco and claim exemption aseach is holding less than 10 percent equity shares inthe Indian company. Can GAAR be invoked to denytreaty benefit?InterpretationThe above arrangement of splitting the investmentthrough two subsidiaries appears to be with the intentionof obtaining tax benefit under the treaty. Further,there appears to be no commercial substance in creatingtwo subsidiaries as they do not change the economiccondition of investor ALtd. in any manner (i.e.,on business risks or cash flow), and reveals ataintedelement of abuse of tax laws. Hence, the arrangement12/12 TaxManagement International Forum BNA ISSN 0143-7941 49

would be treated as an impermissible avoidance arrangementby invoking GAAR. Consequently, treatybenefit would be denied by ignoring Kand L, the twosubsidiaries, or by treating Kand Lasone and thesame company for tax computation purposes.Example 16:FactsALtd. is aresident of country F5 and is wholly ownedby company MLtd. in country C1. MLtd. is afinancialcompany with substantial reserves and is lookingfor investments in India. MLtd. uses ALtd., its subsidiarycompany, toroute its investment in ZLtd., anIndian company,whereby ALtd. purchases the sharesof ZLtd. Later, ALtd. sells the shares of ZLtd. to CLtd., another company, and realises capital gains.As per the provisions of the relevant DTAA betweencountry F5 and India, ashell/conduit company is noteligible for capital gains exemption in India. However,acompany shall not be deemed to be ashell/conduitcompany if its total annual expenditure on operationsin country F5 is equal to, or more than, 200,000 USDin the immediately preceding period of 24 monthsfrom the date the gains arise. ALtd. claims that capitalgains are not taxable in India as it is not ashellcompany as per the relevant DTAA protocol since it incurred250,000 USD as annual operating business expensesexceeding the limit prescribed therein. CanGAAR be invoked when the limitation of benefitclause is satisfied?InterpretationAs ALtd. has satisfied the limitation of benefit (SAAR)conditions, it cannot be treated as a shell/conduitcompany. Hence GAAR cannot be invoked on theground of ALtd. being aconduit company or that itlacks commercial substance.Example 18:FactsAcompany Aincountry F6, acompany BincountryF7 and a company C in country F8 pool their resourcesand form aspecial purpose vehicle (SPV) as acompany Nsituated in country F1 which has aprovisionof residence-based taxation of capital gains in itstax treaty with India. Nfurther invests the funds in equitiesin India and earns capital gains. The taxpayerclaims the following:s (i) as SPV, aneutral jurisdiction was needed and,after exploring various options, country F1 was selected;s (ii) it is easy to incorporate acompany in F1. It iseasy to operate. Cost of compliance is low and it iseasy to migrate;s (iii) there is no tax liability in country F1; ands (iv) the treaty network of country F1 protects investmentsand also saves taxes in jurisdictions includingIndia.Can GAAR be invoked in such acase?(ii). InterpretationThe arrangement results in asignificant tax benefit toinvestors by routing their investments through countryF1. Can it be said that obtaining tax benefit inIndia is the main purpose of the arrangement? Giventhe facts, it may be held that forming an SPV in an efficientjurisdiction was the main purpose of the arrangementand obtaining tax benefit was not the mainpurpose of the arrangement.Hence, the revenue authorities would not invokeGAAR with regard to this arrangement.NOTES1 Union of India &Anr. vs.Azadi Bachao Andolan &ANR(2003) 263 ITR 706 (SC)2 McDowell &Co. Ltd. vs. CTO (1985) 47 CTR (SC) 126 :(1985) 3SCC 2303 India is not asignatory to the OECD Model Convention,however, the OECD Commentary on the Model Conventiondoes have persuasive value in India.4 The latest OECD Commentary on the Model Convention(2010) contains the same comments.5 Klaus Vogel on Double tax Conventions, Third Edition2005, Preface to Articles 10-12, paras. 5 et seq.6 Double TaxConventions R.18, Feb. 2010, paras. 10B-9to 10B-15.7 IBFD International tax Glossary, Revised 6th Edition,2009, P.39.8 1986 OECD report on double taxation conventions andthe use of conduit companies.9 Klaus Vogel on Double tax Conventions, Third Edition2005, Preface to Articles 10-12, para. 10.10 See fn. 1, above.11 Vodafone International Holdings B.V. vs. Union of India&Anr. (2012) 247 CTR (SC) 1.12 AAR No. 818 of 2009 (2010) 322 ITR 696.13 AAR No. 826 of 2009 (2010) 324 ITR 1.14 Application No. P. 10 of 1996 (1997) 224 ITR 473(AAR).15 16 Application No. P. 9of1995 (1996) 220 ITR 377(AAR).16 See fn. 12, above.17 i.e., the principle enunciated in the Ramsay case (WTRamsay Ltd. vIRC [1981] STC 174) tothe effect that therevenue authorities must look at adocument or atransactionin the context to which it properly belongs.18 Aditya Birla Nuvo Ltd. vs. Deputy Director of Income Tax(International Taxation) &Anr. (2011) 242 CTR (Bom) 56119 The applicability of GAAR has been deferred by oneyear, sothat it would enter into effect on April 1, 2013.The Shome Committee has proposed deferring the introductionof the GAAR by afurther three years.20 Application No. P. 13 of 1995 (1997) 228 ITR 487(AAR).50 12/12 Copyright 2012 by The Bureau of National Affairs, Inc. TM FORUM ISSN 0143-7941

Host CountryITALYCarlo GalliClifford Chance, MilanIntroductionItalian domestic tax law does not contain ageneraldefinition of the term ‘‘beneficial owner’’ (or‘‘beneficial ownership’’). The term commonly appearsin Italy’stax treaties, 1 but is rarely used in Italy’sdomestic legislation. Indeed, the only domestic legislationthat makes express use of the term where it hasafunction comparable to its function in the tax treatiesis the legislation implementing the withholdingtax exemption provided for in the EC Interest andRoyalties Directive into Italian domestic law.This legislationlimits the availability of the exemption to circumstancesin which the recipient of the interest orroyalties ‘‘is receiving the payment as ultimate beneficiaryand not as intermediary,agent, representative ortrustee of another person.’’ 2 Despite its limited use inthe actual legislation, the importance of the term‘‘beneficial owner’’ has generally increased over theyears as it has come to be interpreted as an antiavoidanceprinciple applying in the context of crossborderpayments. Absent adomestic law definition,reference is consistently made to the meaning that theterm has in generally accepted international tax parlance,as modified by the practice of the Italian tax authoritiesand, though to a much lesser extent, itsinterpretation by the tax courts.I. Italian approach to Beneficial OwnershipA. GeneralAs the term ‘‘beneficial owner’’ isvery commonly usedin the tax treaties concluded by Italy,its interpretationhas normally been guided by reference to internationaltax treaty sources, most importantly the Commentaryon the OECD Model Tax Convention onIncome and on Capital (the ‘‘OECD Model Convention’’).Taking the OECD definition and interpretation astheir starting point, the Italian tax authorities initiallytook aneutral approach, identifying the ‘‘beneficialowner’’ asthe person to which the relevant income isattributable for tax purposes.In Circular No. 306 of December 23, 1996, 3 the Italiantax authorities took the position that anon-Italianresident owner of Italian bonds qualifies as the beneficialowner of interest paid on the bonds if ‘‘it is theperson to which the interest must be imputed for taxpurposes, as aconsequence (. ..)the above requirementis not met whenever there is interposed an intermediary,such as an agent or anominee, between thebeneficiary and the debtor of the interest payment.’’ Asimilar interpretation was also adopted by the authoritiesin relation to acase involving the applicationof atax treaty.Specifically,Ruling No. 104/E of May 6,1997 4 stated that ‘‘treaty benefits have to be grantedonly to the subjects that have the status of beneficialowners, the beneficial owner being understood asbeing any person to whom the income can be fiscallyimputed.’’The Italian tax authorities addressed the conceptmore thoroughly in commenting on the legislationimplementing the EC Interest and Royalties Directivein Italian domestic law: Circular No. 47/E of November2, 2005 5 stated that, in order to qualify as the beneficialowner of payments of interest/royalties, acompany ‘‘must receive the payments as final beneficiaryand not as an intermediary, agent, delegate or fiduciaryof any other entity.’’Moreover,acompany thatreceives interest can qualify as the beneficial owner ofthe interest if it ‘‘achieves an economic benefit fromthe underlying transaction. This conclusion is supportedby the rationale underlying this provision,which is to prevent an intermediary being used for themere purposes of benefitting from the exemption.Therefore, taking into account the anti-avoidance purposeof this provision, acompany can qualify as beneficialowner when, from alegal point of view,itholdstitle to the income and the income is available to it.’’Circular 47/E thus clearly indicates that the tax authoritiesinterpret the beneficial owner requirementas an anti-abuse concept aimed at preventing the obtainingof tax benefits through the ‘‘interposition’’ ofintermediaries.In contrast, case law on the subject of beneficialownership is relatively scarce. While several decisionshave made reference to beneficial ownership, there isno meaningful precedent that actually explores theconcept. One notable exception is the provincial TaxCourt of Turin’s decision 6 that, having due regard to anumber of circumstances, aLuxembourg company licensingintellectual property (IP) to an Italian companywas not to be regarded as the beneficial owner of12/12 TaxManagement International Forum BNA ISSN 0143-7941 5112/12 TaxManagement International Forum BNA ISSN 0143-7941 51

the royalties it received under the Italy–Luxembourgtax treaty, but rather as the ‘‘formal’’ beneficiary ofsuch royalties. Among the circumstances taken intoaccount were that: the Luxembourg company had acquiredthe IP for no consideration, and thus did notbear any business risk; the company was whollyownedby acompany resident in the Bahamas; thecompany held only one brand, so that it obviously didnot incur any meaningful maintenance or administrationcosts; and the company did not have any organisationalsubstance, since the relevant labor costscould only account for one or two employees. Interestingly,thecourt did not elaborate on which person wasto be regarded as the beneficial owner and, most importantly,took the position that aparticular entitywas not the beneficial owner of the royalties despitethe fact that the entity retained the entire amount ofthe royalties received and did not pass any of thatamount on to any other person. For this reason, thedecision should not be considered to constitute meaningfulprecedent.B. Beneficial Ownership and wholly artificialarrangementsAlthough it does not specifically deal with the conceptof beneficial ownership, the Italian tax authoritieshave provided additional guidance on the use of conduitcompanies in connection with the reduced domesticrate of dividend withholding tax (i.e., the 1.375percent rate on dividends paid to EU/EEA residents). 7In addressing the issue, the Italian tax authoritieshave taken the position that, in order for aforeignholding company to be entitled to the reduced rate,the foreign holding company must not be part of a‘‘wholly artificial arrangement,’’ asenvisaged by theEuropean Court of Justice (ECJ) in CadburySchweppes. 8 However, the position taken by the Italiantax authorities goes much further than the conceptestablished in the ECJ decision. In the opinion ofthe authorities, in order for it not to be regarded aspart of awholly artificial arrangement, acompanymust conduct agenuine business through its own organisationalstructure (i.e., personnel and assets). Inthe case of aholding company,however,itisacknowledgedthat limited substance may generally be sufficientto enable the company to perform its holdingactivity. Thus, in the case of aholding company, thefocus would rather be on the activity performed by thecompany’s personnel in managing its subsidiariesand, possibly, providing centralised services. In otherwords, awholly passive holding company that did notperform any shareholder/investor role in relation toits subsidiaries would be regarded as part of awhollyartificial arrangement and, as such, denied access tothe favorable withholding regime. Since the Italiantax authorities’ interpretation of what constitutes a‘‘wholly artificial arrangement’’ seems to go wellbeyond that of the ECJ, it would be interesting to seethe Italian approach tested in an actual case beforethat court.Subsequently,the Italian tax authorities’ interpretationof the concept of beneficial ownership hasevolved to absorb the ‘‘wholly artificial arrangement’’approach, i.e., to make an interposed entity’sability toqualify as the beneficial owner of income it receivesconditional on the existence of actual organisationalsubstance. In recent (unpublished) rulings on complexfinancial transactions, the Italian tax authoritieshave refused to treat as abeneficial owner any personthat: (1) is not in aposition to decide on the use andenjoyment of aparticular item of income because ofcontractual obligations; and (2) retains the relevantflow of funds for only afew days or weeks before passingthe funds on, possibly reduced by asmall spread,to some other person (even though the tax on thetransaction was totally unrelated to the specific underlyingflow). More specifically, the tax authorities havetaken the position that acompany (in the case concerned,aspecial purpose vehicle (SPV)) cannot bedeemed to be the beneficial owner of agiven stream ofincome (in the case concerned, interest) unless thecompany has substance, i.e., direct employees withsufficient expertise and decision-making power tomake management decisions with respect to the relevantassets (in the case concerned, debt claims) andincome. Thus, in the opinion of the Italian tax authorities,acompany will be regarded as the beneficialowner of income only if its own management canknowledgeably and independently decide on the useof the income.As amatter of field practice, the Italian tax authoritieshave enthusiastically endorsed the Indofood decision9 (for obvious reasons, they have been lessenthusiastic about the decisions in the Canadian PrévostCar 10 and Danish ISS 11 cases) as ameans of challengingwhat they believe to be pass-througharrangements, without however referring to the decisionin their official guidelines.C. Foreign finance companiesRecent legislation has evidenced adifferent approachto the concept of beneficial ownership, prompted byactual tax controversies initiated by the Italian tax authorities.In venturing into the international market,Italian groups (especially where the principal Italiancompany is not alisted company) have traditionallyused foreign affiliates to issue bonds on the internationalmarket. These foreign issuers, organised in avariety of forms ranging from fully fledged (andstaffed) group finance companies to single transactionSPVs, would issue bonds on the international marketand remit the proceeds to the Italian group companies(often the parent) by way of aloan. The interest on theloan would normally be exempt from Italian withholdingtax under the EC Interest and Royalties Directive.The Italian tax authorities began to challengesuch structures by taking the position that the intereston the loans was not eligible for exemption under theInterest and Royalties Directive because it was beneficiallyowned not by the foreign issuing companies butby the bondholders. This approach has led to anumber of tax controversies revolving entirely aroundthe concept of beneficial ownership. In order to put anend to such controversies and provide Italian companieswith an additional way of accessing internationalmarkets, new legislation was introduced in July 2011.The legislation provides for afavourable tax regime (5percent withholding) for interest on such loans whenthe foreign recipient is not the beneficial owner butuses the interest to service the bonds. 1252 12/12 Copyright 2012 by The Bureau of National Affairs, Inc. TM FORUM ISSN 0143-7941

In commenting on the new provisions, the Italiantax authorities have taken the position that in determiningwhether the recipient of the interest derives anactual economic benefit from the transaction and istherefore to be regarded as the ‘‘beneficial owner,’’ allthe facts and circumstances should be taken into account.More specifically,‘‘it may be necessary to investigateboth the economic and the contractual profilesof the relevant transactions, together with the existenceof adequate substance that has the necessary capacityto manage financial risks.’’ 13D. Current position regarding the concept of ‘‘BeneficialOwner’’As the above analysis suggests, the concept of beneficialownership for Italian tax purposes is largely basedon the meaning given to the term in the OECD ModelConvention and the Commentary thereon, albeit interpretedas strictly as possible under asubstanceover-formapproach. The interpretation of the Italiantax authorities (who seem to be more concerned withchallenging taxpayers’ structures than providing impartialguidance) is even stricter and requires that theperson in receipt of the relevant income streamshould have its own, duly skilled, managerial resourcescapable of exercising actual control over theincome stream. The tax authorities’ interpretation appearsto conflict with the meaning of beneficial ownerto be derived from the OECD Model Convention andaccepted internationally,but taxpayers wishing to relyon the wider international definition should be preparedto defend their position in court.II. Application of Italian rulesA. Dividends paid by HCo to FHoldCoIn principle, the fact that FHoldCo distributes onwardsthe dividends it receives from HCo, possibly togetherwith other profits that it has generated, shouldnot lead to the conclusion that FHoldCo is not to beregarded as the beneficial owner of those dividends. Infact, provided that the distribution of the dividends iseffected in observance of the ordinary procedures andformalities provided for with respect to the approvalof the accounts and the subsequent distribution of theultimate net profit by FHoldCo, there should be nocase for claiming that FHoldCo is not the beneficialowner of the dividends it receives. In other words, thedividends distributed by FHoldCo would not be thedividends it receives from HCo but, rather its aggregatenet profits, as distributed following adistinct andseparate decision made by FHoldCo’s shareholders.The conclusion might be different if FHoldCo wereto have no control over the dividends is receives fromHCo. This could be the case, for example, if FHoldCo’sconstituting documents provided that any item ofincome received by FHoldCo was to be remitted immediatelyto FHoldCo’s shareholder, i.e., withoutFHoldCo’s management (and/or ashareholders’ resolution)being able to influence the process.Similarly, ifFHoldCo: (1) held only the participationin HCo; (2) had atrack record of systematicallydistributing all dividends received shortly after receipt(say within 90 days); and (3) did not perform anyactual shareholder/investor function in relation to itssubsidiary, HCo, the risk of FHoldCo’s not beingtreated as the beneficial owner of the dividends wouldincrease substantially.B. Interest paid by HCo to FFinCoThe outcome here would very much depend uponwhether FFinCo was under alegal obligation to remitto the lending banks the interest it receives. In decidingwhether FFinCo would be regarded as the beneficialowner of that interest, account would have to betaken of all the relevant facts and circumstances. Forexample, if the bank loan contained provisions requiringFFinCo to remit any interest it received on theloan made to HCo, FFinCo could scarcely be deemedto be the beneficial owner of that interest.The fact pattern indicates that FFinCo borrowsfrom the banks when it needs to fund the other groupcompanies. In other words, FFinCo appears to be borrowingand lending on the specific amounts it borrows,rather than lending to its affiliates by drawingfunds from avariety of sources. In such circumstance,the position of FFinCo as the beneficial owner of theinterest it receives would be substantially weakened.The conclusion would be different if FFinCo wereacting more like abank, i.e., by drawing from severalfunding sources and using the proceeds to fund its affiliateson anon-selective basis. For example, in suchascenario, interest and repayments received from affiliateswould be retained by FFinCo and/or reused tofund other affiliates, rather than being repaid to thebank from which the amounts were borrowed in thefirst place to fund the affiliate repaying/paying the interest.Finally, the fact that FFinCo has its own managementand personnel with expertise in the managementof financial transactions would be useful incountering the Italian tax authorities’ approach underwhich acompany cannot be the beneficial owner of aparticular stream of income, unless it has its owndecision-making resources for managing the relevantassets and income.C. Royalties paid by HCo to FIPCoThe analysis in relation to royalties would proceedalong the same lines as that relating to interest, so thatthe key questions would be: does FIPCo have controlover the royalties it receives from HCo or is it underan obligation to remit them to some other person?Does FIPCo actually independently manage its ownportfolio of intangibles and exercise autonomousdecision-making power? Again, all the facts and circumstanceswould have to be taken into consideration.In the case at hand, if one looks at the overall picture,it might be difficult, in view of the existence ofthe licensing/sub-licensing scheme, to maintain thatFIPCo should be regarded as the beneficial owner ofthe Italian-source royalties. Indeed, the matching ofthe relevant rights with the income derived therefromwould increase the likelihood that FIPCo would be regardedas passing on the royalties it receives. Again,all the facts and circumstances would affect the conclusion.Factors that might strengthen FIPCo’s positionas the beneficial owner include:12/12 TaxManagement International Forum BNA ISSN 0143-7941 53

s the lack of acontractual link between the licenseand the sub-license;s the fact that the licence and the sub-license were negotiatedat different times;s the fact that recourse under the license is not limitedto the sub-license;s the substantial difference between the duration ofthe license and that of the sub-license;s the fact that the licensed IP is licensed under sublicensesto several other sub-licensees; ands the fact that the licensed IP is used by FIPCo togetherwith other intangibles that it owns and exploitscommercially.The fact pattern indicates that FIPCo employs threelawyers to take care of the legal protection of the IP.Whether this is sufficient for FIPCo’s staff toberegardedas ‘‘in control’’ ofthe IP would depend on theparticular features of the IP and the core activitiesnecessary to maintain its value. For example, if the IPis mature and often threatened by the possibility ofcounterfeiting, the role of the lawyers would be key (tothe extent they are actually in charge of managing,rather than simply administering, the IP legal work).If the IP’s value depends largely on advertising andpromotion, the legal work being limited to administeringregistrations and hiring external lawyers for theoccasional protection action, it would be difficult tomaintain that FIPCo is actually the owner of the IP.Again, while the existence of adequate substance maynot be essential to the internationally accepted notionof ‘‘beneficial owner,’’ itmay play asignificant role inthe Italian analysis, at least as advanced by the tax authorities.Should FIPCo not in fact be regarded as the beneficialowner of the royalties, the royalties would be subjectto a30percent withholding tax. While it would, inprinciple, be possible to look through the intermediatecompany (i.e., FIPCo) to the actual beneficialowner of the royalties and apply the relevant taxtreaty, nosuch treaty is envisaged to exist in the factpattern under consideration, so that the full domesticrate would apply.NOTES1 Adefinition is contained in Art. 9ofthe Protocol to theItaly–Germany tax treaty (signed on Oct.18, 1989): aperson is defined as the ‘‘beneficial owner’’ of incomewhere it is the person to which the right from which theincome arises is attributable and to which such income isattributable under the tax legislation of each ContractingState.2 Presidential Decree 600 of Sept. 29, 1973, Art. 26-quarter(4)(c)(1).3 General guidance on the then new tax regime for interestarising from certain bonds.4 Regarding the conditions for the refund of the tax creditand/or the equalisation tax to nonresidents under certainItalian tax treaties.5 For purposes of the decree implementing Council Directive2003/49/EC of 3June 2003 (the ‘‘Interest and RoyaltiesDirective’’) into Italian law.6 Decision n. 124 of Oct. 19, 2010, Chamber IX.7 See Circular No. 32/E of July 8, 2011.8 Decision of Sept. 12, 2006 on Case C-196/04.9 Court of Appeals judgment of March 2, 2006 in IndofoodInternational Finance Ltd. v. JP Morgan Chase Bank N.A.London Branch.10 The Queen vPrévost Car Inc., 2009 FCA 57.11 SKM 2012.121Ø.12 If the foreign recipient is indeed the beneficial owner,the exemption under the Directive would apply.13 Circular n. 41/E of Aug. 5, 2011.Transfer Pricing ForumTransfer Pricing Forum is an interactive online service bringing you detailedpractical guidance on technical transfer pricing issues. Transfer Pricing Forumshows you exactly how to deal with complex technical problems, in up to 31countries.In the form of a detailed technical case study, current transfer pricing topics areanalysed and discussed in detail by individual experts in up to 31 countries. Thequestion asked is: How would you solve this problem in your country? In-depthanswers to a new topical question are published every issue. For moreinformation email internationalmarketing@bna.com54 12/12 Copyright 2012 by The Bureau of National Affairs, Inc. TM FORUM ISSN 0143-7941

Host CountryJAPANEiichiro Nakatani and Akira TanakaAnderson Mōri&Tomotsune, TokyoIntroductionThe term ‘‘beneficial owner’’ (or ‘‘beneficialownership’’) is not used in Japan’s domestictax laws except in provisions concerning taxationwith respect to trusts. On the other hand, theterm appears quite frequently in Japan’s tax treaties,most prominently in the articles that grant exemptionsfrom or reductions in Japanese tax on Japanesesourcedividends, interest and royalties paid to treatycountry residents. Even though ‘‘beneficial ownership’’isanimportant concept under the treaties forpurposes of determining whether treaty country residentsare eligible for treaty benefits, the meaning ofthe term is not clear because the term is not defined inJapan’s tax treaties (or indeed in tax treaties generally),and in addition there have been no Japanesecourt judgments stating the meaning of the termunder Japan’s tax treaties and very little administrativeguidance has been issued in relation to the term.Nevertheless, to acertain extent, there is acommonunderstanding of the meaning of ‘‘beneficial ownership’’based on certain indications as to its interpretationprovided in commentaries such as theCommentary on the OECD Model TaxConvention onIncome and on Capital (the ‘‘OECD Model Convention’’).I. Japanese rules on Beneficial OwnershipA. Japanese domestic tax lawAs noted above, there are no provisions in Japanesedomestic tax law containing the term ‘‘beneficialowner’’ (or ‘‘beneficial ownership’’) except for thoseconcerning taxation with respect to trusts. Accordingly,inprinciple, Japanese domestic tax law is of noassistance in interpreting the meaning of the term‘‘beneficial owner’’ under Japan’s tax treaties. 1That being said, it should be noted that, as ageneralrule, under Japan’s income tax laws (Article 12 of theIncome TaxAct and Article 11 of the Corporate TaxAct), in cases where aperson to which income derivedfrom assets or business seems to be legally imputed ismerely nominal —i.e., it is not that person but anotherperson that actually enjoys the income —theother person will be subject to tax on the income (theprinciple of ‘‘substance over form’’). This may affectthe interpretation of the term ‘‘beneficial owner’’inthecontext of Japan’s tax treaties. 2B. Japan’s tax treaties1. General understandingAfter the introduction of the term ‘‘beneficial owner’’in the 1977 version of the OECD Model Convention,Japan began to incorporate the term in its own taxtreaties. For example, the provisions of the old Japan–United States tax treaty, which was signed in 1971, donot use the term, but the new Japan–United States taxtreaty (hereinafter the ‘‘Japan–United States taxtreaty’’), which was signed in 2003, introduced provisionsthat make use of the term with the result thattreaty country residents can enjoy benefits under thetreaty only if they are the beneficial owners of incomesuch as dividends, interest and royalties. 3As noted above, there is no definition of the term‘‘beneficial owner’’ inJapan’s tax treaties. However,there are some indications as to how the term is to beinterpreted and these are discussed in I.B.1.a. to c.,below.a. National TaxAgency guidanceThe National TaxAgency of Japan has issued guidance(Q&A) (‘‘Guidance’’) on the interpretation of theterm ‘‘beneficial owner’’ asitapplies in relation to culturalroyalties under Article 12(2)(b) of the Japan–Hungary tax treaty. 4 According to the Guidance,where J, aJapanese company, purchased afilm fromH, aHungarian company that was not the maker ofthe film, and paid to Hconsideration for the film, Hwould be considered to be the beneficial owner of theconsideration, which is treated as acultural royalty,only if Hreceived from or had licensed to it by theowner of the copyright in the film, whether in wholeor in part, any of the following rights: the right of reproduction;the right of screen presentation; the rightof distribution; or the right of public transmission.Therefore, if Hwas an agent of the beneficial owner,an intermediary between Jand the beneficial owner,or amanagement company with respect to the copyrightin the film, Hwould not be considered to be the12/12 TaxManagement International Forum BNA ISSN 0143-7941 5512/12 TaxManagement International Forum BNA ISSN 0143-7941 55

eneficial owner of the consideration. This Guidanceshould be referred to when considering the interpretationof the term ‘‘beneficial owner.’’Although it is not clear whether and to what extentthe rule provided in the Guidance is generally applicable,under the standard interpretation in Japan, theterm ‘‘beneficial owner’’ means aperson that is notmerely the recipient of the income concerned but theperson to which the income is substantially/actuallyattributable. If the recipient of income is anominee,an agent or aperson acting as aconduit for anotherperson that in fact receives the benefit of the income,as noted in I., above, such recipient is not consideredto be the taxpayer in relation to that income. Thus, theterm ‘‘beneficial owner’’ isconsidered to be aconceptthat makes it clear that eligibility for treaty benefits islimited to the person to which the income concernedis attributable and does not extend to aperson that ismerely the recipient of the income.b. Commentary on the OECD Model ConventionThe commentary 5 on Article 10 of the OECD ModelConvention states that:The term ’beneficial owner’ is not used in anarrowtechnical sense, rather it should be understood in itscontext and in light of the object and purposes of theConvention, including avoiding double taxation andthe prevention of fiscal evasion and avoidance. Wherean item of income is received by aresident of aContractingState acting in the capacity of agent or nomineeit would be inconsistent with the object andpurpose of the Convention for the State of source togrant relief or exemption merely on the status of theimmediate recipient of the income as aresident of theother Contracting State. The immediate recipient ofthe income in this situation qualifies as aresident butno potential double taxation arises as aconsequenceof that status since the recipient is not treated as theowner of the income for tax purposes in the State ofresidence. It would be equally inconsistent with theobject and purpose of the Convention for the State ofSource to grant relief or exemption where aresidentof a Contracting State, otherwise than through anagency or nominee relationship, simply acts as aconduitfor another person who in fact receives the benefitof the income concerned. 6The Commentary on Articles 11 and 12 of the OECDModel Convention provides similar explanations withrespect to interest and royalties.c. Technical explanation of the Japan–United StatesTaxTreatyThe U.S. Treasury Technical Explanation of theJapan–United States tax treaty 7 states that:The term ’beneficial owner’ is not defined in the Convention,and is, therefore, defined as under the internallaw of the Contracting State imposing tax (i.e., thesource country). The beneficial owner of the dividendfor purposes of Article 10 is the person to which thedividend income is attributable for tax purposesunder the laws of the source state. Thus, if adividendpaid by acorporation that is aresident of one of theContracting States is received by anominee or agentthat is aresident of the other Contracting State onbehalf of aperson that is not aresident of that otherContracting State, the dividend is not entitled to thebenefits of this Article.2. Treaty provisions clarifying the meaning ofbeneficial ownerThe Japan–United States tax treaty has provisionsthat provide atypical example of aperson that is not abeneficial owner of dividends, interest and royalties.The Japan–United Kingdom and Japan–France taxtreaties contain similar provisions. These provisionscan also be of assistance in interpreting the meaningof the term ‘‘beneficial owner.’’a. Article 10(11) of the Japan–United States TaxTreaty(Dividends)Article 10(11) of the Japan–United States tax treatyprovides that aresident of aContracting State will notbe considered the beneficial owner of dividends withrespect to preferred stock if the preferred stock wouldnot have been established or acquired unless apersonthat is:s not entitled to benefits with respect to dividendspaid by aresident of the other State that are thesame as, or more favourable than, those availableunder the treaty to aresident of the first State; ands not aresident of either Stateheld equivalent preferred stock in the resident of thefirst State. 8In other words, Article 10(11) provides that aresidentof aContracting State will not be considered thebeneficial owner of dividends with respect to preferredstock in the context of certain ‘‘back-to-back’’preferred stock arrangements. According to the TreasuryTechnical Explanation of the treaty, the operationof this rule can be illustrated by the followingexample:A, aU.S. resident, owns preferred stock in X, aJapanesecompany, that entitles Atodividends of 10x eachyear to the extent of X’s earnings. B, aresident of athird country that does not have a tax treaty withJapan, owns preferred stock in Athat entitles Btodividendsof 10x each year to the extent of A’searnings andotherwise has terms that are equivalent to the terms ofthe preferred stock of Xheld by A. Awould not haveestablished or acquired its preferred stock in XifBdidnot hold preferred stock in A. Xhas earnings of 15x inyear one, and pays adividend of 10x to A. Apays adividend of 10x to B. Under Paragraph 11, Awill notbe considered the beneficial owner of the dividendsfrom X, and therefore is not entitled to treaty benefitswith respect to the dividends from X.Article 10(11) applies to conduit transactions usingpreferred stock and similar interest rights and doesnot seem to apply to transactions using ordinarystock. However, since Article 10(11) simply provides atypical example of aperson that is not to be regardedas abeneficial owner, even where the arrangementconcerned is not a‘‘back-to-back’’ preferred stock arrangementof akind to which the provision applies(for example, it is an arrangement that does not involvethe use of preferred stock), this does not necessarilylead to the conclusion that the recipient ofdividends (i.e., aperson that is in asimilar position to‘‘A’’inthe above example) derived from the arrangementis the beneficial owner of the dividends. Thequestion is whether the recipient is to be consideredthe beneficial owner from the perspective of the recipient’seconomic situation/position. In other words,56 12/12 Copyright 2012 by The Bureau of National Affairs, Inc. TM FORUM ISSN 0143-7941

the recipient of dividends is not to be considered thebeneficial owner of the dividends unless the benefit ofthe dividends is substantially/actually attributable tothe recipient.b. Article 11(11) of the Japan–United States TaxTreaty(Interest)Article 11(11) of the Japan–United States tax treatyprovides that aresident of aContracting State will notbe considered the beneficial owner of interest with respectto adebt-claim if the debt-claim would not havebeen established unless aperson that is:s not entitled to benefits with respect to interest arisingin the other State that are the same as, or morefavorable than, those available under the treaty to aresident of the first State; ands not aresident of either Stateheld an equivalent debt-claim against the residentof the first State. 9In other words, Article 11(11) provides that aresidentof aContracting State will not be considered thebeneficial owner of interest in the context of certain‘‘back-to-back’’ loan arrangements. According to theTreasury Technical Explanation, the operation of thisrule can be illustrated by the following example:A, aU.S. resident, holds adebt-claim against X, aJapanese company, that entitles Atointerest of 10xeach year. B,aresident of athird party that does nothave a tax treaty with Japan, owns a debt-claimagainst Athat entitles Btointerest of 10x each yearand otherwise has terms that are equivalent to theterms of the debt-claim held by A. Awould not haveestablished its debt-claim against XifBdid not hold adebt-claim against A. X pays interest of 10x to A,which pays interest of 10x to B. Under paragraph 11,Awill not be considered the beneficial owner of the interestfrom X, and therefore is not entitled to treatybenefits with respect to the interest from X.As in the case of Article 10(11), Article 11(11) simplyprovides atypical example of aperson that is not to beregarded as the beneficial owner of interest. Thus,even where the loan arrangement concerned is not a‘‘back-to-back’’ loan arrangement of akind to whichArticle 11(11) applies, this does not necessarily lead tothe conclusion that the recipient of interest (i.e., aperson that is in similar position to ‘‘A’’inthe above example)derived from the arrangement is the beneficialowner of the interest. It is still necessary to considerwhether the benefit of the interest is substantially/actually attributable to the recipient from the perspectiveof the recipient’s economic situation/position.c. Article 12(5) of the Japan–United States TaxTreaty(Royalties)Article 12(5) of the Japan–United States tax treaty providesthat aresident of aContracting State will not beconsidered the beneficial owner of royalties with respectto intangible property if the royalties would nothave been paid to the resident unless the resident paysroyalties in respect of the same intangible property toaperson that is:s not entitled to benefits with respect to royalties arisingin the other State that are the same as, or morefavorable than, those available under the treaty to aresident of the first State; ands not aresident of either State. 10In other words, Article 12(5) provides that aresidentof aContracting State will not be considered thebeneficial owner of royalties in the context of certain‘‘back-to-back’’ royalty arrangements. According tothe Treasury Technical Explanation, the operation ofthis rule can be illustrated by the following example:B, aresident of athird country that does not have ataxtreaty with Japan, licenses Japanese patent rights to A.Asublicenses its entire interest in the same Japanesepatent rights to X, aJapanese company. Xpays royaltiesof 100x to Awith respect to the sublicense and Apays royalties of 99x to Bwith respect to the license.The 100x of royalties would not have been paid to AifAhad not paid royalties with respect to the Japanesepatent rights to B. Under Paragraph 5, Awill not beconsidered the beneficial owner of the royalties fromX, and therefore is not entitled to treaty benefits withrespect to the royalties from X.As in the case of Article 10(11), Article 12(5) simplyprovides atypical example of aperson that is not to beregarded as the beneficial owner of royalties. Thus,even where the royalty arrangement concerned is nota ‘‘back-to-back’’ royalty arrangement of a kind towhich Article 12(5) applies, this does not necessarilylead to the conclusion that the recipient of royalties(i.e., aperson that is in similar position to ‘‘A’’intheabove example) derived from the arrangement is thebeneficial owner of the royalties. It is still necessary toconsider whether the benefit of the royalties issubstantially/actually attributable to the recipientfrom the perspective of the recipient’s economicsituation/position.II. Application of Japanese rulesA. Dividends paid by HCo to FHoldCoSince preferred stock is not used in the arrangement,even if the Japan–Country X contains a provisionsimilar to Article 10(11) of the Japan–United Statestax treaty, that provision would not directly apply.However, this would not necessarily lead to the conclusionthat FHoldCo is to be regarded as the beneficialowner of the dividends paid to it by HCo.Under the standard interpretation of the term ‘‘beneficialowner’’ inthe context of dividends, if the dividendsare not substantially/actually attributable to therecipient of the dividends (i.e., the recipient does notenjoy the benefit of the dividends), the recipient wouldnot be considered to be their beneficial owner. Inaddition,the attribution is determined from the perspectiveof the economic situation/position of therecipient. On this basis, the Japanese tax authoritiesmight argue that FHoldCo was not the ‘‘beneficialowner’’ of the dividends paid by HCo becauseFHoldCo redistributes virtually all of the dividends toParent within 90 days of receiving them. In particular,if FHoldCo is obliged to redistribute dividends toParent under certain agreements between FHoldCoand Parent, this might increase the risk that the Japaneseauthorities would take such aposition.HCo/FHoldCo might be able to rebut this argumentby asserting that the case at hand is very differentfrom the cases to which provisions such as Article10(11) of the Japan–United States tax treaty apply,12/12 TaxManagement International Forum BNA ISSN 0143-7941 57

which would in turn imply that FHoldCo should beconsidered the beneficial owner of the dividends.If FHoldCo is not obliged to redistribute the dividendsautomatically to Parent, HCo/FHoldCo couldargue that FHoldCo actually enjoys the benefit of thedividends. However, since there are no court precedentsrelating to this issue, it is difficult to discountthe risk that FHoldCo would not be considered thebeneficial owner.B. Interest paid by HCo to FFinCoIn view of the fact that FFinCo re-lends to HCo thefunds received from the relevant bank at an interestrate that is 10 percent higher than the rate charged toFFinCo by the relevant bank, the relevant bank wouldnot be considered to have an equivalent debt-claim ofthe kind discussed in I.B.2.b., above. Thus, even if theJapan–Country Ztax treaty contains aprovision similarto Article 11(11) of the Japan–United States taxtreaty, itisquite possible that the provision would notapply.Under the standard interpretation of the term ‘‘beneficialowner’’ inthe context of interest, if the interestis not substantially/actually attributable to the recipientof the interest (i.e., the recipient does not enjoy thebenefit of the interest), the recipient would not be consideredto be its beneficial owner. Inaddition, the attributionis determined from the perspective of theeconomic situation/position of the recipient. On thisbasis, the Japanese tax authorities might argue thatFFinCo is not the ‘‘beneficial owner’’ ofthe interestpaid to it by HCo because FFinCo receives the interestfrom HCo and in turn makes the repayment to the relevantbank, and as aresult FFinCo enjoys the benefitof only avery small portion of the interest it receivesfrom HCo.HCo/FFinCo might be able to rebut this argumentby asserting that the case at hand is very differentfrom the cases to which provisions such as Article11(11) of the Japan–United States tax treaty apply,which would in turn imply that FFinCo should be consideredthe beneficial owner. Although this assertionseems plausible, since there are no court precedentsrelating to this issue, it is difficult to completely discountthe risk that FFinCo would not be consideredthe beneficial owner.C. Royalties paid by HCo to FIPCoThe situation in the case at hand is very similar to thesituation envisaged in Article 12(5) of the Japan–United States tax treaty (see I.B.2.c., above). Thus, ifthe Japan–Country Qtax treaty contains aprovisionsimilar to Article 12(5) of the Japan–United States taxtreaty, itisquite possible that FIPCo would not beconsidered the beneficial owner of the royalties paidto it by HCo.Even if the Japan–Country QTreaty does not containsuch aprovision, since Article 12(5) of the Japan–United States tax treaty simply provides a typicalexample of aperson that is not abeneficial owner ofroyalties, there remains the risk that FIPCo would notbe considered the beneficial owner.NOTES1 In relation to the argument as to whether the domesticlaw meaning of ‘‘beneficial owner’’ isrelevant for the interpretationof the term for tax treaty purposes, theOECD discussion draft ‘‘Clarification of the meaning of‘beneficial owner’ in the OECD model tax convention’’dated April 29, 2011 proposes the following wording forthe Commentary on Article 10 (Dividends):Since the term ‘beneficial owner’ was added to addresspotential difficulties arising from the use of the words’paid to ...aresident’ in paragraph 1, it was intended tobe interpreted in this context and not to refer to any technicalmeaning that it could have had under the domesticlaw of aspecific country (in fact, when it was added to theparagraph, the term did not have aprecise meaning in thelaw of many countries). The term ‘beneficial owner’ istherefore not used in anarrow technical sense (such asthe meaning that it has under the trust law of manycommon law countries), rather, itshould be understoodin its context, in particular in relation to the words ‘paid...to aresident’, and in light of the object and purposesof the Convention, including avoiding double taxationand prevention of fiscal evasion and avoidance. This doesnot mean, however, that the domestic tax law meaning of‘beneficial owner’ is automatically irrelevant for the interpretationof that term in the context of the Article: thatdomestic law meaning is applicable to the extent that it isconsistent with the general guidance included in thiscommentary.2 Some Japanese tax experts state that the meaning of theterm ‘‘beneficial owner’’ inprovisions under Japanese taxlaws concerning taxation with respect to trusts should bereferred to in determining the meaning of the term underJapan’s tax treaties. However, since taxation with respectto trusts is very different from the taxation of incomesuch as dividends, interest and royalties that is unrelatedto trusts, this is not considered to be the standard understanding.3 For example, Japan–United States tax treaty, Art. 11(2)provides that ‘‘such interest may also be taxed in the ContractingState in which it arises and according to the lawsof that Contracting State, but if the beneficial owner ofthe interest is aresident of the other Contracting State,the tax so charged shall not exceed 10 percent of the grossamount of the interest.’’4 Although the Guidance is not legally binding, in practice,taxpayers need to refer to it in considering the taxconsequences of atransaction, especially if the transactionis similar to that addressed in the Guidance.5 Since the Commentary on the OECD Model Conventionis not atreaty per se, ITisnot legally binding. That beingsaid, in its Oct. 29, 2009 judgment, the Supreme Court ofJapan held that the Commentary on the OECD ModelConvention constitutes material that is to be referred as a‘‘supplementary means of interpretation’’ within themeaning of Vienna Convention on the Law of Treaties,Art. 32.6 According to the OECD discussion draft ‘‘Clarificationof the meaning of ‘beneficial owner’ in the OECD modeltax convention’ dated April 29, 2011, this wording willalso be amended in the near future.7 The Technical Explanation of the Japan–United Statestax treaty reflects the policies behind the provisions of thetreaty, aswell as understandings reached with respect tothe application and interpretation of the treaty. However,the Technical Explanation is not atreaty per se and istherefore not legally binding. It is not clear whether itconstitutes material that is to be referred as a‘‘supple-58 12/12 Copyright 2012 by The Bureau of National Affairs, Inc. TM FORUM ISSN 0143-7941

mentary means of interpretation’’ within the meaning ofVienna Convention on the Law of Treaties, Art. 32.8 Specifically, Japan–United States tax treaty, Art. 10(11)provides as follows:Aresident of aContracting State shall not be consideredthe beneficial owner of dividends in respect of preferredstock or other similar interest if such preferred stock orother similar interest would not have been established oracquired unless aperson: (a) that is not entitled to benefitswith respect to dividends paid by aresident of theother Contracting State which are equivalent to, or morefavorable than, those available under this Convention toaresident of the first-mentioned Contracting State; and(b) that is not aresident of either Contracting State; heldequivalent preferred stock or other similar interest in thefirst-mentioned resident.9 Specifically, Japan–United States tax treaty, Art. 11(11)provides as follows:Aresident of aContracting State shall not be consideredthe beneficial owner of interest in respect of adebt-claimif such debt claim would not have been established unlessaperson: (a) that is not entitled to benefits with respect tointerest arising in the other Contracting State which areequivalent to, or more favorable than, those availableunder this Convention to aresident of the first-mentionedContracting State; and (b) that is not aresident of eitherContracting State held an equivalent debt-claim againstthe first mentioned resident.10 Specifically, Japan–United States tax treaty, Art. 12(5)provides as follows:Aresident of aContracting State shall not be consideredthe beneficial owner of royalties in respect of the use ofintangible property if such royalties would not have beenpaid to the resident unless the resident pays royalties inrespect of the same intangible property to aperson: (a)that is not entitled to benefits with respect to royaltiesarising in the other Contracting State which are equivalentto, or more favorable than, those available under thisConvention to aresident of the first-mentioned ContractingState; and (b) that is not aresident of either ContractingState.WORLDWISE//////////////////////////////////International Tax Centre Get a global perspective on international taximplications for your business or your clientswith the complete tool-kit for today’s taxpractitioner, featuring treaties, backgroundanalysis, news and insights, rates, andtransfer pricing guidance.VIEW ON FREE TRIAL TODAY ATwww.bnai.com/itaxbna.com 0812-JO9050© 2012 The Bureau of National Affairs, Inc.12/12 TaxManagement International Forum BNA ISSN 0143-7941 59

Host CountryMEXICOEnrique Ramirez and Layda CarcamoChevez, Ruiz, Zamarripa yCia., S.C., Mexico CityIntroductionAs will be discussed in more detail in I., below,though it is used in Mexican tax legislation incertain particular cases, the term ‘‘beneficialownership’’ has not yet been the subject of either specificregulation or legislation or of a private letterruling that has been made public, nor has it been addressedby the Mexican tax courts.In light of the Forum fact pattern, this paper addressesthe likely tax treatment that would apply toeach of the different payments to be made by HCo,i.e., the tax treatment applicable to dividends, interestand royalties to be paid by HCo to respectivelyFHoldCo, FFinCo and FIPCo.I. Beneficial Owner concept in Mexican legislationIt will emerge from the discussion in II., below, thatthe following conclusions can be drawn with respectto the issue of beneficial ownership in connectionwith payments of dividends, interest and royalties tononresidents of Mexico.s The issue of beneficial ownership has no relevanceto dividend payments, since, under Mexico’s domesticlegislation, no withholding tax is imposed ondividends. Income tax, if any, triggered on the distributionof adividend is always borne by the distributingMexican resident corporation (in thepresent case, HCo), never by the shareholder in receiptof the dividend.s Interest payments made to aforeign corporationresident in atreaty partner country (here FFinCo)that is the beneficial owner of the interest will besubject to the highest rate of source-country taxationagreed to by Mexico under its tax treaties,which is always 15 percent, except where the beneficialowner of the interest is aregistered bank residentin the treaty partner country, inwhich case a4.9 percent rate will apply.Since, in the present case, the activity of FFinCo isto obtain third-party bank financing on aregularbasis and relend the funds so obtained to subsidiariesof Parent, earning an arm’s-length markup, itwould be difficult for the Mexican tax authorities tomaintain that FFinCo is not the beneficial owner ofthe interest. Indeed, the tax authorities might havelittle interest in doing so, in view of the fact that ifthe banks were considered to be the beneficialowners of the interest, the rate of withholding taximposed on the interest would always be lower than15 percent.s As royalties are subject to source-country taxationat the rate of 10 percent under all Mexico’s tax treaties,the beneficial ownership test would becomerelevant should Parent not be resident in atreatycountry. Itisthe opinion of the authors that, in theabsence of aspecific regulation defining ‘‘beneficialownership’’ for these purposes, the tax authoritieswould look at factors such as the functions performedby FIPCo in managing and administeringthe intellectual property (IP) licensed from Parent.In summary,inthe absence of specific regulation ortax court decisions regarding the term ‘‘beneficialowner,’’ since Mexico is acivil law country and thereforeits core principles are codified, the first approachof the Mexican tax authorities would be to apply thelaw and to consider that, if the taxpayer that has thecontractual right to the income concerned acts in itsown name and on its own behalf, it will be the beneficialowner of the income, unless it is proven that suchtaxpayer acts on behalf of athird party or that the receiptof the income by that taxpayer was asimulatedact.On the other hand, in the process of interpreting atax treaty,some international generally accepted rulesof interpretation might be taken into consideration,for example, those set forth in the Vienna Convention,1 which provides that treaties must be interpretedin good faith.In addition, the Mexican tax authorities could referto the OECD Commentary on the Model Convention.The Miscellaneous TaxResolution issued annually bythe Mexican Ministry of Finance specifically providesthat the OECD Commentary in effect is to apply forpurposes of tax treaty interpretation to the extent theCommentary is in line with the provisions of the taxtreaties entered into by Mexico. The Commentary isdeemed to be auseful and valid instrument for interpretationpurposes and its application has thus beenrecognised by the Ministry of Finance.According to the OECD Commentary, the term‘‘beneficial owner’’ isnot used in anarrow technicalsense; rather, itistobeunderstood in its context andin the light of the object and purposes of the OECD60 12/12 Copyright 2012 by The Bureau of National Affairs, Inc. TM FORUM ISSN 0143-7941

Model Convention, including the avoidance of doubletaxation and the prevention of fiscal evasion.The OECD Commentary contains wording to theeffect that an intermediary such as an agent or anominee is not the beneficial owner of agiven type ofincome, as such an intermediary is acting for the accountof another person and not in its own name. Thismakes sense in the context of the fact that, when an intermediaryis acting as an agent or anominee, all theincome it receives in that capacity is ‘‘passed on’’totheprincipal, with the exception of the consideration paidto the agent or nominee for its services.Based on the above, generally, when an intermediarysuch as an agent or anominee receives interestincome, dividends or royalties from aresident of anothercountry, the benefits of any tax treaty in effectbetween the country of residence of the intermediaryand the country of residence of the payer would notapply, asthe intermediary would be viewed as amereconduit and not entitled to benefit under the treaty.Aconduit cannot normally be regarded as the beneficialowner of income if, although it is the formalowner, it has, as a practical matter, very narrowpowers that render it, in relation to the income concerned,amere fiduciary or administrator acting onaccount of the interested parties.In the event that the Mexican tax authorities were toconduct areview in these kinds of circumstances, theauthors believe that the tax authorities would applycriteria based on the guidelines set forth in the OECDCommentary. They would also look at the main purposeof the structure concerned, which would have tobe other than merely the obtaining of atax benefit.Furthermore, they would take into consideration thespecific issues and circumstances of the case, such as:s who is the economic owner of the income concerned,who might not necessarily be the sameperson as its the legal owner;s whether the recipient of the income is able freely todispose of the related assets or earnings;s whether payments to third parties are limited to orconditioned on the collection of the payment to therecipient;s whether the recipient has the ability to decide onthe use of the proceeds without having to obtain theapproval of another party;s whether the recipient is acting in its ordinarycourse of business and in its own name rather thanon behalf of another party; ands whether the recipient has apre-acquired or prearrangedobligation to remit the collected funds toathird party.Again, the above are only general guidelines that, inthe absence of specific regulations, court precedentsor legislation, the authors assume would be taken intoconsideration in identifying who is the beneficialowner of agiven item of income.II. Application of the Mexican approachA. Dividends paid by HCo to FHoldCoUnder Mexican tax legislation, dividend payments orprofit distributions do not represent taxable income inthe hands of the recipient, but in certain instances, theentity distributing the dividends may be subject totaxation.Dividends distributed by a Mexican corporationfrom its CUFIN account 2 do not trigger any Mexicanincome tax consequences —either for the distributingcorporation or for the recipient of the dividends, irrespectiveof the latter’s tax residence. The purpose ofthis regime is to allow for the tax-free distribution ofprofits that were previously taxed at the corporatelevel.The CUFIN account is increased each year by therelevant net after-tax profits (taxable income lessincome tax and certain non-deductible items), as wellas by dividends received from other Mexican entities.Conversely,the account is reduced by distributed dividends.The balance of the account is adjusted for inflation.Acorporation distributing dividends must comparethe balance of its CUFIN account with the dividend tobe paid: if the balance of the account is insufficient,the excess, if any, must be grossed-up by the applicabletax rate (30 percent for 2012, and 29 percent for2013 and succeeding years). The resulting amount istaxable in the hands of the distributing entity at theapplicable corporate income tax rate (i.e., 30 percentor 29 percent, as appropriate).Income tax paid by the distributing entity, asdescribedin the preceding paragraph, may be creditedby the entity in the year in which it is paid againstannual corporate income tax due, or against monthlyadvanced payments and annual income tax of the twosubsequent years. Consequently, the CUFIN balancerepresents the amount of retained previously-taxedearnings that may be distributed without any furthercorporate income tax having to be paid.Accordingly, the Mexican tax legislation does notimpose any income tax withholding on dividends, regardlessof the recipient’sidentity (i.e., whether the recipientis an individual or a corporation) andresidence (i.e., whether the recipient is aresident or anonresident of Mexico) and irrespective of whetherthere is sufficient balance in the CUFIN account. Thetax burden, if any, isalways borne by the corporationdistributing the dividends.In the case at hand, HCo distributes dividends toFHoldCo, which, in turn, promptly (within 90 days ofreceiving them) redistributes all of the dividends toParent. In light of the way in which dividends paid bya Mexican corporation (here, HCo) are treated inMexico for tax purposes, the fact that dividends paidby HCo are immediately redistributed to Parent, is irrelevant:dividends are never taxable in the hands ofthe recipient, regardless of its identity or country ofresidence. Thus, it would not be necessary to attemptto establish whether FHoldCo is the beneficial ownerof the dividends.B. Interest paid by HCo to FFinCoUnder the Mexican Income TaxLaw, interest earnedby a nonresident is deemed to be Mexican-sourceincome when the related capital is placed or investedin Mexico, or when the interest is paid by aMexicanresident or by anonresident with apermanent establishment(PE) in Mexico. Under the Income TaxLaw,tax is imposed on Mexican-source interest income atrates that vary depending on the identity and residenceof the recipient.In the case at hand, FFinCo is anonresident subsidiaryof Parent that finances the capital needs of many12/12 TaxManagement International Forum BNA ISSN 0143-7941 61

of the Parent group companies through third partybank borrowings. Based on the specific needs of HCo,FFinCo borrows from third-party banks supported byHCo’s guarantee and pledges of HCo assets, and lendson the funds to HCo on parallel terms at an interestrate that is 10 percent higher than the interest ratecharged to FFinCo by the relevant bank or bank syndicate.As noted above, interest paid by HCo to FFinCowould be deemed to be Mexican-source income, sinceit is paid by aMexican resident corporation. In orderto determine the applicable withholding tax rateunder domestic legislation, reference would have tobe made to Article 195 of the Income TaxLaw.Specifically,Section III of Article 195 of the Income TaxLawprovides that withholding tax applies at the rate of 30percent (29 percent commencing January 2013) to interestpaid to a nonresident corporation. The taxwould have to be withheld by HCo and paid to the taxauthorities as afinal income tax payment on behalf ofFFinCo.Under any of Mexico’s tax treaties, the maximumwithholding rate applicable to interest paid to aforeigncorporation that is the beneficial owner of the interestwould be 15 percent, which is considerablylower than the 30 percent or 29 percent rate (as applicable)to be imposed under Mexico’s domestic legislation.Despite its extensive tax treaty network, Mexicohas not agreed to ageneral withholding rate on interestpayable to nonresident corporations resident intreaty partner countries lower than 15 percent. Consequently,ifFFinCo is resident in atreaty country, itwould be subject to a15percent withholding tax onthe interest income paid to it by HCo.As described above, FFinCo finances the capitalneeds of many of the Parent group subsidiariesthrough third-party bank borrowings. Under Mexicanlegislation, interest paid to anonresident bank registeredwith the Ministry of Finance is subject toincome tax withholding at the rate of 4.9 percent, providedthe bank is the beneficial owner of the interestand is resident in acountry with which Mexico has atax treaty in effect.Based on the foregoing, interest paid to FFinCo (assumingFFinCo resides in atreaty country) would besubject to a15percent withholding, as opposed to the4.9 percent withholding that is available to abankresident in atreaty country if it is the beneficial ownerof the interest concerned.However, itisunlikely that FFinCo would not betreated as the beneficial owner of the interest based onthe facts described above, since it is an entity engagedin financing all the Parent group subsidiaries; that is,FFinCo’s main activity consists of lending funds to allthe subsidiaries in the group, irrespective of the factthat it may sometimes have to obtain the necessaryfunds through third-party bank borrowings. Additionally,aninterestmark-up is charged to HCo, which, assumingit is agreed at arm’s-length, would affordsubstance to the transactions.Consequently, the interest paid by HCo to FFinCowould be subject to income tax withholding at the rateof 15 percent, and since this rate is higher than therate that would normally be available to abank residentin atreaty country, the arrangement would notbe viewed as astrategy for reducing tax or abusing therelevant tax treaty.C. Royalties paid by HCo to FIPCoUnder the Forum fact pattern, HCo pays royalties toFIPCo under asublicense agreement. The royaltiesare equal to 11 percent of HCo’s sales. Under its licenseagreement with Parent, FIPCo in turn pays royaltiesto Parent equal to 10 percent of HCo’s sales.Under Mexico’s domestic legislation, royalties paidto nonresidents are deemed to be Mexican sourceincomewhen the related asset or right is taken advantageof in Mexico, or when the royalties are paid by aMexican resident or a nonresident with a PE inMexico. Income tax must be withheld from such royaltiesby the payer at the rate of 30 percent (29 percentas of January 2013).Under all of Mexico’s current tax treaties, the withholdingtax rate on royalties is limited to 10 percent,which is considerably lower than the rate imposedunder Mexico’s domestic legislation. In all cases, the10 percent rate applies only if the beneficial owner ofthe royalties is aresident of the other ContractingState.In the case at hand, royalties are paid by HCo toFIPCo for IP that FIPCo in turn licenses from Parent.FIPCo oversees the registration of the IP it licensesfrom Parent, and manages efforts by outside lawyersand other third-party contractors to ensure that the IPretains its legally protected status and that such statusis enforced against potential infringers.As already noted, withholding tax on royalties is imposedon the beneficial owner of the royalties at therate of 10 percent under all of the tax treaties signedby Mexico, which means that the royalties paid toFIPCo or to Parent would be subject to this withholdingrate, assuming that both entities are residents oftreaty countries. Should Parent not be resident in atreaty country,the issue could be raised of FIPCo’sentitlementto the reduced 10 percent withholding rateunder the treaty with Country Z, on the basis thatFIPCo could be considered not to be the beneficialowner of the royalties.Mexico has no specific regulations on this subject,but it would be difficult to establish that FIPCo is notin fact the beneficial owner of the royalties, especiallyin the absence of evidence that FIPCo is obliged to redistributeits proceeds to Parent, as well as becauseFIPCo is in charge of overseeing the registration of theIP and the protection of its legal status, for which itearns a mark-up that is established at market. AsFIPCo does in fact perform some management andadministrative functions in maintaining the IP sublicensedto HCo, FIPCo would most likely be deemedthe beneficial owner of the royalties paid to it by HCo.NOTES1 Vienna Convention on the Law of Treaties, signed onMay 23, 1969.2 Cuenta de utilidad fiscal neta or net after-tax profits account.62 12/12 Copyright 2012 by The Bureau of National Affairs, Inc. TM FORUM ISSN 0143-7941

Host CountryTHENETHERLANDSMartijn JudduLoyens &Loeff N.V., AmsterdamIntroductionThis paper discusses the beneficial ownershipconcept in relation to the Netherlands, wherethe Netherlands is the source State in ataxplanning structure involving an active foreign-basedgroup of companies. The Facts, with the Netherlandsas Host Country, are the starting point for the discussion.The paper first discusses the general Dutch rules oninbound investments in Dutch tax resident companies,particularly when the investments are madethrough an intermediate (holding) company. Thepaper goes on to discuss the Dutch interpretation ofthe term ‘‘beneficial owner’’ inthe relevant provisionsof the Netherlands’ tax treaties. As most of the Netherlands’tax treaties are based on the OECD Model Convention,the text of the OECD Model is taken as astarting point. Attention is given to some of the parliamentarycomments on beneficial ownership, the leadingcase law on beneficial ownership, the guidance tobe derived from the OECD Commentary, the relevantstatutory provision aimed at dividend stripping, andthe relevant extra-statutory anti-abuse doctrine. Aswill appear from the discussion, the Netherlands generallydoes not aggressively apply the condition ofbeneficial ownership to restrict intra-group tax planningwhere the Netherlands is the source country.However, the Dutch policy for tax treaty negotiations,as outlined most recently in 2011, does aim in otherways to deny the availability of the benefits of theNetherlands’ tax treaties to parties for which thesebenefits were not intended: the relevant policy andsome examples are also briefly discussed in this paper.Finally, the principles emerging from the general discussionwill be applied to the fact pattern under whichDutch tax resident HCo pays dividends to foreignFHoldCo (acting as an intermediary holding companyfor foreign Parent), pays interest to foreign FFinCoand pays royalties to foreign FIPCo (which latter twoare also subsidiaries of Parent). For amore detaileddescription of the fact pattern, see II.A., below.In view of the fact pattern, it is beyond the scope ofthis paper to discuss the beneficial ownership issuesthat may arise in relation to the Netherlands as thestate of residence of arecipient of dividends, interestand royalties, or the beneficial ownership issues thatmay arise in certain other cases, for example, cases involvingstructured financial transactions and products.I. The relevant Dutch rulesA. Dutch rules on inbound investment throughintermediaries1. Dutch corporation tax on inbound investmentsUnder the Dutch Corporation TaxAct 1969 (CTA), aforeign entity is only subject to tax on income fromcertain Dutch sources. 1 The taxable sources of incomeinclude taxable income from asubstantial interest (inshort, an interest of 5percent or more of the shares oraspecial class of shares) in aDutch resident companywhere both of the following conditions are satisfied:(1) the substantial interest does not form part of theassets of abusiness enterprise carried on by the foreignentity; and (2) the foreign entity holds the substantialinterest for the primary purpose, or one of theprimary purposes, of avoiding a Dutch individualincome tax or Dutch dividend tax liability of athirdparty, for example, an indirect shareholder. 2Income from the substantial interest will not besubject to tax if the substantial interest is attributableto the business enterprise carried on by the foreignentity. Based on the parliamentary history of this provision,it is not necessary for the foreign shareholderto be carrying on abusiness in amaterial sense, but itshould have the intention of holding the interest otherthan as an investment, i.e., with aview to obtaining areturn that can be expected from normal asset management.For purpose of evaluating abusiness groupstructure, asubstantial interest is considered attributableto the business assets of the foreign entity if the12/12 TaxManagement International Forum BNA ISSN 0143-7941 6312/12 TaxManagement International Forum BNA ISSN 0143-7941 63

usiness of the Dutch entity is an extension of thebusiness of the foreign entity.Also, if the foreign entityis aholding company that performs agenuine functionin the conduct of agroup’sbusiness, it will not beregarded as holding the substantial interest as amereinvestment. This applies both to aforeign top holdingcompany and to aforeign sub-holding company thatperforms an intermediary function. For structures inwhich private equity funds are involved, the decidingcriteria for attribution to business assets is whetherthe fund management is actively involved in the managementof the Dutch entity and its participations.Even if the substantial interest does not form part ofthe foreign entity’s business assets, atax liability willonly arise if there is an avoidance motive. As theavoidance motive test was introduced only as of 2012,its exact interpretation is not yet entirely clear.The existenceof atax avoidance motive seems to be tested bylooking at whether the interposition of the foreignentity results in alower Dutch individual income taxor Dutch dividend tax liability of athird party,such asthat of the direct or indirect shareholders. Even if thecomparison shows that more tax would be payablewere the foreign entity not to be interposed, there willnot necessarily be an avoidance motive, if it can bedemonstrated that the interposed entity has a realfunction. In this context, reference was made in theparliamentary history to European Court of Justice(ECJ) case law on the compatibility of anti-avoidanceprovisions with EC law, which requires that for suchprovisions to be compatible they should apply only tocompletely artificial arrangements. 3 It is then necessaryto determine whether the economic reality is consistentwith the legal form. The objective elements forassessing the economic reality include the place of effectivemanagement, the tangible presence of theplace of business in the foreign country and the realrisk incurred by the interposed foreign entity. Inmaking the evaluation, particularly in the case of a‘‘pooling structure,’’ the presence or absence of qualifiedstaff with sufficient powers in relation to holdingthe substantial interest is also mentioned in the parliamentaryhistory as afactor that should be takeninto account.If there is ataxable substantial interest, the tax basewill depend on what tax avoidance motive is involved.If there is an income tax avoidance motive, then theDutch taxation will be based on the income from thesubstantial interest, and will cover both regularincome (including dividends) and capital gains, generallyon anet basis, with the allowance of adeductionfor attributable costs. 4 If there is only adividend taxavoidance motive, the corporation tax charge will effectivelybe 15 percent of the dividends, as defined fordividend tax purposes, i.e., on agross basis. 5 This isintended to achieve abetter match between the corporationtax due and the dividend tax intended to beavoided.Even if it is established that the foreign entity isliable to tax under domestic law, actual taxation mayoften be avoided or reduced by invoking atax treaty. 6Under the great majority of the Netherlands’ tax treaties,the right to tax capital gains on shares is not allocatedto the Netherlands as asource country, but isallocated to the country of residence of the foreignentity,asunder Article 13 (Capital Gains) of the OECDModel Convention. As regards dividends, under thearticles in its tax treaties that are comparable to Article10 (Dividends) of the OECD Model, the Netherlandswill generally fully or partly reduce its effectivetaxation, but such reduction is generally not only subjectto the condition that the recipient is aresident ofthe other state, but also to the condition that the recipientis the beneficial owner of the dividends andholds at least acertain qualifying shareholding in theDutch resident company paying the dividends.Aforeign entity with adirect or indirect taxable substantialinterest in aDutch resident company is alsosubject to tax with respect to any receivable that it hasfrom the Dutch resident company. 7 Again, such taxationonly applies in the case of ataxable substantial interest,i.e., where the substantial interest: (1) does notbelong to the assets of an enterprise carried on by theforeign entity; and (2) is held with atax avoidancemotive. Again, atax treaty may provide for areductionin the Dutch tax payable.2. Dutch dividend taxUnder the Dividend TaxAct 1965 (DTA), the Netherlandsgenerally levies a15percent dividend tax ondividends distributed by Dutch resident companieswith acapital divided into shares. 8 There are severalpossibilities for afull exemption (or full refund) ofdividend tax. In practice, the important exemptionsare the exemption for domestic corporate shareholderswhere the shareholding qualifies for the participationexemption regime, and the exemption for certainqualifying EU shareholders based on the Netherlands’implementation of the EC Parent-Subsidiary Directiveand other EC law. 9 It is explicitly provided thatneither of these exemptions is available if the recipientof the dividends is not their beneficial owner. 10 Inpractice, another important source for the potentialreduction of the dividend tax is the Netherlands’ taxtreaty network, which currently comprises approximately90 active treaties. The reduction of the rate ofdividend tax to arate below the 15 percent domesticrate under these treaties is generally subject to thecondition that the recipient is aresident of the otherContracting State, that the recipient is the beneficialowner of the dividends and that the recipient holds atleast acertain qualifying shareholding in the Dutchresident company paying the dividends. Dutch tax lawcontains only a negative definition of ‘‘beneficialowner,’’ asitdoes not define who is abeneficial ownerbut only provides, and then not exhaustively, who willin principle not be regarded as abeneficial owner. 11The provision concerned, which is specifically targettedat dividend-stripping transactions but effectivelyhas amuch wider scope, is discussed in I.B.5., below.3. No withholding tax on interest and royaltiesThe Netherlands generally does not impose awithholdingtax on interest, save in certain exceptionalcases. An exception may apply, for instance, in thecase of interest on certain loans that may be deemedto qualify as equity of the issuer, with the result thatthe interest may then be subject to dividend tax. TheNetherlands does not impose awithholding tax onroyalties. Interest and royalty payments that are not atarm’s length and that in fact are disguised or deemed64 12/12 Copyright 2012 by The Bureau of National Affairs, Inc. TM FORUM ISSN 0143-7941

dividend distributions may be subject to Dutch dividendtax. This paper does not address these exceptionsfurther and it is assumed that no withholding taxwould be due on the interest and royalty payments envisagedin the fact pattern.B. Beneficial Ownership —the Dutch interpretation1. IntroductionMost of the Netherlands’ tax treaties largely follow theOECD Model Convention. For the Netherlands,which, as source State, generally levies withholdingtax only on dividends, the use of the term beneficialowner is of particular relevance in the context of Article10(2) of the OECD Model Convention, wherebeneficial ownership appears as one of the conditionsfor the reduction of the source State taxation of dividends.As in the OECD Model Convention, the term‘‘beneficial owner’’ isnot defined in the Netherlands’tax treaties, though it is used in them. Pursuant to thegeneral interpretation rule in Article 3(2) of the OECDModel Convention, any term not defined in the treatywill, unless the context requires otherwise, have themeaning it has under the laws of the state applying thetreaty.Where the Netherlands is applying the treaty asthe source State, the concept will thus have the meaningthat it has under Dutch domestic law, unless thecontext requires otherwise. As regards the context requiringotherwise, the term is often considered tohave an independent international fiscal meaning,and the OECD Commentary also appears to be relevantregarding the context in which the term is to beinterpreted.Dutch tax law does not contain a‘‘positive’’ definitionof the term ‘‘beneficial owner’’. Who is recognisedas the beneficial owner is determined by factual circumstances.As the concept is not defined in the statutorylaw,ithas been left to case law to elaborate on themeaning of the concept. Since 2001, Dutch tax law hascontained a‘‘negative’’ definition indicating who willnot be recognised as the beneficial owner of dividendincome. The relevant provisions, which all use thesame or similar wording, aim to limit Dutch dividendtax relief (whether by way of exemption or reductionat source, or by way of acredit against individualincome tax or corporation tax) in the case of typicaldividend-stripping transactions. 12 However, the textof the provisions gives them abroader scope so thatthey may, in principle, also apply to certain intragroupreorganisations, although the impact of theprovisions in these circumstances has been mitigatedby published policy. 13 Dutch domestic tax law includesa general extra-statutory anti-abuse conceptthat was developed in case law. However, itappearsfrom the relevant case law that its application in thecontext of tax treaties is generally very limited.Beneficial ownership is only one of the conditionsfor the reduction of Dutch source-state taxation.Among the other conditions are that the recipient andbeneficial owner should be aresident of the relevanttax treaty state and, under certain treaties, that itshould be a‘‘qualified person.’’ Asthe fact pattern assumesthat these conditions are met, they will not befurther discussed in this paper.Suffice it to say that inactual tax planning, it is important to ensure thatthese conditions are satisfied.2. Limited general legislative and parliamentaryguidanceThe term ‘‘beneficial owner,’’ asacondition for the reductionof Dutch source State taxation, particularly inrelation to dividends, has for many years been includedin the Netherlands’ tax treaties without havingbeen defined or explained in the law. 14 Some, more orless circumstancial, guidance can be derived fromcomments made in the parliamentary discussions oncertain treaties and on general tax treaty policy. 15These comments indicate that the term ‘‘beneficialowner’’ refers to arecipient that receives income towhich it has title and not to arecipient that receivesincome for the benefit of athird party. These commentsalso indicate that, in aback-to-back loan situation,the relevant tax treaty provisions are onlyapplicable if the taxpayer is the ultimate, i.e., the real,beneficiary of the income and that no real benefit accruesif the recipient is under acontractual obligationto pass the income entirely or almost entirely on to athird party (a later comment refers to acontractualobligation to pay the major part of the income to athird party). 16 Some later parliamentary discussionson Dutch tax treaty policy have reiterated that, asback-to-back structures do not result in entitlement tothe application of atreaty, itisnot necessary in thiscontext to provide amore precise description of theterm ‘‘beneficial owner’’ and that the factual circumstancesare crucial. When the question was raised asto whether the term should be more precisely definedwith aview to its use for purposes of countering treatyshopping, it was merely stated that the meaning givento ‘‘beneficial owner’’ ininternational tax law is heavilydependent on factual circumstances, so that it isnot possible to give it further meaning in generalterms. Recent parliamentary discussions on Dutch taxtreaty policy have also dealt with the term ‘‘beneficialownership’’. 17 In, it was recognised that businessesare best served if there is international consensusabout the meaning of the term and reference wasmade to the OECD Commentary. Reference was alsomade to the public discussion draft issued in April2011, in which the OECD proposed aclarification ofthe meaning of ‘‘beneficial owner’’inthe OECD ModelConvention with proposed changes to the OECDCommentary. Itwas stated in the Dutch parliamentarydiscussions that the Netherlands was also involvedin the preparation thereof and that there wouldbe no reason for observations or reservations if thoseclarifications were to be included in the OECD Commentary.The guidance to be derived from parliamentarydiscussions about the term in general is thusfairly limited. It does suggest that the term is not to bebroadly interpreted with aview also to counteringtreaty shopping, and it does suggest that only acontractualobligation for the recipient to pay the incomeconcerned to athird party and not simply the makingof such payment in practice would have implicationsto the effect that the recipient was not the beneficialowner. Further, itsuggests that the term is to be interpretedin line with the guidance in the OECD Commentary.12/12 TaxManagement International Forum BNA ISSN 0143-7941 65

It should be noted that the Dutch tax authoritiesgenerally also apply the beneficial owner conceptunder those (older) tax treaties that do not include theterm explicitly.This is based on the reasoning that thebeneficial owner requirement is also implied underthose tax treaties, as it was introduced only by way ofa clarification of the circumstances in which dividends,interest and royalties are considered paid to aresident of the other state.The more recently introduced anti-dividendstrippingprovision, which is discussed in I.B.5.,below, does not contain a‘‘positive’’ definition of whowill be recognised as abeneficial owner.Nor do the explanatorynotes accompanying the provision containsuch adefinition —rather they focus on who is not tobe recognised as abeneficial owner.3. Guidance in Dutch case lawAs Dutch tax law does not contain a‘‘positive’’ definitionof the term ‘‘beneficial owner,’’ who is recognisedas the beneficial owner is determined by factual circumstancesand it is case law 18 (and the antidividend-strippingprovision described in I.B.5,below) that has given the concept its meaning. Accordingto the case law, the starting point in classifyingastructure or transaction for Dutch tax purposesis generally its legal form. Only in special circumstancesmay one deviate from this starting point. 19One obvious example is in the case of sham transactions,which are not recognised for tax purposes (itcould even be argued that such transactions are alsonot recognised for Dutch civil law purposes, as Dutchcivil law also looks to the true intentions of the partiesrather than only the ostensible legal form). Takinginto account the legal form of astructure or transactionmeans that all aspects of the legal arrangementswill be taken into account. Thus, aperson that acts asan agent or anominee for another person will not beregarded as the beneficial owner for Dutch tax purposes.Aperson that is the legal owner of an asset willgenerally be regarded as the owner of that asset forDutch tax purposes, unless the entire economic interestrests with another party pursuant to arelationshipbetween the legal owner and that other party. 20 Suchcontractual arrangements may thus impact on who isthe beneficial owner of the income derived from theasset. On the other hand, the case law indicates that aperson can be the beneficial owner of the income derivedfrom certain assets without being the owner ofthe underlying assets (for example, by acquiring onlythe dividend coupons and not the underlyingshares). 21Guidance on the interpretation of the concept ofbeneficial ownership has for many years been derivedlargely from the 1994 Dutch Supreme Court ruling inthe ‘‘market maker case.’’ 22 The case involved aU.K.resident market maker that had purchased dividendcoupons with respect to adividend that had been declaredon shares in Royal Dutch Shell but that had notyet become payable. The U.K. market maker did notown or acquire the shares concerned, it only acquiredthe dividend coupons from the Luxembourg-residentowner of the shares (which would not have been entitledto any reduction of Dutch dividend tax). TheU.K. market maker claimed that it had become thebeneficial owner of the dividend within the meaningof the then-applicable Netherlands–United Kingdomtax treaty (which was the first Dutch tax treaty to includethe term ‘‘beneficial owner’’) and that it wastherefore entitled to the reduced rate of Dutch dividendtax under that treaty. The Dutch Supreme Courtruled that the U.K. market maker was indeed the beneficialowner of the dividend because: (1) through thepurchase, it had acquired legal title to the dividendcoupons; (2) it could freely dispose of such couponsand of the amounts to be paid thereon; and (3) uponreceipt of the dividend, it did not act as avoluntaryagent or for the account of aprincipal. It is worthnoting that the Supreme Court ruling makes it clearthat, under the relevant tax treaty, there was no needfor the recipient to be the owner of the underlyingshares to be the beneficial owner of the dividend 23 andthat the beneficial ownership test had to be met at thetime that the dividend became payable. Moreover, theSupreme Court did not apply other tests, for example,whether the (sole or predominant) reason for thetransaction was to obtain atax benefit. This latteraspect was brought into the discussion in the ‘‘secondmarket maker case,’’ 24 which did not so much concernbeneficial ownership as the possible application of theDutch general anti-abuse doctrine to a dividendstrippingtransaction. The Supreme Court ruled thatthe mere willingness of the market maker in that caseto co-operate in atransaction aimed at tax avoidanceby the counter-party did not also imply that themarket maker had atax avoidance motive. The willingnessto co-operate was not sufficient reason fordrawing the conclusion that the predominant motivefor the transactions was tax avoidance and not thetransaction result or fee for the market maker.4. The OECD commentary on BeneficialOwnershipAs many of the Netherlands’ tax treaties are largelybased on the OECD Model Convention, it is generallyappropriate to look also to the OECD Commentary onthe Model Convention for the interpretation of theconcept of beneficial owner, although views in the literaturediffer as to whether and to what extent theOECD Commentary is binding and/or is to be interpretedusing astatic or ambulatory approach. In anycase, Dutch Supreme Court case law and Dutch governmentpolicy statements also explicitly acknowledgethe OECD Commentary as arelevant source ofguidance, and in some cases, even recognise the relevanceof later versions of the OECD Commentary tothe interpretation of tax treaties concluded before therelevant update of the OECD Commentary. 25 With respectto dividends, paragraph 12 of the OECD Commentaryon Article 10 is particularly relevant. As itexplains the grounds for the beneficial owner requirementand provides guidance on the interpretation ofthe term, it would appear to supply the context referredto in Article 3(2) of the OECD Model, which inturn may place limitations on the acceptability of rigorouslyapplying the term as defined under domesticlaw. Paragraph 12 of the OECD Commentary recognisesthat it would be inconsistent with the object andpurpose of the convention for the state of source togrant relief or exemption merely on account of the66 12/12 Copyright 2012 by The Bureau of National Affairs, Inc. TM FORUM ISSN 0143-7941

status of the immediate recipient of an item ofincome, when that item of income is received by aperson acting in an agency or anominee relationship.Paragraph 12 also recognises that it would be inconsistentwith the object and purpose of the conventionfor the state of source to grant relief or exemptionwhere the direct recipient acts as aconduit for anotherperson that in fact receives the benefit of theincome concerned. For these reasons, the OECDCommentary suggests that aconduit company cannotnormally be regarded as the beneficial owner if,though the formal owner, ithas, as apractical matter,very narrow powers that render it, in relation to theincome concerned, amere fiduciary or administratoracting on account of the interested parties. The OECDCommentary, and/or the context of the relevant taxtreaties, does not seem to restrict the Dutch interpretationset out in I.B.2. and 3., above, which in particularfocuses on denying beneficial ownership to anagent or anominee and/or where there is acontractualobligation to on-pay dividends received.In apublic discussion draft issued in April 2011, theOECD proposed aclarification of the meaning of beneficialowner in the OECD Model Convention withproposed changes to the OECD Commentary on Articles10, 11 and 12 of the Model Convention. In lightof the comments received on that first discussiondraft, the OECD issued arevised discussion draft inOctober 2012 which includes revised proposedchanges to the OECD Commentary. Although thesechanges are not yet part of the OECD Commentaryand it is not desired to go into detail here, it is worthbriefly highlighting some of their elements. First, theproposed text seems to aim to restrict the impact oftechnical meanings of the term under domestic lawsto the extent that they are not consistent with the contextfor the term and the guidance in the OECD Commentaryin particular in relation to the interpretationof the words ‘‘paid to ... aresident’’ since the term‘‘beneficial owner’’ was added to address potential difficultiesarising from those words.The proposed text also provides further guidance onthe material interpretation of the term, particularly inparagraph 12.4. There are some differences betweenthe April 2011 and the October 2012 discussion draftproposals for an amended paragraph 12.4. Both draftsrepeat the examples (agent, nominee, conduit companyacting as fiduciary or administrator) of recipientsof dividends that are not the beneficial owners.The proposed text in the April 2011 discussion draftalso gives the reason for this, which is that the recipientin these circumstances does not have the full rightto use and enjoy the dividend and the dividend is notits own. Afurther reason given is that the powers ofsuch arecipient over such adividend are constrainedin that the recipient is obliged (because of acontractual,fiduciary or other duty) to pass the payment receivedto another person. In a subsequentmodulation, this is phrased more positively: the recipientis the beneficial owner: where he has the fullright to use and enjoy the dividend unconstrained byacontractual or legal obligation to pass the paymentreceived to another person. The proposed Commentarystates that such an obligation will normally derivefrom the relevant legal documents but may also befound to exist on the basis of facts and circumstancesshowing that, in substance, the recipient clearly doesnot have the full right to use and enjoy the dividend.The text proposed in the October 2012 discussiondraft for amended paragraph 12.4 of the OECD Commentaryalso repeats the examples (agent, nominee,conduit company acting as fiduciary or administrator)of recipients of dividends that are not the beneficialowners of the dividends. The proposed text alsogives the same reason for this, which is that the recipient’srightto use and enjoy the dividend is constrainedby acontractual or legal obligation to pass on the paymentreceived to another person. The reference to the‘‘full right to use and enjoy’’isdeliberately replaced byareference to the ‘‘right to use and enjoy’’; the referenceto powers over the dividend are also stricken out.Proposed paragraph 12.4 of the OECD Commentaryas included in the October 2012 discussion draft alsostates that an obligation to pass on the payment willnormally derive from the relevant legal documentsbut may also be found to exist on the basis of facts andcircumstances showing that, in substance, the recipientclearly does not have the right to use and enjoy thedividend unconstrained by acontractual or legal obligationto pass on the payment received to anotherperson. While the proposed text of April 2011 did notfurther specify the type of obligation to be considered,and many concerns were raised on that point in thecomments on the April 2011 discussion draft, the October2012 discussion draft and the Commentary proposedin that draft does elaborate in some detail onthe type of obligation to be considered. The type of obligationconcerned must be related to the payment received;it would, therefore, not include acontractualor legal obligation unrelated to the payment receivedeven if such obligation could effectively result in therecipient using the payment received to satisfy thatobligation. Examples of such unrelated obligations inthe proposed text are those unrelated obligations thatthe recipient may have as adebtor or as aparty to financialtransactions, or typical distribution obligationsof pension schemes and of certain qualifyingcollective investment vehicles. Where the recipient ofadividend does have the right to use and enjoy thedividend unconstrained by acontractual or legal obligationto pass on the payment received to anotherperson, according to the October 2012 proposedamended paragraph 12.4 of the OECD Commentary,the recipient is the ‘‘beneficial owner.’’Proposed paragraph 12.5 also clarifies the relationbetween the term ‘‘beneficial owner’’ and other formsof anti-abuse rules. While the term ‘‘beneficial owner’’is aform of anti-abuse provision, it does not addressother instances of treaty shopping and, for those purposes,states are explicitly referred to other approachesand provisions.Although it is not part of the interpretation of theterm ‘‘beneficial owner’’, it is worth drawing attentionto what is included in the OECD Commentary on Article10, in paragraphs 17 and 22. Paragraph 17 addressesthe possible need for anti-abuse provisions tocounteract manoeuvres whereby acompany increasesits percentage shareholding in another companyshortly before that other company distributes adividendprimarily for purposes of securing the tax reductionavailable with respect to dividends on qualifyingholdings. Paragraph 22 addresses the possible need12/12 TaxManagement International Forum BNA ISSN 0143-7941 67

for special exceptions to the taxing rule in the case ofinterposed base companies and other similar entities.As indicated, this is not part of the beneficial ownerconcept, and the OECD Commentary suggests thatany such anti-abuse provisions should be separatelyand explicitly be negotiated.5. The statutory anti-dividend-stripping provisionSince 2001, Dutch tax law has contained anegativelyphrased definition of the term ‘‘beneficial owner’’.Under the relevant provision, aperson will not be regardedas abeneficial owner if: (1) in connection withthe receipt of adividend, that person has paid considerationwithin the framework of aseries of compositetransactions, (2) the dividend, in whole or in part, directlyor indirectly, inures to the benefit of an individualor legal person that would have been entitled toasmaller reduction or refund of, or credit for, dividendtax than the person that has paid the consideration,and (3) such individual or legal person acquiresor retains, directly or indirectly, aposition in shares,profit participating certificates or loans that actuallyfunction as equity, comparable to its position in similarinstruments prior to the time the composite transactionwas initiated. 26 Acomposite set of transactionscan also be present where transactions are enteredinto in the regulated market (depending on the factsand circumstances) and will be deemed to be presentin the case of the acquisition of one or more dividendcoupons or in the case of temporary usufruct (asstatutorily defined). The main intent behind the introductionof this principle was to counter typicaldividend-stripping transactions, in which, for example,shares are transferred temporarily to apersonentitled to amore beneficial Dutch dividend tax ratethan the transferor shortly before the dividend paymentdate, while the transferor retains its position inthe shares, for example via aput/call arrangement.It could be argued that, based on its literal wording,the provision could also affect intra-group relationsand intra-group reorganisations, particularly in casesinvolving the interposition of an intermediate holdingcompany. Insuch circumstances, it could be arguedthat the issuing of shares by the intermediate holdingin exchange for shares in the Dutch subsidiary companyconcerned constitutes the payment of considerationwithin the meaning of the provision, that the‘‘indirect parent’’ isentitled to aless beneficial dividendtax rate than the intermediate holding company,and that the indirect parent retains asimilar positionin the shares, albeit indirectly rather than directly. Inpublished policy, the Dutch tax authorities take theposition that the anti-dividend stripping rules canindeed be applicable to intra-group reorganisations,depending on the circumstances, such as the amountof time that elapses between the reorganisation andthe payment of adividend, the character of the dividend(i.e., regular dividend, incidental (super)dividendor liquidation distribution), and the permanencyof the reorganisation. 27 The same published policy indicatesthat the provision is not intended to frustrateenduring, non-tax-motivated intra-group reorganisations.Dividend-stripping is not considered to be presentin the case of an enduring reorganisation incombination with the distribution of regular dividends.To enjoy asafe haven in the case of enduringreorganisations, the parties may limit themselves todistributing regular dividends only. Inthis context,the concept of a‘‘regular dividend’’ will, in any eventencompass adividend the amount of which does notexceed twice the average amount of the dividends distributedover the three preceding calendar years in accordancewith the regular dividend policy. Inthe caseof an enduring reorganisation in combination withthe distribution of anon-regular dividend, such as asuper-dividend, other factors such as the time lapsebetween the reorganisation and the dividend will alsohave to be taken into account. No safe haven term hasbeen provided for such cases. To return to the mainrule, the anti-dividend-stripping provision does notseem to apply where an intermediate holding companyhas been interposed from the inception of thestructure, rather than being interposed at atime whenthe Dutch resident subsidiary already had retainedearnings or anticipated having retained earnings.According to the legislator, the Dutch domestic(‘‘negative’’) definition of the beneficial owner conceptshould also have an impact on the interpretation ofDutch tax treaties, via tax treaty provisions that aresimilar to Article 3(2) of the OECD Model Convention,and in relation to qualifying EU situations, via theprovision in the EC Parent-Subsidiary Directive thatallows Member States to apply their domestic antiabusemeasures. For the time being, it remains uncertainwhether the Dutch Supreme Court will change its(formal) tax treaty interpretation of the beneficialowner concept following this (economic) domesticlaw definition, or whether its willingness and/or abilityto do so is to some extent restricted by the requirementsof context (see Article 3(2) of the OECD Modeland paragraph 12 of the OECD Commentary on Article10 of the Model).6. The extra-statutory General Anti-Abusedoctrinea. The Anti-Abuse doctrine in shortFor Dutch tax purposes, the treatment of certaintransactions can, under the doctrine of fraus legis(abuse of law) developed in case law,bedifferent fromthat which would follow from their legal form. Thefraus legis doctrine can be applied if two conditionsare satisfied. First, the taxpayer’s sole or main motivefor undertaking the transactions concerned is theavoidance of tax (the ‘‘subjective’’ or‘‘motive’’ test).Second, the envisaged tax effects of the transactionswould conflict with the purpose and intent of the legislation(the ‘‘objective’’ or‘‘purpose and intent’’ test).If the fraus legis doctrine is applied, the actual factsare reclassified or substituted by the nearest economicallysimilar facts under which the proper tax effectswould arise. The Dutch government has in the past expressedthe view that the domestic anti-abuse doctrineof fraus legis can be applied in treatysituations. 28 In practice, however,the Dutch SupremeCourt has taken avery restrictive approach in applyingthis doctrine under tax treaties, as illustrated bythe case law on the interposition of holding companies.68 12/12 Copyright 2012 by The Bureau of National Affairs, Inc. TM FORUM ISSN 0143-7941

. Last-minute tax planningThe interposition of aholding company in astructurehas been the subject of dispute between the tax authoritiesand taxpayers on anumber of occassions.The tax authorities have been successful in challengingcertain cases involving ‘‘last-minute tax’’planning,i.e., when the interposition of the intermediate holdingcompany is effected shortly before, and evidentlyin anticipation of, a dividend distribution. 29 Thesestructures were challenged by denying recognition ofthe interposed company. It is not entirely clearwhether the relevant case law is actually based on theapplication of the fraus legis doctrine or or on apureclassification of the facts of the cases concerned, withthe already anticipated dividend distribution being attributedto the former direct shareholder of the distributingcompany on the grounds that the interposedcompany did not have the intention of becoming theeconomic owner.Itshould also be noted that this caselaw was decided in the context of the TaxArrangementfor the Kingdom (TAK), which resembles ataxtreaty,but is in fact adomestic act applicable betweenthe Netherlands and the Netherlands Antilles, i.e., a‘‘quasi-tax treaty.’’ These cases date from before theamendment of the TAKtoinclude aprovision that explicitlyallows for the application of domestic rules tocombat fraud, abuse or improper use. 30 Cases of lastminutetax planning thus appear potentially subject tosuccessful challenge, whether under acharacterisationof the facts or fraus legis.c. Taxplanning and treaty shoppingIn group structuring that does not have the characteristicsof last-minute tax planning, (quasi-) tax treatyshopping seems to be regarded as acceptable. In oneDutch Supreme Court case, it was explicitly ruled thatthe mere fact that acompany is interposed is in itselfinsufficient for the application of fraus legis, even ifthe company is interposed solely for tax reasons. 31This was not regarded as conflicting with the purposeand intent of the dividend tax rules and the applicabletax treaty (or more precisely, the quasi-tax treaty, asthis case also concerned the TAK). The facts that theholding company was incorporated in alow-tax jurisdiction,that it did not perform economic activitiesand that, having no or little substance, it was aresidentof the low-tax jurisdiction based only on its incorporationunder the law of that jurisdiction did notchange the conclusion in the ruling. It seems fair toconclude that this case ruled that treaty shopping assuch, where there are no explicit measures directagainst it and where it has no elements of artificialityor last-minute tax planning, is not subject to challengeby the application of the fraus legis doctrine.d. Cash-box and holding company structuresOther cases regarding the application of fraus legis involve‘‘cash-box’’ and holding company structures.These structures originated from the desire of shareholdersof Dutch companies to realise capital gainsrather than dividends, based on the difference in thetax treatment of these kinds of income at the time. Thetax authorities challenged these structures by giving adifferent tax treatment or tax qualification to thetransactions and transaction results involved on thebasis of fraus legis.The tax authorities were successfulin domestic cases, but unsuccessful in internationalcases where tax treaties applied.The basic cash-box structure intially involved ashareholder with aholding company and an operatingsubsidiary. The holding company would extract dividendsfrom the operating subsidiary and then sell theoperating subsidiary to anew holding company heldby the same shareholder. The shareholder would thensell the cash-box holding company to abank, realisingacapital gain rather than dividends. In domestic situations,the Supreme Court ruled that the capital gainwas to be recharacterised as adividend. The basicholding structure involved ashareholder that sold theshares in acompany with high retained earnings to anew holding company against debt, while retaining(indirectly) 90 percent ownership of the company orthe business. As dividends could be paid from the existingcompany to the interposed holding companyfree of Dutch taxation, the new holding companycould draw on the retained earnings of the acquiredDutch company and use them to pay interest andprincipal on the purchase price owed. The retainedearnings could thus be realised subject to adifferenttax regime than would apply in the case of direct realisation.In domestic situations, the Supreme Courtruled that, if the new holding company could financethe purchase price out of the existing company’s retainedearnings, the holding company was to be ignoredbased on the fraus legis doctrine, so thatdividends were considered to be derived not by thenew holding company but by the former shareholder.There have been cases concerning similar transactionswhere the shareholder was anon-Dutch residentlocated in acountry with which the Netherlands has atax treaty.Inthe relevant cases, and under the tax treatiesthen applicable, the Supreme Court ruled thateven where the avoidance of dividend tax was the predominantreason for the transaction and even wherethe fact that no Dutch dividend tax would be leviedwould be in conflict with the purpose and intent ofDutch tax law,the respective tax treaties prevented theNetherlands from taxing the dividends concernedbased on fraus legis. According to the Dutch SupremeCourt, in those cases, neither the text of the relevanttax treaty nor the explanatory notes of the two countriesindicated that the common intent of the ContractingStates was to treat the capital gain in thesecircumstances as adividend for tax treaty purposes orto treat the dividends on the transferred shares as dividendspaid to the seller of the shares. 32 And, neitherthe treaty text nor the explanatory notes indicated thatthe income not being taxable in the Netherlandswould be in conflict with the purpose and intent of thetreaty. 33The relevant case law seems to indicate that thefraus legis doctrine can only be applied in atax treatysituation if either the text of the treaty concerned orthe explanatory notes of both the treaty states (orother sources) provide asufficient basis for supposingacommon intention that the doctrine should be applied.3412/12 TaxManagement International Forum BNA ISSN 0143-7941 69

e. 2003 OECD commentary on anti-abuse provisionsAlthough it does not directly relate to the interpretationof the term ‘‘beneficial owner’’, but rather to theapplication of general anti-abuse rules under tax treaties,it is interesting to note one of the 2003 changes tothe OECD Commentary on Article 1ofthe Model Convention,particularly the 2003 additions to paragraphs9through 9.6 and paragraphs 22 and 22.1. From paragraphs9.4 through 9.6, it can be derived that states donot have to grant tax treaty benefits where arrangementshave been entered into that constitute abuse ofthe provisions of the applicable tax treaty,but that theassumption that such arrangements have been enteredinto should not be lightly made. The tax treatybenefits should not be available where the main purposeof the arrangements made was to secure amorefavourable tax position, where that would be contraryto the object and purpose of the relevant provisions.Paragraph 9.6 thus suggests the desirability of specialanti-abuse provisions.Paragraphs 22 and 22.1 of the OECD Commentarystate that an analysis has been made of certain possibleways to deal with the abuse of tax treaties, includingsubstance over form, economic substance andgeneral anti-abuse rules. According to the Commentary,such rules are considered not to conflict with taxtreaties, as they are part of the basic domestic rules establishedby domestic tax laws for purposes of determiningwhich facts give rise to atax liability; theserules are not addressed in tax treaties and are thereforenot affected by them. Thus, according to theCommentary, there will be no conflict. The Commentarygives the following example: to the extent that theapplication of the ways of dealing with abuse referredto above result in the recharacterisation of income orthe redetermination of the taxpayer that is consideredto derive the income, the provisions of the Conventionwill be applied taking into account these changes.This OECD approach seems to go much further thanthe approach consistently adhered to, so far, bytheDutch Supreme Court. In addition, it seems that manyanti-abuse rules go far beyond simply determining thefacts that give rise to taxation (including the Dutchfraus legis doctrine, which may recharacterise thefacts or even substitute an alternative fact pattern).The Netherlands has made an observation in paragraph27.7 to the effect that the Netherlands does notadhere to the statement that, as ageneral rule, domesticanti-avoidance rules do not conflict with the provisionsof tax conventions. The compatibility of suchrules with treaty provisions is dependent on, amongother things, the nature and wording of the rule concerned,the wording and purpose of the relevant treatyprovision and the relationship between domestic andinternational law in acountry. Since tax treaties arenot meant to facilitate the improper use thereof, theapplication of national rules and provisions may bejustified in specific cases of abuse or clearly unintendeduse. In such situations the domestic measurehas to respect the principle of proportionality andshould not go beyond what is necessary to prevent theabuse or the clearly unintended use.The 2011 Note on Dutch TaxTreaty Policy 35 also devotesattention to the application of domestic antiabuserules to tax treaties, particularly in the situationwhere the law of the other state implies that adomesticanti-abuse concept also applies in the context ofthe application of atreaty without the treaty having tomake explicit reference to this. The Dutch policy is toaim to agree on the possibility of consultation to providemore certainty for taxpayers and to ensure thebalanced result of treaty negotiations, if it is decidedin the negotiations to accept explicitly the applicationof domestic anti-abuse doctrines. The policy statementdoes not explicitly address in what circumstancesadherence to domestic doctrines will beconsidered.C. Treaty shopping —the 2011 Note on Dutch tax treatypolicy1. General introductionAs may be derived from the above discussion, the interpretationof the term ‘‘beneficial owner’’ does notleave much room for the application of the concept tocounter treaty shopping in the context of normalgroup structuring (except where there is ‘‘last-minute’’tax planning). In particular,the Dutch Supreme Courtcase 36 described in I.B.6.c., above is often referred toas guiding case law to the effect that treaty shoppingthat takes the form of normal tax planning is not to bechallenged.The OECD Commentary on the Model Convention,and also the positions in the OECD Discussion Drafton beneficial ownership, seem to indicate that theterm ‘‘beneficial owner’’ isnot intended to be ameansof combatting treaty shopping. This does not implythat the Netherlands has no interest in, or no othermeans of, countering treaty shopping where the Netherlandsis the host country. Indeed the opposite is thecase, as is clearly apparent from the 2011 Note onDutch TaxTreaty Policy, which devotes specific attentionto the improper use of tax treaties and the measuresfor countering such improper use, and also fromthe developments in recent tax treaties concluded bythe Netherlands. 37 On the one hand, it is outside thescope of this paper to address these aspects in detail.On the other hand, as some countries may use theterm ‘‘beneficial owner’’ tocurb perceived tax treatyshopping or other improper uses of tax treaties, itseems appropriate to devote some attention to thisrecent policy statement.2. Improper use and application of anti-abuserulesThe 2011 Note on Dutch TaxTreaty Policy addressesin some detail the issue of tax treaty abuse, which isinterpreted in the 2011 Note to mean the claiming oftax treaty benefits by persons for whom such benefitswere not intended. Roughly three categories of treatyabuse are recognised: (1) tax-motivated escape (for example,emigration); (2) shopping within atreaty (forexample, aperson entitled to treaty benefits uses artificialtransactions to become eligible for aparticularand more beneficial treaty benefit); and (3) treatyshopping (for example, aresident of athird state gainsaccess to atax treaty benefit that was not intended forthat person). This paper discusses only the third formof abuse, i.e., treaty shopping.70 12/12 Copyright 2012 by The Bureau of National Affairs, Inc. TM FORUM ISSN 0143-7941

As already noted, as regards the application of domesticanti-abuse rules, the 2011 Note states that theNetherlands aims to agree on the possibility of consultation,if it is decided in tax treaty negotiations explicitlyto accept the application of domestic anti-abusedoctrines (see I.B.6.e., above). The application of domesticanti-abuse provisions is provided for, invaryingphraseology, in, for example, the TAK quasi-taxtreaty, and in the Netherlands–Ghana, Hong Kongand Panama tax treaties. The Hong Kong treaty alsoexplicitly refers to the rule on the taxation of foreignerswith asubstantial interest in aDutch company(see I.A.1., above) as an anti-abuse rule.As regards the possible explicit inclusion of antiabuserules in tax treaties, the 2011 Note states thatthe Netherlands values the prevention of tax treatyabuse and is therefore willing to include provisions tolimit treaty benefits if the Netherlands and/or theother treaty country recognises arisk of treaty abusein light of the way the relevant tax systems interact.The Note recognises that there is potential for abusewhere an entity in the Netherlands is interposed inorder to obtain tax treaty benefits for sources ofincome from other countries (for example, areductionof foreign withholding tax on dividends, interestand royalties), as well as where an entity in aforeigncountry is interposed to obtain treaty benefits with respectto income derived from Dutch sources (for example,areduction of Dutch dividend tax).To deal with the first situation (i.e., where the Netherlandsis the interposed country), in addition to domesticanti-abuse measures (for example, that requirefinancial services companies to have real presence andreal risks), the Netherlands includes a beneficialowner requirement and also accepts more specificprovisions to prevent abuse in its tax treaties. The2011 Note states that the Netherlands, at the requestof the other treaty state and with due regard to what isreasonable, is willing to include in its treaties provisionsto prevent tax treaty abuse.As regards the second situation (i.e., where the foreigncountry is interposed in order to reduce Dutchtaxation), the Netherlands particularly focuses on thetaxation of dividends (as there is generally no Dutchwithholding tax on interest and royalties). The Netherlandsrecognises apotential for tax treaty abuse inparticular where the foreign country levies neithercorporation tax nor dividend tax on subsequent distributions,or where the country has aterritorial systemof taxation. The requirement that the foreign interposedperson be the beneficial owner of the dividendsis not sufficient to protect against such treaty shopping.The 2011 Note recognises the need for antiabuseprovisions, not only in order to protect Dutchtax revenue, but also in light of the fact that other taxtreaty negotiations may be made more difficult if theNetherlands could be used as astepping stone alongan entirely tax-free dividend route because of the lackof adequate anti-abuse provisions. The 2011 Notestates as apolicy aim that, to prevent cases of taxtreaty abuse that are not already covered by the beneficialownership requirement, the Netherlands willactively propose to include atargeted anti-abuse provisionin its tax treaties. The 2011 Note also addressesthe possible forms that anti-abuse provisions maytake and their advantages and disadvantages.3. Alternative forms of anti-abuse rulesThe first possible approach takes the form of entitybasedprovisions and/or limitation on benefits provisions.Typically, inaddition to tax residence in theother state, certain other requirements must also bemet in order to qualify for tax treaty benefits (for example,under astock-exchange test, aheadquarterstest or an activities test). The recognised advantage ofthis approach is the certainty provided for those personsthat pass the tests. The recognised disadvantagesof the approach include potential ‘‘overkill’’ or‘‘underkill’’and, in the case of limitation on benefits provisions,complexity. This may in practice be areason toinclude in addition elements of the second approach,i.e., amain purpose test.The second possible approach takes the form oftransaction-based provisions and/or main purposetests. Typically, atransaction-based approach is followedto determine whether the granting of treatybenefits is justified or whether treaty benefits shouldbe disallowed where the transaction concerned wasdesigned primarily to obtain treaty benefits and thusmakes use of atest with amore general wording (i.e.,atest that has to be applied on acase-to-case basis anddepending on the circumstances, rather than atestthat is strictly defined) and asubjective motive test.The advantage of this approach is that the provisionused can generally be simple and that the result can betailor-made to avoid both overkill and underkill. Thedisadvantage is that such an approach and asubjectivemotive test provide no or little advance clarity andcertainty. The 2011 Note makes it clear that the Netherlands’aim is always to make it possible for ataxpayerto demonstrate that a transaction does notinvolve tax avoidance, i.e., to provide some sort of ultimateremedy whereby ataxpayer can obtain treatybenefits if the tests are inconclusive (often referred toas a‘‘safety-net’’ or‘‘last fall-back’’). In practice thisconvenience often has to be sought from the authorities,possibly only after mutual agreement. The 2011Note also states that the Netherlands intends to excludefrom treaty benefits income or persons thatqualify for aspecial regime where there is arisk oftreaty abuse.The above is, of course, only avery short summaryof some aspects of the improper use of tax treaties addressedin the 2011 Note. And, of course, the 2011Note is only apolicy statement of the Netherlands’aims in tax treaty negotiations. Ultimately, the taxtreaties concluded are the result of negotiation and exhibitawide variety of approaches and clauses, andsometimes acombination of approaches. It would bebeyond the scope of this paper to address all these indetail. However, itmay be interesting to note some(recent) examples. For examples of tax treaties with alimitation on benefits provision, one may look to theNetherlands’ treaties with Japan and the UnitedStates, where the provisions concerned were includedat the request of the tax treaty partner, and to theNetherlands’ treaties with Bahrain, Barbados, HongKong, Kuwait and Panama, where the provisionswere included at the request of the Netherlands. Forexamples of tax treaties with amain purpose provision,one may look to the Netherlands’ treaties withArmenia, Croatia, Egypt, Estonia, Jordan, Kazakh-12/12 TaxManagement International Forum BNA ISSN 0143-7941 71

stan, Latvia, Malta, Mexico, Morocco, Qatar, Romania,South Africa, Surinam, Switzerland, Tunisia, theUnited Arab Emirates, the United Kingdom and Uzbekistan.II. Application of Dutch rulesA. Fact pattern and further assumptionsIn this section, the principles emerging from the generaldiscussion in I., above are applied to the envisagedfact pattern in which Dutch tax resident HCopays dividends to foreign FHoldCo (acting as an intermediaryholding company of foreign Parent), interestto foreign FFinCo and royalties to foreign FIPCo(FFinCo and FIPCo both also being subsidiaries ofParent). In addition to the assumptions stated in thefacts (for example, that all foreign companies are taxresident under the relevant tax treaties and qualifiedpersons under any applicable limitation on benefitsarticles), this paper assumes that the foreign companiesinvolved have no other connection with the Netherlandsthan as described in the facts (for example,they do not carry on business in the Netherlandsthrough aDutch permanent establishment (PE)). Furthermore,it is assumed that all transactions, particularlyloan and license transactions, are at arm’slength.For purposes of the discussion, it is assumed that therelevant tax treaties conform to the most recent OECDModel Convention. In many cases, the Netherlands’tax treaties are indeed based on the OECD Model Convention,although some are still based on previous versionsand there are also certain variations in practice.Obviously, asaDutch tax resident company, HCo willbe taxable in the Netherlands on its profits. The (corporate)taxation at the level of HCo is outside thescope of the current topic and will not be discussedhere.B. Dividends paid by HCo to FHoldCoAs regards dividends paid by HCo to FHoldCo, twoDutch taxes are particularly important: corporationtax (discussed in I.A.1., above) and dividend tax (discussedin I.A.2., above). The application of the relevanttax treaty and the beneficial owner requirementmay be issues that arise in connection with the latter;with regard to the former,the application of Dutch domesticlaw may result in the conclusion that no corporationtax liability would arise in this fact patternwithout these issue having to be considered.1. Dutch corporation taxAs anonresident, FHoldCo, is potentially subject totax on income from its substantial interest in HCo, aDutch resident company, but will be subject to taxonly if: (1) the substantial interest does not form partof the assets of abusiness enterprise of FHoldCo; and(2) FHoldCo holds the substantial interest for the primarypurpose, or one of the primary purposes, ofavoiding aDutch individual income tax or dividendtax liability of athird party (for example, here the indirectshareholder, Parent). Whether or not FHoldCois itself considered to carry on an active business enterprisein the material sense, it will most likely bedeemed to carry on abusiness and be allowed to allocateits substantial interest in HCo to that business.This is because it seems evident that the shares in HCoare not held merely for an investment return. This isbased on the guidance that can be derived from theparliamentary history of the relevant provision, particularlyas it relates to intra-group holding structures.Also, if the foreign entity is aholding company thatperforms a genuine function in the conduct of agroup’s business, it will not hold the substantial interestas amere investment. This applies both to aforeigntop holding and aforeign sub-holding companywith an intermediary function. Given the fact pattern,the substantial interest is attributable to the businessassets of FHoldCo if the business of the Dutch entity,HCo, is an extension of the business of the foreigndirect shareholder, FHoldCo, or the foreign indirectshareholder, Parent, for which FHoldco performs anintermediary function. Since Parent carries on anactive business itself and acts as the top holding companyfor the multinational group of operating companiesand given FHoldCo’s intermediary role in theholding structure, the potential liability to Dutch corporationtax would appear to be set aside under Dutchdomestic tax law. Whether it is FHoldCo that is thebeneficial owner in the tax treaty sense (or whether itis Parent, which has already been taken into accountfor purposes of determining that an enterprise isbeing carried on —advantageously, inthis instance,as this prevents the income from the substantial interestfrom being taxable altogether) does not, therefore,seem to have any relevance. As may be inferred fromthe general description of Dutch taxation of incomefrom asubstantial interest in I.A.1., above, the evaluationmight have been more complicated under adifferentfact pattern, but tax treaty protection might stillhave been available. (See I.A.1., above and the explanationin relation to dividends at II.B.2., below: substantialinterest taxation may be set aside by ataxtreaty if the treaty provides for full exemption, as substantialinterest taxation does not of itself mean thatthe intermediary holding company is not the beneficialowner, except under treaties where areservationhas been made for the application of the beneficialowner requirement in these circumstances; where thetax treaty concerned does not provide for full exemption,corporation tax may arise).2. Dutch dividend taxAs anonresident, FHoldCo is potentially subject to the15 percent dividend tax on the dividends distributedto it by HCo, unless areduction is provided for by theapplicable tax treaty (or EC law, although this paperfocuses only on the impact of tax treaties). To qualifyfor such reduction, FHoldCo, the recipient of the dividends,must also qualify as the beneficial owner of thedividends, both under domestic law and under the taxtreaty. Dutch tax law does not contain a‘‘positive’’definition of the term ‘‘beneficial owner,’’ but indicationsof its meaning may be derived from parliamentarydiscussions, case law and the OECDCommentary. What emerges from the fact pattern isthat FHoldCo owns the shares and receives the dividendsbut generally redistributes all the dividends,less an amount to cover its modest administrative72 12/12 Copyright 2012 by The Bureau of National Affairs, Inc. TM FORUM ISSN 0143-7941

costs, within 90 days of receiving them. Nevertheless,FHoldCo would most likely be regarded as the beneficialowner under the Dutch interpretation of the term.Parliamentary comments, even though not very explicitor detailed, indicate that the beneficial owner isarecipient that receives income to which it has title,which would seem to encompass FHoldCo. On theother hand, the beneficial owner is not arecipient thatreceives income for the benefit of athird party: the relevantcomments suggest that only acontractual obligationto pay the income as such to a third partyindicates that the recipient may not be the beneficialowner,not the mere fact that such payments are madein practice. Dutch case law also takes arestrictive approach.Even in the case of adividend-stripping typetransaction, beneficial ownership was recognisedwhere the person that had acquired legal title to thedividend coupons could freely dispose of the couponsand the amounts to be paid thereon and, on receivingdividends, did not act as an agent or for the account ofaprincipal. In this case too, the focus was therefore onwhether there was any legal obligation to pay on thedividends received. Also when the existing OECDCommentary is consulted as asource for the Dutch interpretationof ‘‘beneficial ownership,’’ three specificcategories of recipient are seen to be excluded: anagent, anominee and aconduit whose very narrowpowers render it amere fiduciary or administratoracting on account of another person. The fact patterndoes not seem to go as far as suggesting that FHoldCofalls into one of those categories merely becauseFHoldCo generally redistributes the dividends shortlyafter receiving them —inthe interval before redistribution,FHoldCo appears to have full powers with respectto the dividends received and the use of thefunds for its own activities, including the meeting ofits modest administrative costs. On that basis,FHoldCo could be accepted as the beneficial owner if,as indeed seems to be the case, it acts in its own nameand for its own account and not as an agent or anomineefor another person and has the power and controlto freely dispose of the dividends received, not havingentered into acontractual relationship to pay themon. 38The Dutch statutory provision targetted atdividend-stripping transactions contains a‘‘negative’’definition designed to indicate who will not be recognisedas abeneficial owner.Although the relevant provisionhas abroad scope, so that it could also apply inthe case of intra-group reorganisations, it does notseem to have much relevance to the fact pattern underconsideration here. Assuming that FHoldCo was interposedat the time when HCo was initially set up, theanti-dividend-stripping provision would have no application.Even if FHoldCo was interposed at alaterstage, the effective application of the anti-dividendstrippingprovision could perhaps to alarge extent beavoided under the published policy decision, whichprovides an exception for enduring intra-group reorganisationsand asafe haven for regular dividends,subject to certain limits. In the case of dividends exceedingthe limits for regular dividends, there wouldbe more risk of apotential challenge as to their beneficialownership. Although the Dutch tax authoritiestake the position that the anti-dividend-stripping provisionwould also apply in atax treaty context, it remainsuncertain whether the Dutch courts wouldindeed follow that approach, particularly in the caseof an intra-group reorganisation.The Dutch extra-statutory anti-abuse concept offraus legis does not seem to have much relevance tothe fact pattern under consideration here. It seemsvery unlikely that FHoldCo’s beneficial ownership ofthe dividends could be successfully challenged on thebasis of fraus legis. The fact pattern seems not to indicateany artificial ‘‘last-minute’’ tax planning in anticipationof adividend, but rather the kind of normalplanning that has generally been explicitly accepted,even if it has been engaged in for tax reasons. Basedon existing case law, the possibility of applying frauslegis could be expected to be denied in the context of atax treaty unless the Contracting States explicitly expressed,in the text of the treaty itself or by way of explanatorynotes, acommon intent that it should beapplied.It follows from the above that, under the Dutch interpretationof the term ‘‘beneficial owner,’’ therewould be no or only very little room for asuccessfulchallenge of FHoldCo’s beneficial ownership of thedividends. It is therefore expected that FHoldCowould be accepted as the beneficial owner.However,itshould be understood that this is due to afairly pureinterpretation by the Netherlands of the term ‘‘beneficialowner.’’ As indicated in I.C., above, individualDutch tax treaties may include separate, more specificarrangements to counter the deemed improper use oftax treaty benefits and, in particular, specific conditionsfor the reduction of Dutch dividend tax, and/orlimitation on benefits provisions or main purpose testprovisions. As there is awide variety of different testsand conditions, it is beyond the scope of this paper toaddress them. However, the reader is cautioned that,in practice, acareful review should be made of all applicablefacts and circumstances and of the proviusionsof the relevant tax treaty.C. Interest paid by HCo to FFinCoThe beneficial ownership question is not relevant inthis situation. As the Netherlands generally does notlevy withholding tax on interest payments, in principle,there would be no Dutch withholding tax on theinterest paid by HCo to FFinCo (assuming none of theexceptional circumstance apply —for example, wherehybrid loans are deemed to function as equity and/orthe interest is not at arm’s length —see I.A.3., above)However,insome cases, the Netherlands levies corporationtax on aforeign entity deriving Dutch-sourceinterest income, for example, where the interest is attributableto aDutch (deemed) PE. This is assumednot to apply in the case of FFinCo. As noted in I.A.2.,above, aDutch corporation tax liability may also arisefor aforeign entity with adirect or indirect taxablesubstantial interest in aDutch resident company withrespect to any receivable that it has from the Dutchresident company. Such taxation only applies in thecase of ataxable substantial interest, i.e., where thesubstantial interest does not belong to the assets of anenterprise and is held for tax avoidance purpsoes.Since FFinCo is asister company of HCo, it does nothave adirect or indirect substantial interest in HCo,so that no tax liability should arise. As FFinCo bor-12/12 TaxManagement International Forum BNA ISSN 0143-7941 73

ows from third party banks, which presumably alsodo not have adirect or indirect substantial interest inHCo, the beneficial ownership question is not even indirectlyrelevant.D. Royalties paid by HCo to FIPCoAs the Netherlands generally does not levy withholdingtax or corporation tax on royalties derived by nonresidententities, in principle, no Dutch tax arisesunder the given fact pattern (assuming no exceptionalcircumstances exist, for example, circumstances inwhich the royalties are not at arm’s length, or FIPCohas aPEinthe Netherlands to which the royalties areallocable). The beneficial ownership question is thereforenot relevant (see I.A.3., above).NOTES1 CTA, Arts. 17 and 17a.2 CTA, Art. 17(3)b.3 ECJ Sept. 12, 2006, nr. C-196/04 (Cadbury Schweppes).4 CTA, Arts. 17(3)b and 18(2).5 CTA, Art. 17(3)b and 17(5).6 In the Netherlands, treaties generally take priority overdomestic tax law following the principles set out in theConstitution, Arts. 93 and 94.7 CTA, Arts. 17(3)a and 17a sub (c).8 DTA, Arts. 1(1) and 5.9 DTA, Art. 4(1), respectively Art. 4(2).10 DTA, Art. 4(4).11 DTA, Art. 4(7) and 4(8).12 DTA, Art. 4(7) and 4(8), CTA, Art. 25. The latter provisionrestricts the ability of acorporation to credit the dividendtax withheld on the dividends received if it is not thebeneficial owner thereof.13 Decree Nov. 21, 2011, DGB2011/6870M, Stcrt. 2012,151.14 The CTAcontains an explicit provision on the tax treatmentof connected intra-group borrowing and on-lending(and licensing and sub-licensing): CTA, Art. 8c. This fn.briefly discusses the provision, as it is sometimes (erroneously)interpreted as beneficial ownership test. However,the provision is not intended as such. Under the provision,interest (or royalties) received and interest (or royalties)paid by aDutch corporation under such connectedintra-group borrowing and on-lending (or licensing andsub-licensing) is not included in taxable profits, if the corporationdoes not run real risk with respect to the transactions.The corporation must still report an arm’s lengthremuneration for its involvement in the transactions. Forborrowing and onlending, the real risk test has been furtherspecified. The corporation is considered to run realrisk if the equity appropriate for the activity is at leastequal to the lower of 1percent of the loans or EUR 2million,the equity is actually maintained to cover the risks,and the equity will actually be affected if the risks materialise.Although the provision is sometimes erroneouslyseen as abeneficial ownership test, parliamentary explanationsof the provision expressly state that it is not intendedas such but is intended to exclude the income andexpenses from the tax base to avoid the Netherlandshaving to grant atax credit for possible (foreign) withholdingtax on the interest (or royalties). In practice, thepossibility cannot be excluded that the Dutch approachmay affect the manner in which the source state willregard the beneficial ownership of aDutch corporationthat is affected by the relevant provision.15 Parliamentary Documents, Second Chamber, 1979-1980, 15517, no 7. Parliamentary Documents, SecondChamber, 1979-1980, 1619, Additions, 1988 Note on generalDutch TaxTreaty Policy, Parliamentary Documents,Second Chamber, 20365, nos. 1and 2, Questions and Answers,Parliamentary Documents, Second Chamber,20365, no. 3, respectively no. 5.16 Note that these statements were made in the generalcontext of parliamentary questions and answers on theconcept of beneficial ownership of interest under tax treatiesand not in relation to dividends. Note also that thesecomments were not made with respect to their applicationto borrowing and on-lending within the meaning ofthe rules described in fn. 15, above; CTA, Art. 8c.17 Parliamentary Documents, Letter of June 24, 2011, nr.IFZ2011/383M.18 References to case law are to decisions of the Dutch SupremeCourt (Hoge Raad der Nederlanden), which has atax section and which is the highest Dutch judicial institutionrendering decisions on Dutch direct tax matters.References to publications are references to ‘‘Beslissingenin belastingzaken Nederlandse Belastingrechtspraak’’(BNB), Decisions in tax cases Netherlands TaxCase Law.19 Supreme Court, Jan. 27, 1988, 23919, BNB 1988/217.20 Supreme Court, Oct. 16, 1985, 23033, BNB 1986/118.21 Supreme Court, April 6, 1994, 28 638, BNB 1994/217.22 Supreme Court, April 6, 1994, 28 638, BNB 1994/217.23 This is probably true of most Dutch tax treaties in relationto portfolio dividends. Ownership of shares is often acondition for obtaining the reduced rate for qualifying investmentdividends. Some treaties contain an explicitshare ownership requirement, such as the Netherlands–Finland and Netherlands–United States tax treaties.24 Supreme Court, Feb. 21, 2001, 35415, BNB 2001/196.25 Supreme Court, Sep. 2, 1992, BNB 1992/379, Dec. 9,1998, BNB 1999/267, 2011 Note on TaxTreaty Policy,Feb.11, 2011, IFZ2011/100M1.26 DTA, Art. 4(7) and 4(8); CTA, Art. 25(2) and 25(3).27 Decree, Nov. 21, 2011, DGB2011/6870M, Stcrt. 2012,151.28 Questions and Answers, Parliamentary Documents,Second Chamber, 1987-1988, 20 365, no. 3respectivelyno. 5. In more recent statements in the ParliamentaryDocuments on the 2001 Netherlands–Belgium tax treatythis position has been retracted, but areservation is stillmade for the possible application of fraus conventioniswhere both parties agree that an arrangement constitutestax treaty abuse.29 Supreme Court, Jan. 8, 1986, BNB 1986/127, June 28,1989, BNB 1990/45, May 18, 1994, BNB 1994/252.30 TAK, Art. 35a.31 Supreme Court, May 18, 1994, BNB 1994/253.32 Supreme Court, Dec. 15, 1993, BNB 1994/259, June 29,1994, BNB 1994/294, March 15, 1995, BNB 1995/150,Dec. 6, 2002, BNB 2003/285, the last seeming to suggestthat not only can the text of and explanatory notes to therelevant tax treaty be referred to, but acommon intentioncan also be derived from other sources.33 See the case law referred to in fn. 31, above. Althoughit is difficult to distinguish fraus legis (abuse of domesticlaw) from fraus conventionis/tractatus (abuse of the taxtreaty itself), the case law in which the Supreme Courtalso tested the purpose and intent of atreaty is sometimesconsidered to demonstrate that the latter doctrine hasalso been rejected by the Supreme Court. See SupremeCourt, May 12, 2006, 39223 and 39224, BNB 2007/36 andBNB 2007/37.34 The question has been raised in the literature as towhether there is now more of apossibility that the appli-74 12/12 Copyright 2012 by The Bureau of National Affairs, Inc. TM FORUM ISSN 0143-7941

cation of the fraus legis (or fraus conventionis) doctrineunder atax treaty will be countenanced in future SupremeCourt case law. This question has been raised onthe basis of Dutch case law (Supreme Court, Sep. 5, 2003,BNB 2003/379) indicating the possible acceptance of certain(statutory) notional or deemed income conceptsunder tax treaties as well, albeit subject to certain verystrict conditions. The question also derives from the generallyincreasing focus on the improper use of tax treaties,particularly in the 2003 Update of the OECDCommentary on Article 1ofthe Model Convention. Theanswer may depend on whether application of fraus legisto the specific transactions concerned was contemplatedwhen the tax treaty was signed. For references, see Peters,Roelofsen, in Cahiers de droit fiscal international, IFARome 2010, Taxtreaties and tax avoidance: application ofanti-avoidance provisions, The Netherlands, page 562.35 Note on TaxTreaty Policy, Notitie fiscaal verdragsbeleid,Feb. 11, 2011, IFZ2011/100M1.36 Supreme Court, May 18, 1994, BNB 1994/253.37 Note on TaxTreaty Policy, Notitie fiscaal verdragsbeleid,Feb. 11, 2011, IFZ2011/100M1.38 Note that, as the applicable tax treaty is assumed toconform to the OECD Model Convention, this paper doesnot discuss those few Dutch treaties with aspecific antiabuseprovision for flow-through dividends, of which thetraditional examples are the Netherlands–Malta, –Tunisiaand –Venezuela tax treaties.GLOBALADVANTAGE//////////////////////////////////InternationalTax CoreThe single, comprehensiveresource every global tax plannerneeds for the fi ve international taxessentials: tax treaties; up-to-datetax rates; reliable daily tax news;in-depth profi les of internationaltax regimes; and commentary andanalysis from cross-border taxexperts.FOR MOREINFORMATION ORTO START YOURFREE TRIAL, VISITwww.bna.com/corebna.com 0812-JO9052© 2012 The Bureau of National Affairs, Inc.12/12 TaxManagement International Forum BNA ISSN 0143-7941 75

Host CountrySPAINEduardo Martínez-MatosasGómez-Acebo &Pombo, BarcelonaIntroductionArticles 10, 11 and 12 of the OECD Model TaxConvention on Income and Capital (the‘‘OECD Model Convention’’) provide that certaintypes of income (dividends, interests and royalties)paid by acompany of aContracting State (thesource state) to aresident of the other ContractingState (the residence state) can qualify for reduced (orno) source state taxation, provided the recipient of theincome (in the residence state) is the ‘‘beneficialowner’’ ofthe income.Neither the OECD Model Convention nor Spanishtax legislation (including the legislation implementingthe EC Parent–Subsidiary and Interest and RoyaltiesDirectives) defines the term ‘‘beneficial owner.’’ Nor isthe term defined in the Commentary on the OECDModel Convention, which is very frequently used bythe Spanish tax authorities and Spanish Courts as interpretativeguidance in their decisions and judgments.In this context, it is important to note that theOECD Report on Double Taxation Conventions andthe Use of Conduit Companies concludes that ‘‘a conduitcompany cannot normally be regarded as thebeneficial owner if, though the formal owner,ithas, asapractical matter, very narrow powers which renderit, in relation to the income concerned, amere fiduciaryor administrator acting on account of the interestedparties.’’ 1The Draft OECD Report on the Clarification of theMeaning of ‘‘Beneficial Owner’’ inthe OECD ModelConvention was published on April 29, 2011. Themost important points made by the draft report arethe following:s the term ‘‘beneficial owner’’ should be interpretedonly in atreaty context and therefore has an autonomoustreaty meaning; its interpretationshould, therefore, not refer to any technical meaningthat it may have under the domestic law of aparticular country;s the recipient of income is the ‘‘beneficial owner’’ ofthat income where it has the full right to use andenjoy the income unconstrained by acontractual,legal (or factual) obligation to pass the payment receivedto another person. The use and enjoyment ofthe income must be distinguished from the legalownership, as well as the use and enjoyment, of theasset with respect to which the income is paid;s some examples of recipients of income that do notconstitute ‘‘beneficial owners’’ are agents, nominees,and conduit companies acting as fiduciariesor administrators;s the fact that the recipient of income is considered tobe the beneficial owner of the income does notmean, however,that the reduced source country taxmust automatically be applied. Thus, other ways ofaddressing conduit companies and treaty shoppingin general should still remain fully applicable (i.e.,specific treaty anti-abuse provisions, general antiabuserules, and substance over form or economicsubstance approaches).Some of these points have already been made bySpanish commentators on a number of occasionswhen analyzing the meaning of the ‘‘beneficial owner’’concept. Some of these commentators (for example,F.A. Vega Borrego 2 and N. Carmona 3 )have stated thatit might be reasonable to apply the ‘‘beneficial owner’’requirement even when the relevant tax treaty doesnot expressly include the concept (as is the case withmany of the tax treaties signed by Spain). For instance,in the case of income received by an agent, thegrounds for extending the beneficial owner approachwould be that the agent is not subject to tax on suchincome in its state of residence, because the income isattributed to the principal.Thus, in the absence of any clear definition of ‘‘beneficialowner’’for Spanish tax purposes, one must lookto how the term is interpreted by the Spanish courts.I. Spanish approach to Beneficial OwnershipA. Interpretation of the term ‘‘Beneficial Owner’’ bySpanish courts: the Hungarian conduit casesThe Hungarian conduit cases, all of which were decidedby the Spanish High Court (Audiencia Nacional,AN) in 2006-07, concern structures used by aSpanishsoccer club, Real Madrid, to pay Hungarian entitiesfor the right to use the ‘‘image rights’’ofcertain soccerplayers with whom Real Madrid had work contracts.The Hungarian entities, in turn, transferred almostthe full income received to entities that were residentsof the Netherlands or Cyprus. The use of the Hungar-76 12/12 Copyright 2012 by The Bureau of National Affairs, Inc. TM FORUM ISSN 0143-7941

ian entities had aclear goal: to obtain the benefit ofthe Spain–Hungary tax treaty, which provides for 0%withholding tax on royalties paid by Spanish companiesto Hungarian companies.In all the cases, the Spanish tax authorities had concludedthat the interposed entity in Hungary was notabeneficial owner because it paid almost all the ‘‘royalties’’received to non-Hungary (i.e., Netherlands orCyprus) resident companies. According to Martín Jiménez,4 the fact that the Hungarian entities only retainedasmall part of the royalties (between 0.5% and2%) and the clear link between the payments receivedand the payments made (payments being made on thesame day or one day after payments were received)were crucial in leading the tax authorities to concludethat the Hungarian entities were not the beneficialowners of the payments.The following were among the factors consideredby the Spanish tax authorities to indicate clearly thatthe position of the Hungarian conduits was very weak:no invoices were issued between the principal companiesand the Hungarian entities; the royalty paymentswere made despite no invoices being issued (sometimeson dates prior to those established in the contract,sometimes in amounts that were different fromthose provided for in the contract); in some cases, thedate of signature of the contract between theNetherlands/Cyprus company and the Hungarianentity was later than the date of the contract betweenthe Hungarian entity and Real Madrid.The AN concluded that the Hungarian entities werenot the beneficial owners of the royalties, under Article12 of the Spain–Hungary tax treaty. The maingrounds for the AN’sreaching this conclusion were itsassimilation of the ‘‘beneficial ownership’’ clause to a‘‘business purpose test’’(general anti-abuse clause): 5 ifthere is abusiness reason to place an entity betweenthe payer and the final recipient of the income beyondthe desire to reduce Spanish withholding taxes, the intermediarywill be the beneficial owner of the income;conversely, ifthe only goal of the conduit is to reduceSpanish withholding taxes, the conduit will fall outsidethat concept. 6 The following aspects were consideredcritical by the AN in arriving at its decision: 7s the rights licensed by the Hungarian entities wereacquired from entities resident in countries withwhich Spain did not have atax treaty or only had atax treaty that was less favorable than the Spain–Hungary tax treaty with respect to royalties paid bySpanish companies;s the Hungarian entities transferred, on the same day(or the day after), almost the full amount of theincome received from Real Madrid to other entities(resident in the Netherlands or Cyprus); ands the Hungarian entities only retained asmall part ofthe royalties (between 0.5% and 2%).The Hungarian conduit cases are in conflict withtwo recent decisions handed down by the Spanish SupremeCourt on March 21, 2012, in which the applicationof the EC Parent–Subsidiary Directive 8 (whichprovides for 0percent withholding tax on dividendspaid between qualifying EU companies) was deniedbecause the interposition of aDutch holding companybetween aU.S. parent company and aSpanish subsidiarylacked a valid ‘‘economic reason’’ (despite theDutch subsidiary having substance in the form of10-19 employees 9 ), but the Spain–Netherlands taxtreaty was regarded as applicable to dividends paid bythe Spanish company to the Dutch parent.Although the AN did not consider the issue of beneficialownership in these cases (the Spain–Netherlands tax treaty does not have a beneficialownership clause), it is indisputable that if the AN hadnot thought that the income was attributable to theDutch company, itwould not have applied the Spain–Netherlands tax treaty (it can be inferred from theproceedings that the Spanish tax authorities had triedto apply the Spain–United States tax treaty, whichallows for the imposition of withholding tax on dividendsat a higher rate than does the Spain–Netherlands treaty). 10B. Beneficial Ownership and withholding agentsAs Martín Jiménez has noted, 11 the judgments of theAN in the Hungarian conduit cases touch on an importantadministrative question connected with beneficialownership: who should be liable (including forpenalties) when it is eventually established in thecourse of atax audit that the recipient of an item ofincome is not the beneficial owner of the income —the withholding agent or the recipient?In the context of the conduit cases, the AN consideredthat it was the withholding agent, because therelevant Spanish law (which was in force at the timethe payments were made by Real Madrid and is still inforce) permits the tax authorities to collect the taxfrom the withholding agent.However,the question can be raised as to what standardof due diligence applies to awithholding agent inestablishing beneficial ownership? Is it sufficient forthe recipient of the income concerned to provide thewithholding agent with acertificate of tax residence inthe residence state? In opinion of Martín Jiménez, 12 ifsuch certificate states that the recipient of the incomeis its beneficial owner,then the withholding agent willbe justified in arguing that it has no tax liability.However,such certificates are not sufficient to prove thatthe recipient is the beneficial owner of income becausewho the beneficial owner is will only be clear tothe tax authorities after atax audit and not before therelevant income is paid.II. Application of Spanish approachA. Dividends paid by HCo to FHoldCoIn view of the Draft OECD Report on the Clarificationof the Meaning Of ‘‘Beneficial Owner’’ in theOECDModel TaxConvention, itispossible that, in the eventthat HCo underwent atax audit, the Spanish tax authoritiesmight conclude that FHoldCo was not the‘‘beneficial owner’’ ofthe dividends paid by HCo becauseFHoldCo promptly redistributes virtually all ofthem to Parent within 90 days of receipt. The authoritiescould, therefore, argue that FHoldCo lacks the fullright to use and enjoy the income and that it is, inpractice, obliged to pass the payment received toParent.In this regard, under the approach of the AN, thefact that FHoldCo does not employ people to performits holding activity (i.e., that it does not have sub-12/12 TaxManagement International Forum BNA ISSN 0143-7941 77

stance) could support the Spanish tax authorities inreaching such aconclusion. Thus, under a‘‘businesspurpose test,’’ the authorities could conclude thatthere is no business reason for interposing FHoldCobetween HCo and Parent, apart from the desire toreduce Spanish dividend withholding tax. Conversely,FHoldCo could strengthen its chances of being consideredthe beneficial owner of the dividends, andtherefore reinforce the position that it has an economicsignificance beyond serving as avehicle for thecollection and redistribution of dividends paid byHCo, if:s FHoldCo were to have a staff of experiencedmanagement/control personnel who take care ofsupervising the subsidiaries’ performance developmentsand, in turn, report to Parent on aperiodicalbasis;s FHoldCo were to appoint the directors of the subsidiaries;ands the group structure comprising FHoldCo, HCo andother subsidiaries were to create synergies or addedvalue deriving from the functional/regional amalgamationof the companies concerned (for example,from the establishment of common IT systems, productiveprocesses, joint courses, joint policies,etc. 13 ).B. Interest paid by HCo to FFinCoThe analysis is the same as that set forth in II.A.,above, although FFinCo has agreater chance thanFHoldCo of passing the business purpose test andtherefore being considered the ‘‘beneficial owner’’ ofthe interest. This is because FFinCo has astaff ofexperiencedfinancial personnel that negotiates thirdparty financing arrangements and performs risk managementfunctions with respect to the group’s financialposition (i.e. ‘‘qualified substance’’).C. Royalties paid by HCo to FIPCoFor reasons similar to those applicable to FFinCo withrespect to the treatment of interest paid to it by HCo(as set forth in II.B., above), FIPCo has some chanceof being treated as the ‘‘beneficial owner’’ ofthe royaltiespaid to it by HCo for purposes of the Spain–Country Qtax treaty under the business purpose test.The main argument in defending this conclusionwould again be that FIPCo has employees who arequalified to perform IP management and protectiontasks. This conclusion would be reinforced if FIPCodid not routinely pay its net proceeds to Parent shortlyafter receiving the royalties.NOTES1 Commentary on OECD Model Convention Art. 10, para.2.2 F.A. Vega Borrego, El concepto de beneficiario efectivo enlos Convenios para evitar la Doble Imposición,Documentosdel Instituto de Estudios Fiscales 8/2005.3 N. Carmona, Convenios fiscales internacionales yfiscalidadde la Unión Europea, CISS-Wolters Kluwer, 2012.4 A. Martín Jiménez, Beneficial Ownership: CurrentTrends, 2World TaxJ.(2010), Journals IBFD.5 See also F.A. Vega Borrego, fn., 2, above.6 A. Martín Jiménez, see fn. 4, above.7 A. Ceballos Morales, El concepto de beneficiario efectivoysujurisprudencia, Cuadernos de Formación,Colaboración10/10,Volumen 10/2010, Instituto de Estudios Fiscales,2009.8 Directive 90/435/EEC.9 The Supreme Court stated that an entity would not bedeemed to have substance merely because it has employees.Rather, itwould need to prove that the employeesperform the management activities effectively.10 A. Martín Jiménez, see fn. 4, above.11 A. Martín Jiménez, see fn. 4, above.12 A. Martín Jiménez, see fn. 4, above.13 See Spanish Economic-Administrative Court decisionof June 1, 2010, regarding the existence of abusiness purposein the context of acorporate restructuring involvingaSpanish holding entity and its subsidiaries.In-HouseTrainingMost of our training courses canbe delivered in house. You cansave travel and accommodationcosts and, depending onnumbers, course fees too.If you have six or more people (orcan form a group with others),you will find our in-house trainingcost effective.Our tutors are chosen for theirexpertise, presentation skills andadaptability. So the coursecontent, particularly the practicalexamples, can usually be tailoredto your company’s key technicalissues and industry specialisation.We have a solution that can workfor you, so please contact us ontraininginfo@bna.com or callBloomberg BNA on +44 (0)207847 5804 to discuss.78 12/12 Copyright 2012 by The Bureau of National Affairs, Inc. TM FORUM ISSN 0143-7941

Host CountrySWITZERLANDWalter H. Boss and Stefanie M. MongePoledna Boss Kurer AG, Attorneys at Law, Zü rich –LuganoIntroductionBeneficial ownership is ahighly controversialissue in the context of international tax, particularlysince the OECD issued its discussiondraft on the subject in April 2011.This paper first outlines anumber of leading courtcases regarding beneficial ownership for purposes ofentitlement to a refund of Swiss withholding taxunder an applicable tax treaty and then goes on tosummarise the practice adopted by the Federal TaxAdministration (FTA) based on the jurisprudence ofthe Swiss Federal Supreme Court regarding the beneficialownership issue in atreaty context.I. Swiss approach to Beneficial OwnershipA. Leading court cases regarding Beneficial Ownership1. Judgment of Swiss Federal AdministrativeCourt of March 7, 2012In its latest judgment on this issue, which was handeddown on March 7, 2012, 1 the Swiss Federal AdministrativeCourt decided on whether aDanish bank wasthe beneficial owner of dividends for purposes of entitlementto a refund of Swiss withholding tax onSwiss dividends derived from equities that the bankhad acquired for purposes of hedging total returnswap positions.Under atotal return swap, the long party promisesto pay to the counter-party the amount by which theprice of agiven equity or basket of equities appreciatesover the life of the swap (if it does so appreciate)and an amount corresponding to the dividends distributedduring the life of the swap, while the counterpartyundertakes to pay to the long party the amountby which the share price depreciates over the life ofthe swap (if it does so depreciate) in addition to amargin. By entering into atotal return swap, apartycan indirectly benefit from the development of andyield from aSwiss equity instrument without incurringthe Swiss withholding tax that is levied at arateof 35 percent (or areduced treaty rate) in the case ofdirect investment.In the case at issue, aDanish bank had entered intototal return swaps with counter-parties in France,Germany, the United Kingdom and the United Stateswith respect to equity baskets comprising Swiss equities.In order to hedge the swap positions, the bankhad acquired the corresponding amount of underlyingSwiss equities. For the duration of the swaps, thebank collected dividend payments on the acquiredSwiss equities, which were subject to 35 percent Swisswithholding tax. Based on the Switzerland–Denmarktax treaty, the bank asked for afull refund of the 35percent Swiss withholding tax (the Switzerland–Denmark treaty has since been amended and nowprovides for aresidual withholding tax of 15 percent).The FTA had denied the refund request of theDanish bank, arguing that, because the bank had enteredinto swap transactions, it was obliged to forwardthe Swiss dividends received to the swap counterparties.In the view of the FTA, the bank did notqualify as the beneficial owner of the Swiss dividendsand therefore could not benefit under theSwitzerland–Denmark tax treaty. The Danish Bankappealed the decision of the FTA tothe Federal AdministrativeCourt.The Federal Administrative Court came to the conclusionthat the Danish bank retained beneficial ownershipof the Swiss dividends, despite the fact that ithad entered into swap transactions. The Danish bankwas therefore entitled to claim afull refund based onthe Switzerland–Denmark tax treaty. The Court heldthat the fact that the bank had entered into the swaptransactions did not per se oblige the bank to acquirethe Swiss underlying equities. The bank would havebeen under the obligation to pay an amount equal tothe Swiss dividends to the swap counter-parties evenif the bank had not hedged the swap transactions andhad not collected the Swiss dividends. The Court furtherreasoned that —irrespective of its having enteredinto the swap transactions —the bank could have acquiredthe Swiss equities and collected the dividendsderived therefrom. Finally, the Court held that basedon the circumstances of the case, no treaty abusecould be assumed (the Switzerland–Denmark treatydoes not contain an explicit anti-abuse clause). TheCourt concluded that the Danish bank had engaged inagenuine commercial business activity and had itsown offices, personnel and infrastructure.12/12 TaxManagement International Forum BNA ISSN 0143-7941 7912/12 TaxManagement International Forum BNA ISSN 0143-7941 79

2. Judgment of the Swiss Federal Supreme Courtof November 9, 1984In its decision of November 9, 1984, 2 the Swiss FederalSupreme Court had the chance to interpret theanti-abuse clause contained in Article 9(2)(a)(i) of theold Switzerland–Netherlands tax treaty of November12, 1951 (as amended by aProtocol signed on June 22,1966). A new Switzerland–Netherlands tax treatybased on the OECD Model Convention entered intoforce on November 9, 2011.Article 9(2)(a)(i) of the old Switzerland–Netherlands tax treaty provided for a zero rate ofwithholding tax on dividend payments made by aSwiss subsidiary to aDutch parent company,providedthe Dutch parent company owned at least 25 percentof the share capital of the Swiss subsidiary paying thedividends. The treaty did not require a minimumholding period. The Switzerland–Netherlands treatywas at the time one of the few tax treaties concludedby Switzerland that contained an explicit anti-abuseclause. Article 9(2)(a)(i) explicitly stated that the zerorate would apply only if the affiliation between thetwo companies concerned was not established or wasnot maintained primarily in order to benefit from thetreaty.The facts of the case were as follows. The appellantwas acorporation organised under the laws of theNetherlands with its corporate domicile in Amsterdam.The parent company of the Dutch company wasalimited liability company incorporated under thelaws of the Netherlands Antilles with its registeredoffice in Curaçao. The Netherlands Antilles companywas, in turn, held by ajoint stock corporation organisedunder the laws of the Principality of Liechtensteinand having its corporate domicile in Vaduz. TheDutch company held 3,747 shares in ajoint stock corporationorganised under the laws of Switzerlandwith its corporate domicile in Zug. The remaining1,248 shares of the share capital of the Swiss subsidiarywere held by aU.S. company. The Swiss subsidiarywas engaged in the sale of trucks to Saudi Arabia.The trucks were produced by the U.S. company referredto above. Twodirectors, M. and S., sent to theSwiss subsidiary by the corporate group, were responsiblefor the sales activities. On July 20, 1980 theDutch company received asubstantial dividend. TheSwiss subsidiary had deducted 35 percent withholdingtax from the gross dividend and transferred thewithholding tax to the FTA.Based on the then-applicable treaty,the Dutch companyclaimed afull refund of the tax withheld. However,the FTA only granted arefund in the amount of20 percent of the gross dividend. The refund of the remaining15 percent was refused based on the FTA’sopinion that the affiliation between the Dutch companyand the Swiss subsidiary was established primarilyin order to benefit from the treaty. From aneconomic point of view it would have made moresense to have the Swiss participation held directly bythe Liechtenstein company rather than interposingthe Dutch company and the Netherlands Antilles company.In upholding the decision of the FTA, the FederalSupreme Court reasoned as follows. Whether the affiliationbetween the two companies was establishedor maintained primarily in order to benefit from theapplicable treaty must be determined taking into accountall the facts of the respective case. Obviously,the subjective weight of such intent can only be ascertainedby reference to objective circumstances. In ascertainingthe existence of an intent of abuse, theentirety of the facts supporting or negating suchintent is decisive. The expression ‘‘. ..established ormaintained primarily in order to benefit ...’’ meansnone of the other considerations presented in order tojustify the affiliation has the same weight as the intentto benefit from the applicable treaty. The Court didnot require that the abusive intent should outweigh byfar all other circumstances.The Court went on as follows. The treaty does not —as amatter of principle —preclude aDutch companyheld by foreign shareholders, i.e., shareholders residingoutside the Netherlands, from claiming a fullrefund of Swiss withholding tax. If such acompanyqualifies as amanufacturing or trading company andengages in the same or asimilar line of business as theSwiss subsidiary,the Court assumes that plausible objectivereasons exist for the affiliation between the twocompanies. Hence, in those instances, the existence ofintent to abuse appears to be apriori unlikely. Thesame conclusions apply to Dutch service companiescooperating with Swiss subsidiaries. However, thesituation is different if the Dutch parent company,which is held by foreign shareholders, is apure domiciliarycompany. The participation held by aDutchholding company in aSwiss subsidiary may be justifiedby objective reasons such as operational reasons—for example, the regional and industry-wide centralisationof acertain enterprise under one management— or may be motivated by economic policymeasures of third countries. However, general corporatepolicy reasons or tax-driven motives of acorporategroup are not sufficiently strong to rebut thepresumption that an abusive benefit under the treatyis intended.In any case, the affiliation between aSwiss companyand aDutch company is deemed to have been establishedor to be maintained primarily in order tosecure afull refund of Swiss withholding tax if theDutch company has no business operations in theNetherlands and the management, conduct of theday-to-day business and corporate governance takeplace outside the Netherlands. This type of holdingcompany —tailored as apure domiciliary companywith foreign shareholders — merely has a formalstatutory seat in the Netherlands. Hence, in accordancewith the anti-abuse clause of the treaty, afullrefund of Swiss withholding tax must be denied to apure domiciliary company.The Court concluded that the Dutch company was aholding company tailored as apure domiciliary company.This conclusion was based on the fact that theDutch company had no substance in the Netherlands,i.e., no offices of its own and no personnel on its payroll.Finally, the Court held that the Dutch companyplayed the role of a‘‘conduit’’ within the corporategroup.80 12/12 Copyright 2012 by The Bureau of National Affairs, Inc. TM FORUM ISSN 0143-7941

3. Judgment of the Swiss Federal Supreme Courtof November 28, 2005In its judgment of November 28, 2005, 3 the FederalSupreme Court held for the first time that in internationallaw areservation of abuse of rights is inherentin all tax treaties.The facts of the case were as follows. A. HoldingApS, which had its domicile in Denmark, was incorporatedat the beginning of 1999 with acapital stockof DKK 125,000. According to its articles of association,the company’s purpose was to acquire participationsin other companies as well as to makeinvestments of various kinds in Denmark and abroad.All of the share capital of the Danish company washeld by C. Ltd., acompany domiciled in Guernsey(Channel Islands). C. Ltd. was awholly owned subsidiaryof D. Ltd., which was domiciled in Bermuda. Thesole shareholder and director of D. Ltd. was E., aresidentof Bermuda. The Danish company was the soleshareholder of F. AG, acompany domiciled in theSwiss canton of Schaffhausen, whose shares had beenacquired in December 1999 for atotal amount of CHF1. The Swiss subsidiary manufactured consumergoods.The Danish company resolved at the general meetingof its Swiss subsidiary to distribute adividend ofCHF 5,500,000. Out of this amount, withholding taxof CHF 1,925,000 was paid by the Swiss subsidiary tothe FTA. The net dividend of CHF 3,575,000 was paidto the Danish holding company. Subsequently, theDanish company resolved to distribute adividend toC. Ltd. in the amount of DKK 26,882,350.The Danish company subsequently filed arequestwith the competent Danish tax authorities for arefund of the Swiss withholding tax of CHF 1,925,000.The Danish tax authorities forwarded the request tothe FTA. The FTA rejected the refund request on thegrounds that the Danish company was not performingany economic activities in Denmark, but was establishedand interposed for the sole purpose of takingadvantage of the Switzerland–Denmark tax treaty ofNovember 23, 1973.In response to the question of when to assume theabuse of atreaty, the Federal Supreme Court consultedthe Commentary on the OECD Model Conventionfor interpretation, and in particular its remarkson ‘‘look-through provisions,’’ 4 which prevent acompanyresident in one Contracting State from claimingthe tax relief on income and gains provided for in theapplicable treaty, if:s the persons that have adirect interest or an indirectinterest (through one or more companies, irrespectiveof where such companies are domiciled) in thecompany are not resident in either of the ContractingStates; ors the persons that are in control of the company,either directly or indirectly (through one or morecompanies, irrespective of where such companiesare domiciled), are not resident in either of the ContractingStates.The Court considered that E., the sole shareholderand director of the Bermuda company, was aresidentof Bermuda. E. not only controlled the Bermuda companybut also, as aresult of the structure chosen byhim, the Danish company. Thus, the person whowould have benefitted the most from the withholdingtax relief was aresident of neither of the two ContractingStates, i.e., Switzerland and Denmark. The Courtconcluded that the beneficial owner was E., i.e., aresidentof Bermuda.The Court reasoned that if atreaty did not containan explicit anti-abuse clause, abuse of the treaty basedon the ‘‘look-through provision’’ referred to abovecould only be assumed if the company in question didnot conduct any economic, active business. The assumptionof abuse of the treaty would therefore not besustainable if the company was able to prove that itsmain purpose was based on substantial economicgrounds and was not merely directed at obtaining theadvantages of the treaty concerned (the ‘‘bona fideclause’’). The same would apply if the company was effectivelycommercially active in the country of its residenceand the tax relief claimed in the otherContracting State derived from income obtained inconnection with such activity (the ‘‘activity clause’’).The Court concluded that the Danish company didnot fulfill any of the conditions set out above. TheDanish company had neither offices of its own nor anypersonnel in Denmark. Thus, neither assets nor leaseexpenses and personnel costs had been accounted for.The Danish company’sdirector,E., who was obviouslyin control of the whole group of companies, was aresident of Bermuda and, according to his own statement,performed all the duties of amanaging directorwithout receiving any reimbursement.In the Court’s view the Danish company was not effectivelyactive in Denmark. Nor did its administrationand its actual management take place inDenmark. It was merely the registered office of theDanish company that was in Denmark. The Court alsotook into account the fact that the Danish companyhad forwarded the dividend it had received from itsSwiss subsidiary to its parent company. Based on theabove, the Court held that the Danish company wasmerely aletterbox company that obviously had nosubstantial economic purposes for its existence inDenmark other than tax purposes. The Court thereforedenied the entitlement of the Danish company toarefund of Swiss withholding tax.Both the Fiscal Affairs Committee of the OECD andthe academic literature stress that the non-observanceof atreaty provision because of an unwritten reservationof abuse of rights may only be permitted subjectto strict conditions. The above judgment of the Courthas been criticised by Swiss academic commentators,who are of the view that the Court has violated thisprinciple by applying the ‘‘look-through provision’’with no basis in the applicable treaty.B. Practice of the Federal TaxAdministrationBased on the above leading cases regarding beneficialownership in atreaty context, the FTAhas adopted thefollowing practice. As ageneral rule, the FTA regardsaforeign holding company as the beneficial owner ofdividends distributed by aSwiss resident corporationfor purposes of entitlement to arefund of Swiss withholdingtax if the following requirements are met:s the foreign holding company must have substanceat its place of residence, such as office premises ofits own, personnel, aphone line, afax line, etc., de-12/12 TaxManagement International Forum BNA ISSN 0143-7941 81

pending on what it needs to be able to carry on itsbusiness. Such substance (and, specifically, the correspondingexpenses) must be reflected in the company’sP&L statement. Additionally, the foreignholding company must have local directors and holdlocal board meetings;s the foreign holding company must be adequatelycapitalised, i.e., it must have sufficient equity (to determinewhether aforeign holding company is adequatelycapitalised, the FTA looks to the Swiss thincapitalisation rules);s there must be business reasons for the affiliation betweenthe Swiss resident corporation and the foreignholding company (business reasons mustprevail over tax reasons).There are no official guidelines from the FTA coveringthe issue of beneficial ownership.II. Application of Swiss rulesA. FHoldCo as the beneficial owner of the dividends paidby HCoFHoldCo, acompany resident in Country X, serves asaholding company for agroup of operating companieswithin an international group. FHoldCo in turn isheld by Parent, aCountry Ycorporation that is the ultimateparent company of the group. FHoldCo alsoserves as holding company for HCo, aSwiss operatingcompany. Switzerland and Country Y, the country inwhich Parent is resident, have not concluded anincome tax treaty that provides relief from Swiss withholdingtax on dividends and interest paid to residentsof Country Y.FHoldCo generally redistributes the dividends receivedfrom HCo to Parent (less an amount to cover itsmodest administrative costs) within 90 days of receivingthem. Under the income tax treaty concluded betweenSwitzerland and Country X, Switzerlandimposes asubstantially reduced withholding tax ondividends paid by aSwiss corporation to corporateresidents of Country Xthat own asubstantial interestin the dividend-paying corporation, but only if suchresidents are the beneficial owners of the dividends inquestion.If the following requirements —developed by theFTA based on the case law outlined in I.A.1.-3., above—are met, the FTAwould regard FHoldCo as the beneficialowner of the dividends distributed by HCo forpurposes of entitlement to arefund of Swiss withholdingtax:s FHoldCo has substance at its place of residence,such as office space, personnel, aphone line, afaxline, etc., depending on what it needs to carry on itsbusiness. The expenses incurred in order to maintainsuch substance are shown in FHoldCo’s P&Lstatement. Additionally,FHoldCo has local directorsand holds its board meetings at its place of incorporation,i.e., in country X;s FHoldCo is adequately capitalised, i.e., it has sufficientequity (to determine whether FHoldCo is adequatelycapitalised, the FTA will apply the Swissthin capitalisation rules);s there are valid business reasons for the affiliationbetween HCo and FHoldCo that prevail over taxconsiderations.Provided the above conditions are fulfilled, the factthat FHoldCo generally redistributes the dividends receivedfrom HCo to Parent (less an amount to cover itsmodest administrative costs) within 90 days of receivingthem does not per se lead to the conclusion thatParent rather than FHoldCo is the beneficial owner ofthe dividends.B. FFinCo as the beneficial owner of the interest paid byHCoUnder Swiss domestic law no withholding tax is payableon the interest paid by HCo to FFinCo. HCo is entitledto pay the entire amount of the interest toFFinCo without having to deduct any withholding tax.Hence, from aSwiss tax perspective, it is irrelevantwhether or not FFinCo qualifies as the beneficialowner of the interest paid by HCo under the applicabletax treaty for purposes of claiming arefund ofwithholding tax.C. FIPCo as the beneficial owner of the royalties paid byHCoUnder Swiss domestic law, noSwiss withholding taxis imposed on the royalties paid by HCo to FIPCo.HCo is entitled to pay the royalties to FIPCo withouthaving to withhold any withholding tax. Hence, underthis scenario it is irrelevant whether or not FIPCoqualifies as the beneficial owner of the royalties paidby HCo under the applicable tax treaty for purposes ofclaiming arefund of withholding tax.NOTES1 1A-6537/2010.2 2BGE 110 Ib 287.3 3BGE 2A.239/2005.4 Commentary on OECD Model Convention, Art. 1atparas. 13 et seq.82 12/12 Copyright 2012 by The Bureau of National Affairs, Inc. TM FORUM ISSN 0143-7941

Host CountryUNITED KINGDOMJames RossMcDermott Will &Emery UK LLP, LondonIntroductionThe concept of ‘‘beneficial ownership’’ islongestablishedin English law,deriving from trustlaw. The term is also used in a number ofplaces in the Corporation TaxActs, but generally onlyin connection with the ownership of shares as part ofthe test for determining whether acompany formspart of agroup or is under the control of anotherperson.The concept of the beneficial ownership of asourceof income has been introduced into the United Kingdom’swithholding tax legislation relatively recently,but has been afeature of the OECD Model Conventionfor agreat deal longer,and as aconsequence is used inthe majority of the United Kingdom’s tax treaties. TheIndofood case 1 and HM Revenue &Customs (HMRC)guidance developed in response to it have emphasisedthat ‘‘beneficial ownership’’ inthis context bears an‘‘international fiscal meaning’’ which is broader inscope than the concept found in both trust and preexistingdomestic tax law: although how muchbroader remains a subject of animated debateamongst practitioners.The term is also encountered in the EU Interest andRoyalties Directive, which provides alegislative definitionof the term. This is generally thought to be narrowerin scope than the tax treaty concept.I. Beneficial Ownership in U.K. lawA. Trust law and the taxation of trustsThe concept of beneficial entitlement, interest or ownershipis deep-rooted in English law, and is generallyunderstood as referring to economic rights in an assetunder the terms of atrust, which are governed by andenforceable under equitable principles. These maytake avariety of forms, and can be implied as amatterof law. Inparticular, ithas been established 2 for atleast 350 years that an equitable interest in an asset(or, inother words, beneficial ownership) will passfrom seller to buyer on the conclusion of acontractfor sale of that asset, even where performance (andthe passing of legal title to the asset) is deferred untilalater point in time.Given the variety of forms that trusts can take, theU.K. tax code does not attempt to attribute trustincome or assets to the ultimate beneficiary in allcases. It contains detailed provisions for the taxationof income and gains, which are beyond the scope ofthis article, that impose acharge on the trustees and(in the case of certain offshore trusts) the settlor of thetrust. These rules need to be considered in particularwhere the interests of the beneficiaries are contingentor subject to the exercise of discretion on the part ofthe trustee. Where, however, a beneficiary is absolutelyentitled to trust income, it will generally formpart of his taxable income for the year in which itarises, whether or not it is distributed to him. 3 Similarly,the capital gains tax code contains provisionswhich effectively disregard nominee and bare trust arrangementsand provide that assets held under sucharrangements are treated as being held by the beneficiary.4As such, the term ‘‘beneficial ownership’’isnot usedin the Taxes Acts as a mechanism for allocatingincome to the appropriate taxpayer (although theterms ‘‘beneficiary’’ and ‘‘beneficial entitlement’’ areencountered in the provisions governing the taxationof trusts and settlements).B. ‘‘Beneficial Ownership’’ in the Corporation TaxActsThe ownership of shares in acompany is atest whichgoverns the application of anumber of provisions ofthe corporation tax. These include:s group relief, whereby losses of one group companycan be set against current year profits of anothergroup company.For these purposes, two companiesare members of the same group if one companyowns, directly or indirectly,75percent of the sharesin the other, orathird company owns 75 percent ofthe shares in both; 5s provisions providing for carried-forward losses ofone company to be transferred to another companywhich takes over its trading activities, provided thesame person or persons have a75percent interestin both companies; 6s the anti-loss buying rules, which disallow carriedforwardlosses following asubstantial change in thenature or conduct of acompany’s trade or businesswithin three years of achange in ownership of thecompany. 7 Achange in ownership involves one ormore persons acquiring half or more of acompany’sordinary share capital.12/12 TaxManagement International Forum BNA ISSN 0143-7941 8312/12 TaxManagement International Forum BNA ISSN 0143-7941 83

In each of these cases, references to ‘‘ownership’’arespecifically described as meaning ‘‘beneficial ownership,’’8 but the concept is not further defined, andHMRC acknowledges that it is adifficult concept todefine precisely. 9 It is clear that the concept derives inlarge part from the equitable trust law principles describedabove, although the courts have explicitly heldthat beneficial ownership and equitable ownershipare not necessarily the same thing. 10 In the specificcase where ashareholder is in bankruptcy or has beenplaced into liquidation, it is clear that he no longerholds beneficial ownership. 11 Where the shares arepotentially subject to disposal, then the position is notas easy to discern.In Wood Preservation Ltd vPrior (HM Inspector ofTaxes), 12 the courts considered the application of apredecessor provision to Part 22 Chapter 1ofCTA2010, which permitted the transfer of carried-forwardlosses together with abusiness to another companyunder common ownership. The appellant’s parentcompany (S) had entered into acontract to dispose ofthe shares of the appellant company. Prior to completionof that contract, it then transferred to the appellanta loss-making agency business that it hadpreviously carried on. The Court of Appeal found thatthe share sale agreement was unconditional by thetime of the transfer of the business, as it could be completedat the option of the purchaser. Consequently,the appellant had ceased to be under the beneficialownership of Satthe point that the deal had becomeunconditional (although the court left open the questionof whether the purchaser had acquired the beneficialownership when Shad relinquished it).By contrast, in JSainsbury PLC vO’Connor, 13 a75percent joint venture subsidiary of the appellant companydid remain under the 75 percent beneficial ownershipof the appellant, despite the fact that 5percentof the shares of the subsidiary were subject to put andcall options which, if exercised, would result in theirbeing transferred to the 25 percent shareholder. TheCourt of Appeal held that the appellant’sinterest in theshares subject to the option was more than ‘‘a merelegal shell’’ and therefore that it had not surrenderedbeneficial ownership.C. ‘‘Beneficial Ownership’’ for treaty purposes: IndofoodThe concept of ‘‘beneficial ownership’’ was first introducedinto the OECD Model Convention in 1977, buthad featured in several U.K. tax treaties prior to thatdate. 14 No attempt was made by the U.K. Governmentor tax authorities to provide guidance on its meaninguntil the advent of the Indofood decision describedbelow, and as such it remained amoot point in theUnited Kingdom, as elsewhere, as to whether the termwas to take its domestic law meaning (in line with therule of interpretation laid down in Article 3(2) of theOECD Model) or whether it had adistinctive internationalmeaning (as suggested in paragraph 12 of theCommentary on Article 10 of the OECD Model, whichhas progressively evolved in the intervening period).For practical purposes, the Indofood decision of theCourt of Appeal appears to have established that beneficialownership bears an ‘‘international fiscal meaning’’that is separate from the domestic law definition.It is striking that the Court does not appear to haveconsidered any of the Wood Preservation line of casesin reaching its conclusions on this point. The caseitself was not a tax case, but was concerned withwhether aloan facility agreement had been properlyterminated, which touched upon how the Indonesiantax authority would apply the beneficial ownershiptest found in the Indonesia-Netherlands tax treaty.Strictly,therefore, the Court’sfindings on the meaningof beneficial ownership are to its meaning under Indonesianlaw, which are questions of fact and not bindingas far as U.K. law is concerned. HMRC, however,takes the view that, because the view taken was consistentwith the OECD interpretation, it forms part ofU.K. law and is binding on HMRC. Subject to the caveatsexpressed above, this article proceeds on that assumption.The facts of Indofood are worth considering in somedetail. Indofood was agroup of companies headed byan Indonesian incorporated and resident company,which sought to raise capital by way of loan notes onthe international market. Rather than have the Indonesianparent company issue the notes directly,whichwould have resulted in a20percent withholding taxon the interest payments to the noteholders, asubsidiarywas incorporated in Mauritius, which issued theloan notes in the market and lent on the capital soraised to the Indonesian group parent. Under theterms of the Mauritius-Indonesia tax treaty,the rate ofwithholding tax was reduced to 10 percent on interestpayments made by the Indonesian company to theMauritian company.In 2004, the Indonesian Government gave notice oftermination of its tax treaty with Mauritius, whichwould increase the rate of withholding to 20 percent.Under the terms of the loan notes, this permitted theissuer to redeem the notes —something it was keen todo following adverse movements in both interest andexchange rates —unless the increased rate of withholdingcould be avoided by the taking of reasonablemeasures available to the issuer. The question for theCourt was whether the interposition of aDutch incorporatedand resident company (referred to as ‘‘Newco’’in the judgment) into the structure for the purpose ofenabling interest payments to be made by Indonesiancompany to benefit from the Indonesia-Netherlandstax treaty would constitute areasonable measure.The Court of Appeal concluded that Newco wouldnot have been the beneficial owner of the interest andwould therefore not have been able to claim the benefitof the Indonesia-Netherlands tax treaty. The precisedetails of the interposition scheme were notclearly defined before the Court, although it seemsclear that the security arrangements that were integralto the loan note issue meant that, in practice, interestpayments by the Indonesian company wouldhave bypassed Newco and would have been appliedultimately to the satisfaction of the noteholders’ entitlementto receive interest. 15 Given this, the Courtconcluded that it was hard to see how Newco could besaid to be the beneficial owner of the interest in substantiveterms given that, in both commercial andpractical terms, it would be obliged to pay on any interestit received from the Indonesian company to theprincipal paying agent in order to satisfy interest paymentsto the noteholders:In practical terms it is impossible to conceive of anycircumstances in which either the issuer or Newcocould derive any ‘‘direct benefit’’from the interest payableby the parent guarantor except by funding its li-84 12/12 Copyright 2012 by The Bureau of National Affairs, Inc. 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ights in respect of which the income is payable is totake advantage of the relevant article of the treaty.TheUnited Kingdom–Netherlands tax treaty goes furtherand applies the purpose test not only to the purposesbehind the creation or assignment of the asset givingrise to the income stream, but also to the establishment,acquisition or maintenance of the companythat is the beneficial owner of the income, and theconduct of its operations.The two principal exceptions are the UnitedKingdom–Switzerland and –United States tax treaties,which contain provisions denying relief where thereare ‘‘conduit arrangements’’(in addition to, in the caseof the treaty with the United States, alimitation onbenefits provision in line with that in the US ModelConvention). Aconduit arrangement is defined as anarrangement structured in such away that the recipientof the income pays on all or substantially all of itdirectly or indirectly to aperson that would not be entitledto treaty relief on as generous terms had it receivedthe income directly. This provision of theUnited Kingdom–United States treaty is engagedwhere the main purpose or one of the main purposesof the arrangement is securing increased benefitsunder the treaty; in the United Kingdom–Switzerlandtreaty, itonly applies where the main purpose of thestructuring is to secure the benefits of the treaty.Although the inclusion of specific anti-treaty shoppingprovisions has been standard practice for someyears, HMRC has not released any guidance on howbroadly such provisions are to be applied, althoughsome of the June 2012 guidance on beneficial ownershipwould appear to be relevant to these provisionsalso. Clearly,such provisions were intended to addressIndofood-type situations but could be read as applyingmuch more broadly.One of the main considerations in setting up atreasuryor IP holding company will be to ensure thatwithholding tax on intra-group interest and royaltypayments is minimised, and as aresult, such an entityis normally located in a jurisdiction with a broadtreaty network. Arguably, loans made or licencesgranted by such an entity could be caught by purposebasedanti-treaty shopping provisions even wherethere is no question that the entity is the beneficialowner of the interest or royalties and is not in themiddle of aconduit arrangement. In practice, the substanceof such an entity will normally be arelevantconsideration, as it is for determining beneficial ownership:Where there is doubt over beneficial ownership, it isuseful to consider the substance of the claimant. Doesit have employees, offices or domestic activities withinthe country of residence? What expertise do its employeeshave? Are its responsibilities in practice dischargedby other group companies or outsourced tothird parties? Even if the claimant company has substance,complex operations, etc, is the income whichis subject to the claim part of those activities or is itstill recognisable as part of aconduit function? However,acompany with few or no employees in its territoryof residence is not precluded from beingrecognised as beneficial owner. Special purpose companiesand holding companies established for commercialpurposes may be recognised as such despitelimited function. 21F. ‘‘Beneficial Ownership’’ in U.K. domestic lawwithholding tax provisionsPrior to 2001, companies were required to withholdtax from the majority of interest or royalties payments(other than interest payments made to banks),whether or not the recipient was resident in theUnited Kingdom. From April 1, 2001, companies werepermitted to make gross payments where they weresatisfied that the recipient of the payment was aU.K.resident company or anonresident within the chargeto U.K. corporation tax in respect of the income concerned.The legislation that implemented this provision22 states that gross payments may be made on thebasis of areasonable belief that the person ‘‘beneficiallyentitled to the income in respect of which thepayment is made’’ falls in to one of these categories.From October 1, 2002, this principle was extendedfurther to permit acompany to pay royalties (but notinterest) without deduction of tax or subject to deductionof tax at alower rate where the paying companyreasonably believes that the payee is entitled to treatyrelief from withholding tax. 23 Once again, the legislationrefers to the recipient being ‘‘beneficially entitled’’to the income. The term is not defined further, but itseems reasonable, given the context in which it appears,that the concept of beneficial entitlement is tobe interpreted consistently with the internationalfiscal definition. Nothing would appear to turn on theuse of the term ‘‘beneficial entitlement’’ rather than‘‘beneficial ownership’’ given that the Budget Noteissued by the Inland Revenue to explain the 2002changes uses the term ‘‘beneficial owner of the royaltyincome.’’ 24G. EU Interest and Royalties DirectiveEuropean Council Directive 2003/49/EC of June 3,2003 requires EU Member States to exempt fromwithholding tax interest and royalty payments madebetween associated EU companies. Companies are associatedfor this purpose if one directly owns 25 percentof the share capital (or, if the Member Stateconcerned so provides, 25 percent of the voting rights)in the other, orathird EU resident company directlyholds 25 percent of the share capital or voting rights inboth. The European Commission has proposed reducingthe ownership threshold to 10 percent and extendingthe exemption to indirect ownership situations.Like the OECD Model Convention, the EU Directiveimposes a beneficial ownership requirement, butunlike the OECD Model, provides adefinition of beneficialownership:Acompany of aMember State shall be treated as thebeneficial owner of interest or royalties only if it receivesthose payments for its own benefit and not asan intermediary, such as an agent, trustee or authorisedsignatory, for some other person. 25The use of the expression ‘‘for its own benefit andnot as an intermediary’’ onits own would appear tosuggest that the Indofood meaning of ‘‘beneficial ownership’’also applies to the Directive. However, thethree examples given of intermediaries (agents, trusteesand authorised signatories) are more consistentwith the trust law concept. 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the term has arather narrower meaning for purposesof the Directive than it does in the OECD Model Convention.II. Application of U.K. rulesA. Dividends paid by HCo to FHoldCo1. U.K. withholding tax on dividendsAlong-standing feature of the United Kingdom’s taxsystem is that there is no general withholding tax ondividend payments made by U.K. resident companies.Between 1973 and 1999, U.K. resident companiespaying dividends were obliged to make quarterly paymentsof ‘‘advance corporation tax’’ (ACT) equivalentto apercentage of the dividends declared in the precedingquarter,which gave rise to acredit against boththe company’scorporation tax liability for the relevantaccounting period and the recipient’s tax liability inrespect of the dividends. ACT, however, was not withheldfrom the declared dividend and was found not toconstitute awithholding tax for purposes of the EUParent-Subsidiary Directive (which prohibits the levyingof withholding taxes on dividends paid betweencertain associated EU companies). 26The question of whether the recipient of adividendis abeneficial owner of it has therefore never been materialto its tax treatment in the United Kingdom and,unsurprisingly, has never received detailed considerationby the courts or HMRC (although the guidanceissued following Indofood is expressed to apply todividend payments as well as interest and royalty payments).The question does now potentially arise, however,following the introduction of the Real Estate InvestmentTrust (REIT) regime in Finance Act 2006.Broadly speaking, aREIT is not taxed on income derivedfrom real property, but is required to distributeat least 90 percent of such income to its shareholdersand to withhold income tax at the basic rate of 20 percent.27 While such distributed income is treated asproperty income for U.K. tax purposes, it remains inform adividend and as such, is covered by the dividendarticle of tax treaties.Alarge number of the United Kingdom’stax treatiesprovide for awithholding tax rate of 0percent or 5percent on dividends where the recipient of the dividendholds a10percent or greater shareholding in thecapital of the U.K. payor. Asthe application of such aprovision would result in aREIT’s property incomegoing wholly or largely untaxed at the level of both theREIT and the shareholder, the REIT legislation providesthat an additional tax charge will be applied to aREIT that makes adistribution to any shareholderwith a10percent or greater shareholding. Anumberof treaties concluded since the introduction of theREIT regime contain special provisions allowing theUnited Kingdom to impose withholding tax of up to15 percent on REIT distributions, which may in timepermit the repeal of the additional tax charge and thuspermit non-U.K. companies to acquire holdings ofgreater than 10 percent in REITs.2. Beneficial Ownership of dividendsFor the moment, however,the beneficial ownership ofadividend for U.K. tax law purposes is aquestion ofmore academic than practical interest. Any attempt toconsider how aU.K. court might approach the questionis necessarily speculative.However, itisimportant to note that dividends arequalitatively different from interest and royalty payments.Dividends are generally not mandated by contractualobligation, and in most cases will only belawful if an overriding test laid down in the relevantcompany law is satisfied, which will normally relate tothe solvency of the company or the availability of sufficientdistributable reserves. In the model question,therefore, FHoldCo would only be able to distributeamounts received from HCo on to Parent if permittedto do so under the company law of Country X. IfFHoldCo were insolvent, such funds might insteadneed to be used to satisfy the company’s creditors.This thinking seems to have underpinned the judgmentof the TaxCourt of Canada in Prévost Car Inc, vHM the Queen, 28 which held that the corporate veilcould not be pierced (at least in terms of beneficialownership) ‘‘unless the corporation is aconduit foranother person and has absolutely no discretion as tothe use or application of funds put to it as conduit, orhas agreed to act on someone else’sbehalf pursuant tothat person’s instructions without any right to doother than what that person instructs it.’’ While notbinding on the U.K. courts, decisions of the courts ofother Commonwealth and common law jurisdictionsare frequently cited where no U.K. precedent is available,and it is submitted that this decision would behighly persuasive to the U.K. courts on this questionshould they ever have to consider it.Consequently,unless Country X’scompany law containsprovisions such as protected cell arrangementswhich effectively ensure that the HCo dividend is protectedfrom FHoldCo’screditors and is secured for thebenefit of Parent, and/or arrangements that effectivelygive rise to atrust or security over the HCo dividendfor the benefit of Parent, FHoldCo is likely to be regardedas the beneficial owner of the dividend paid toit by HCo.B. Interest paid by HCo to FFinCoCompanies and certain other persons which makepayments of yearly interest arising in the United Kingdomare obliged to deduct asum representing incometax at the basic rate (currently 20 percent) from thepayments. 29 As indicated above, there is no longer anobligation to withhold where the paying person is satisfiedthat the person beneficially entitled to receivethe interest is aU.K.-resident company or is receivingit through a U.K. permanent establishment (PE).Other exemptions apply, inter alia, to interest paymentson advances from building societies, 30 to interestpayments on advances from banks 31 authorised toaccept deposits, 32 and to interest payments on quotedEurobonds. 33There is no obligation to withhold on payments ofan interest-like nature that do not constitute interest(such as discounts or premiums). 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In the circumstances contemplated in the fact pattern,HMRC would apply the guidance described inI.D., above. The first question to consider is whetherinterest payments made directly by HCo to the bankwould attract withholding tax. If they do not (and asindicated above, payments of interest to regulatedbanks are generally exempt) then HMRC will not seekto apply the beneficial ownership test (even if, as atechnical matter,FFinCo is not the beneficial owner ofthe interest), because to do so will not affect the taxpayable.Assuming the issue does need to be considered,then on the basis of the facts provided, it is not entirelyclear whether FFinCo would be regarded byHMRC as having the beneficial ownership of the interestpaid by HCo. If, for example, the interest is paidinto an account which is subject to acharge securingFFinCo’s obligations to the relevant bank, then thiswould suggest that FFinCo does not directly benefitfrom the income itself, and therefore cannot be regardedas the beneficial owner of it. The (reasonablysubstantial) mark-up received by FFinCo does notappear to affect the beneficial ownership analysis (atleast as far as HMRC is concerned).By contrast, if the interest receipts from HCo arenot directly tied to FFinCo’s liabilities to the bank andform part of its working capital, then it seems reasonablyclear that FFinCo will be the beneficial owner ofthe interest. Assuming FFinCo fulfils asimilar functionfor anumber of group companies and the receiptsfrom these companies go into asingle, fungibleaccount out of which FFinCo settles its interest obligationsto the banks as well as its operating expenses,then it would seem clear that FFinCo is the beneficialowner of the interest. The fact that FFinCo has substanceand is engaged in negotiating the group’s loanfacilities will strengthen the argument that it is thebeneficial owner of the interest: arelevant issue, accordingthe HMRC guidance, is how far the claimantof treaty relief (i.e., here, FFinCo) is ‘‘actively involvedin the sourcing and application of the funding.’’ 34C. Royalties paid by HCo to FIPCoThe United Kingdom imposes the obligation to deductincome tax at the basic rate (currently 20 percent) onpatent royalties 35 and royalties in respect of acopyright,adesign right or apublic lending right in respectof abook. 36 Although other forms of royalty arenot specifically addressed in the legislation, they willgenerally constitute ‘‘annual payments,’’ which arealso payable subject to deduction. 37 As alluded toabove, acompany is permitted to pay aroyalty for theuse of acopyright, patent, trade mark, design, processor information without deduction of tax (or subject todeduction of tax at alower tax treaty rate) where thecompany reasonably believes that the payee is entitledto claim the benefit of atreaty, 38 or where the EU Interestand Royalties Directive will apply. 39Once again, the guidance issued by HMRC in responseto Indofood will need to be considered (whilenoting, once again, its shortcomings as apiece of technicalanalysis). It is clear in this instance that the beneficialownership of the royalties needs to bedetermined, as royalty payments directly from HCo toParent would attract withholding tax. If there is aspecificobligation on the part of FIPCo to pass on toParent royalty payments received from HCo, then thiswould call into question FIPCo’s beneficial ownershipof the royalties. If, however, FIPCo serves a widerfunction and the royalties are not channelled directlyto Parent, then it should remain eligible to claim taxtreaty benefits. The fact that FIPCo performs substantivefunctions in maintaining and protecting the intellectualproperty will reinforce the argument that it isbeneficially entitled to receive the fruits of that intellectualproperty.NOTES1 Indofood International Finance Ltd vJPMorgan ChaseBank NA, London Branch [2006] EWCA Civ 158.2 See, inter alia, Lysaght vEdwards (1876) 2ChD 499.3 IRC vHamilton-Russell’s Executors (1943) 25 TC200.4 Taxation of Chargeable Gains Act 1992, sec. 60.5 Corporation TaxAct 2010 (CTA 2010), sec. 152.6 CTA 2010, Part 22 Chapter 1.7 CTA 2010, Part 14.8 CTA 2010, secs. 726, 942(8) and 1154(6).9 HMRC Company Taxation Manual para. CTM06030.10 Brooklands Selangor Holdings Limited vIRC [1970] 1WLR 429.11 Ayers vC&K(Construction) Ltd 50 TC 651.12 [1969] 1All ER 364.13 [1991] 1WLR 963.14 See Beneficial Ownership and the OECD Model, JDBOliver, Jerome BLibin, Stef van Weeghel and Charl duToit [2001] BTR 27.15 See MBell, VCarr and SEdge: Indofood –HMRC’sGuidancȩ Tax Journal Issue 858, p9 (Oct. 23, 2006) .16 HMRC International Manual, para. 332010.17 Ibid., para. 333050.18 Clarification of the Meaning of ‘‘Beneficial Owner’’ intheOECD Model Tax Convention; Discussion Draft OECD,April 29, 201119 HMRC International Manual, para. 332050.20 Ibid, para. 332080.21 Ibid, para. 504050.22 Income and Corporation Taxes Act 1988 (ICTA), sec.349C, since re-enacted as Income Tax Act 2007 (ITA),secs. 933-934.23 ICTA, sec. 349E, now ITA, sec. 911.24 Inland Revenue Budget Note 24, April 17, 200225 Council Directive 2003/49/EC, art. 1(4).26 Océ van der Grinten NV vInland Revenue Commissioners[2003] STC 1248.27 ITA, sec. 973.28 2008 TCC 231.29 ITA, sec. 874.30 ITA, sec. 880.31 ITA, sec. 879.32 ITA, sec. 991.33 ITA, sec. 882.34 HMRC International Manual, para. 504050.35 ITA, sec. 903.36 ITA, sec. 906.37 ITA, sec. 901.38 ITA, sec. 911.39 ITA, sec. 914.88 12/12 Copyright 2012 by The Bureau of National Affairs, Inc. TM FORUM ISSN 0143-7941

Host CountryUNITED STATESJohn P. WarnerBuchanan Ingersoll &Rooney, PC, Washington, DCIntroductionThe term ‘‘beneficial owner’’ (or ‘‘beneficialownership’’) rarely appears in the U.S. InternalRevenue Code and —leaving aside the recentlyenacted provisions of FATCA 1 —where used,the term tends to be used in determining reporting oradministrative duties, as opposed to determining theperson on which the incidence of taxation falls. 2 However,the concept of beneficial ownership income permeatessubstantive U.S. income tax law. Mostpertinently for this paper, the term appears quite frequentlyin income tax treaties that the United Stateshas negotiated with other countries, most prominentlyin the articles that grant exemptions of or reductionsin U.S. tax on U.S.-source dividends, interestand royalties paid to treaty country residents. 3I. U.S. rules governing the treatment oftransactions involving intermediariesA. In generalThe last 35 years have been characterised by attemptsto defend against inappropriate ‘‘treaty shopping’’ byrefining the types of treaty country residents that areappropriately eligible for relief under U.S. income taxtreaties. The most dramatic of these attempts hasbeen the development and negotiation of limitationon benefits articles, which attempt to limit the type ofbusiness entities —particularly corporations —residentin treaty countries that can qualify for treatyrelief as ‘‘qualified residents’’ ofsuch countries. 4 Thedevelopment of limitation on benefits articles hasbeen complemented by attempts to determinewhether the treaty country resident that is the directrecipient of apayment that would otherwise qualifyfor relief from tax under aU.S. treaty has asufficientconnection with the payment to be considered the‘‘beneficial owner’’ ofthat payment. While the standardsfor when atreaty country resident is a‘‘qualifiedresident’’ are set forth in often elaborate detail in thetreaties negotiated by the United States, the term‘‘beneficial owner’’ isnot so defined. Its meaning istherefore dependent on the application of U.S.common law and regulatory principles.B. Common law doctrinesBeing agood common law country, the United Stateshas long taken the position that the incidence of taxationis not determined solely by which person or entityreceives agiven item of income, but must also be informedby which person or entity has the true economicbenefits from or control over such item and, insome contexts, who owns the property, performs theservices or bears the risks that give rise to the income.Thus, common law notions such as agent vs. principaland the anticipatory assignment of income and substanceover form (or economic substance) doctrineshave long come into play in determining who is the‘‘true taxpayer’’ with respect to any item of income.1. Agent vs. PrincipalIt is of relevance in the determination of whether thenominal or direct recipient of income is treated as therecipient of such income for United States incomeand withholding tax purposes that aperson or entitythat directly receives an item of income may betreated as amere agent or nominee in certain circumstances.Most of the standards for determiningwhether arecipient of income is the true taxpayer or amere agent with respect to the income concerned havebeen developed in cases in which the taxpayer wasseeking to establish that it was a mere agent thatshould not be taxable on such income. Thus, the rulestend to be clearest with respect to the burden that taxpayersmust satisfy to establish that they are mereagents. In these cases, agency status is available onlywhere certain specific requirements are met. Underthe United States Supreme Court decisions in NationalCarbide Co. v. Commissioner 5 and Bollinger v.Commissioner, 6 six factors must be present for aperson or entity that receives apayment of income tobe assured of being treated as an agent. Such personor entity must:s operate in the name of and for the account of theprincipal;s bind the principal by its action;s transmit the payment to the principal;s hold itself out to third parties as an agent for theprincipal; ands have as its business purpose the carrying on of thenormal duties of an agent.12/12 TaxManagement International Forum BNA ISSN 0143-7941 8912/12 TaxManagement International Forum BNA ISSN 0143-7941 89

Because the standards for tax agency have been developedin cases where the taxpayer was trying tomake sure that the direct payee was not treated as thetrue taxpayer,the principal-agent distinction is of limitedsignificance in situations in which the taxpayer isaffirmatively attempting to treat aparty as the ‘‘truetaxpayer,’’ and not amere agent or nominee, with respectto apayment. Nonetheless, U.S. law incorporatesthe notion that only those who receive items ofincome as principals, as opposed to agents, are thebeneficial owners of such income for tax purposes.2. Anticipatory assignment of income doctrineThe United States has also developed abody of caselaw, under the ‘‘anticipatory assignment of income’’doctrine, whereby the provider of services or theowner of income-producing property such as stock,debt instruments, intellectual property (IP) and leasedtangible property cannot avoid being taxed on theincome generated by such services or property simplyby directing that the income be paid to athird party. 7The doctrine is clearest with respect to compensationfor services, where the provider of services will almostalways be liable for tax on such compensation —evenif the right to the compensation is assigned before entitlementto the compensation has accrued. 8The doctrine also applies with respect to assignmentsof future income from property, atleast wherethe taxpayer retains any other rights with respect tothe property. 9 Although the conceptual clarity of thisdoctrine as applied to assignments of income fromproperty can be somewhat lacking given the generalacceptance in the financial world and under trust lawof the ability to transfer rights to income separatefrom the underlying income-producing property, onefairly clear principle is that the owner of property istaxable on income generated by the property,notwithstandingsuch owner’s transfer of the right to receivesuch income where the owner continues to exercise‘‘sufficient power and control over the assigned propertyor over the receipt of the income, to make it reasonableto treat him as the recipient for income taxpurposes.’’ 10 Thus, those who own stock or debt instrumentsand, at the time such amounts accrue,simply direct the issuer to pay dividends or interest toanother –and not those to whom the payments are directed–are, under U.S. rules, the beneficial owners ofsuch income on whom the incidence of tax falls.Therefore, residents of treaty countries that receiveU.S.-source dividends, interest or royalties by way ofassignments from U.S. or non-treaty country residentsthat retain control over the underlying incomeor over the stock, debt instruments or IP from whichit arises would not be considered beneficial owners ofsuch income. 11 Those fairly straightforward conclusionshave somewhat limited relevance in determiningwhether payments to tax-favoured intermediarieswill be given effect because such intermediaries typicallyown, or have significant rights in, the underlyingproperty with respect to which the relevant items ofincome are being paid. Nonetheless, the notion that ataxpayer’s control over an item of income for tax purposesis relevant in determining whether such taxpayeris taxable on the income may be instructive withrespect to the U.S. view of beneficial ownership inother contexts. 123. Substance over form doctrineThe third, and most relevant, common law doctrineaffecting whether the payment of income to an intermediarywill be given effect for U.S. tax purposes isthe substance over form doctrine, under which atransaction viewed as unnecessary for achieving thenon-tax legal and economic objectives ultimatelysought may be disregarded if it hides the true substanceof the transaction. 13 Where all of the participantsin atransaction or arrangement are related, orcommonly controlled, the IRS and the courts tend toscrutinise the use of tax-favoured intermediaries toensure that the incidence of tax falls on the partiesthat enjoy or bear the ultimate economic and/or legalconsequences from the overall arrangement. Intermediariesthat do not enjoy in any meaningful way thebenefits of income items are not treated as the truetaxpayers. However, the mere fact that the use of arelatedparty intermediary reduces the tax burden thatwould otherwise result is not in and of itself sufficientfor such party to be ignored for tax purposes. 14 Moreover,itisnotalways clear when an intermediary’seconomicor legal benefits with respect to an item ofincome are sufficiently ‘‘meaningful’’tobegiven effectunder U.S. tax principles.a. Authorities applying substance over form doctrine todeny treaty benefitsIn the context of entitlement to treaty benefits, the IRShas long sought —with somewhat mixed success —todeny benefits to payments made by U.S. taxpayers torelated corporations that are residents of treaty countrieswhere the participation of the treaty country residentis viewed as having no substantive purpose oreffect other than qualification for the treaty benefit.The first case in which the IRS took this position wasAiken Industries, Inc. v. Commissioner. 15 In that case,the Bahamian parent of aU.S. corporation lent theU.S. corporation USD 2.25 million, taking back a20-year 4percent sinking fund promissory note. One yearlater, the Bahamian parent assigned the note to awholly-owned second-tier Honduras subsidiary in exchangefor nine USD 250,000 4 percent demandpromissory notes. Although the United States did nothave an income tax treaty with the Bahamas, it had atreaty with Honduras under which U.S.-source interest‘‘received by’’aHonduran corporation was exemptfrom U.S. tax. The IRS sought to impose tax on the interestpaid by the U.S. corporation to the Hondurancorporation on the ground that the latter could be ignoredas asham. Although the court held that the existenceof the Honduran corporation had to berespected, the court held that the interest was not ‘‘receivedby’’ that corporation within the meaning of thetreaty because the corporation was obligated to paythe identical amount to the Bahamian corporation.Noting that the Honduran corporation made no profiton the arrangement, the court concluded that the interpositionof the Honduran corporation had no‘‘valid economic or business purpose’’ other than toobtain the treaty benefits and characterised that cor-90 12/12 Copyright 2012 by The Bureau of National Affairs, Inc. TM FORUM ISSN 0143-7941

poration as ‘‘merely aconduit for the passage of interestpayments to’’ the Bahamian corporation that ‘‘hadno actual beneficial ownership’’ inthose payments. 16Although it would appear that an important factorin the TaxCourt’sdecision in Aiken Industries was thatthe Honduran corporation earned no gross (or net)profit on the back-to-back financing arrangement, theIRS has applied the holding of the case to situations inwhich atreaty country intermediate entity earned aprofit on back-to-back loans. Rev. Rul. 84-152 17 involvedaU.S. subsidiary of aSwiss parent corporationthat borrowed funds for working capital needs at 11percent interest from aNetherlands Antilles subsidiaryof the Swiss parent, which funds had been furnishedto the Antilles affiliate through aloan at 10percent interest from the parent. At the time, the U.S.withholding tax rate on interest paid to Swiss corporationswas 5 percent, whereas the United States–Netherlands tax treaty,asextended to the NetherlandsAntilles, exempted from U.S. tax most U.S.-source interest‘‘derived ...by’’ Netherlands Antilles corporations.Noting that the Antilles affiliate lacked theliquidity to fund the loan to the U.S. subsidiary withoutthe funds advanced by the Swiss parent, the IRSruled that the Antilles corporation lacked sufficientdominion and control over the interest to have ‘‘derived’’such interest within the meaning of the treaty—notwithstanding the interest spread earned by thecorporation. The ruling therefore suggests thatwhether an intermediary is capable in its own right ofearning the income at issue independent of the affiliatethat is the ultimate source of the money or propertymade available to the U.S. taxpayer is afactor indetermining whether the intermediary’s receipt of theincome will be given effect for U.S. tax purposes.At the same time that it issued Rev. Rul. 84-152, theIRS issued Rev. Rul. 84-153, 18 which reached asimilarresult in the case of interest paid by aU.S. subsidiaryto its Netherlands Antilles sister corporation at arate one percentage point higher than the interest ratethat the Antilles corporation was paying on the Eurobondnote offering, the proceeds of which were thesource of the loan to the U.S. subsidiary. Although theIRS conceded that the Antilles corporation was adequatelycapitalised, it held that such corporationlacked sufficient dominion and control over the interestpayments to have ‘‘derived’’them within the meaningof the treaty and that the interposition of the sistercorporation lacked sufficient business and economicpurpose to justify treating it as anything but aconduit.The standard that this ruling seemed to emphasisewas whether there was asufficient non-tax businesspurpose for using the intermediary instead of havingthe U.S. subsidiary borrow the funds in the Eurobondmarket directly.It should be noted that Rev.Ruls. 84-152 and 84-153were declared obsolete as aresult of the issuance ofthe conduit financing regulations under Code section7701(l), discussed below, atleast to the extent that thesituations described in those rulings fall within thescope of such regulations. 19 However, the IRS has notdisavowed the reasoning applied in either ruling. Thecontinuing vitality of the reasoning of Rev. Rul. 84-153, however, isuncertain in light of the decision inNorthern Indiana Public Service Co. v. Commissioner,20 discussed below, inwhich the courts gaveeffect to the participation of aNetherlands Antillessubsidiary that borrowed funds through aEurobondnote offering and re-lent the proceeds of such offeringto an affiliated taxpayer at aone percentage point interestmarkup.Technical Advice Memorandum 9133004 21 reachedasimilar result as to interest paid by aU.S. second-tiersubsidiary to its parent corporation, an internationalfinance and holding company organised in an unspecifiedcountry that had an income tax treaty withthe United States providing that interest ‘‘paid to’’ acorporation resident in that country was exempt fromU.S. tax. The IRS concluded that the interest was noteligible for the benefits of that treaty but should betreated as paid to the finance and holding company’sparent, which was aresident of acountry having atreaty with the United States that allowed an unspecifiedpercentage of U.S. tax to be imposed on interestpayments. The finance and holding company madetwo loans to the U.S. subsidiary, both at floating ratesof interest. Funding for the finance and holding company’sloans to the subsidiary came from the ultimategroup parent in the form of acontribution to capitaland the purchase of convertible debentures issued bythe finance and holding company. Focusing on thefact that the finance and holding company had paidthe ultimate parent dividends equal to more than 99percent of the amount of interest paid by the U.S. subsidiaryto the finance and holding company, the IRSheld that the finance and holding company had insufficientdominion and control over the interest to betreated as more than aconduit with respect to the interest.Although the finance and holding company wasmanaged by at least one experienced internationalbanker,was not thinly capitalised and operated as afinancecompany for the entire group, the IRS concludedthat there was no substantial purpose for thearrangement other than to take advantage of thetreaty exemption. It therefore held that the interestpaid by the U.S. subsidiary was not ‘‘paid to’’ the financeand holding company within the meaning ofthe treaty, but was instead ‘‘paid to’’ the parent, andtherefore was not eligible for the treaty exemption.The IRS achieved a second court success in DelCommercial Properties, Inc. v. Commissioner, 22 whichconcerned asomewhat more involved arrangement.In it, the Canadian parent corporation of amultinationalgroup borrowed funds from athird party Canadianbank, initially at the bank’s prime rate plus 0.5percent, but later increased to the bank’s prime rateplus 1.5 percent. The parent re-lent USD 14 million ofthe borrowing to its Canadian subsidiary, which contributedthe same amount to aCayman Islands subsidiary,which recontributed the same amount to itsNetherlands Antilles subsidiary, which recontributedthe same amount to its Netherlands subsidiary, whichlent USD 14 million to the taxpayer, aU.S. member ofthe group, at the Canadian bank’s prime rate plus 1.5percent. The taxpayer guaranteed the Canadian parent’sobligation to the Canadian bank, which placed amortgage on the taxpayer’s real property. Atthe timethe arrangement was entered into, the United Statesimposed a15percent withholding tax on U.S.-sourceinterest paid to Canadian corporations but, under theUnited States–Netherlands tax treaty, noU.S. tax waspayable on U.S.-source interest paid to Dutch corpo-12/12 TaxManagement International Forum BNA ISSN 0143-7941 91

ations. Without delving into the language in theUnited States–Netherlands tax treaty, the court concludedthe interest paid by the taxpayer was not eligiblefor the interest exemption under that treatybecause, in substance, the taxpayer paid the interestto the Canadian parent. The court focused on threefactors to reach this conclusion:s the interest rate and repayment schedule for theDutch affiliate’s loan to the taxpayer closely correspondedto the interest rate and repayment schedulefor the Canadian bank’s loan to the Canadianparent; 23s the taxpayer guaranteed the bank’s loan to the Canadianparent; ands 18 months after the arrangement was in place, thetaxpayer made loan payments directly to the Canadianparent at the bank’s request. 24In principle, the court appeared to indicate that thepresence of abusiness purpose (other than areductionin U.S. tax) for the Dutch subsidiary’s involvementmight have permitted the taxpayer to obtain thebenefits of the United States–Netherlands tax treatyexemption, but held that the taxpayer had not met itsburden of proof with respect to the business purposesit proffered. 25 As is discussed later, itissomewhat difficultto reconcile some of the reasoning in Del Commercialwith the decision in Northern Indiana PublicService Co. v. Commissioner 26 and, as aresult, the fullscope of the common law treatment of tax-favouredintermediaries under the substance over form doctrineis unclear.b. Authorities granting treaty benefits notwithstandinguse of tax-favoured IntermediariesAlthough the foregoing cases and rulings restrictingthe use of tax-favoured intermediaries to obtain treatyor Code benefits are sizeable in number, the authoritiesare by no means uniform in this respect. Thecourts and the IRS have recognised limits on employingthe substance over form doctrine to treat paymentsto atax-favoured intermediary as instead beingeffectively made to the entity that is the ultimate of theproperty or funds that are the basis for the paymentsat issue.The leading authority in this regard is Northern IndianaPublic Service Co. v. Commissioner, 27 which involvedfacts quite similar to those in Rev. Rul. 84-153,discussed above. In this case, the taxpayer organised asubsidiary in the Netherlands Antilles, interest ‘‘derivedby’’ which would be exempt from U.S. tax underthe United States–Netherlands tax treaty, asextendedto the Netherlands Antilles, solely for the purpose ofraising money in the Eurobond market. The subsidiaryissued USD 70 million of notes at 17.25% interest,the repayment of which was guaranteed by the taxpayer.Onthe same day as the notes were issued, thesubsidiary lent the taxpayer USD 70 million at 18.25%interest. The IRS sought to ignore the participation ofthe subsidiary on the ground that it was amere conduitand to treat the taxpayer’s interest payments asbeing made to the holders of the notes, in which casethey would be subject to a30% withholding tax. Thecourt rejected the IRS’s argument that the Antillessubsidiary’s participation in the arrangement shouldbe ignored for three principal reasons:s in contrast to the Honduran subsidiary in Aiken Industries,the Antilles subsidiary earned aprofit onthe loan to the taxpayer because it charged one percentagepoint more than it paid on the Eurobondnotes;s the Antilles subsidiary retained and independentlyreinvested its gross profit from the arrangementand did not simply distribute it to the taxpayer as adividend; ands in contrast to the situation in Aiken Industries, theultimate source of the funds was aparty unrelatedto the Antilles subsidiary.Thus, the court held that —notwithstanding theclear tax minimisation motivation for its involvement—the fact that the Netherlands Antilles subsidiary engagedin meaningful economic activity by retainingand reinvesting its gross profit was sufficient to giveeffect to its involvement and to conclude that the interestpaid by the taxpayer was ‘‘derived by’’ the subsidiarywithin the meaning of the treaty. 28The courts in Del Commercial (discussed above) attemptedto distinguish Northern Indiana Public ServiceCo. on the grounds that in the former case therewas abusiness purpose for the interposition of theNetherlands Antilles subsidiary. However, the obviousreason why the Antilles subsidiary —and not the taxpayer—was used for the Eurobond note offering wasthat the Netherlands Antilles had no withholding taxon interest paid by Antilles corporations to any foreignpersons, whereas the United States imposed a30% withholding tax on interest paid to those whowere not residents of treaty countries. Moreover, althoughthe Antilles subsidiary in Northern IndianaPublic Service Co. did earn aspread on the back-toloans,it should be noted that the Dutch lender in DelCommercial, which was funded by acapital contribution,had no offsetting interest obligation and apparentlydid not repatriate its interest earnings by way ofdividends before the U.S. taxpayer was directed to payinterest directly to the Canadian parent. Therefore, itis not entirely clear how the courts will treat the nextcase involving the interposition of atax-favoured intermediateentity under the common law substanceover form doctrine.In Field Service Advice 200227006, 29 the IRS indicatedthat the substance over form doctrine did notapply, and therefore gave effect to the involvement ofatax-favoured intermediary in afinancing arrangement.In that case, the parent company of agroup thatincluded the U.S. taxpayer established and capitalisedafinance subsidiary to make loans to the taxpayer forthe purpose of making acquisitions. The finance subsidiarywas organised in an unspecified countrywhose income tax treaty with the United States exemptedU.S. interest paid to residents of that country,whereas the parent was aresident of acountry whosetreaty with the United States permitted the U.S. to taxinterest paid to residents of that country,albeit at areducedrate. The parent contributed to the finance subsidiaryan amount equal to the U.S. taxpayer’sacquisition needs in exchange for stock in the financesubsidiary.The finance subsidiary used those funds topurchase asubordinated debenture from the taxpayer.Notwithstanding the fact that the finance subsidiaryhad no independent source of funding other than theparent company and conducted no activity in the92 12/12 Copyright 2012 by The Bureau of National Affairs, Inc. TM FORUM ISSN 0143-7941

years at issue other than the purchase of the debenturefrom the taxpayer and the collection of intereston such debenture, the IRS held that, in the absenceof evidence that the finance subsidiary either made orwas required to make payments to the parent company,the finance subsidiary had sufficient dominionand control over the interest payments made by thetaxpayer to avoid being treated as aconduit under thecommon law substance over form doctrine.Interestingly, although FSA 200227006 discussedDel Commercial, the IRS did not appear to apply anyof the reasoning of that case in reaching its conclusion.By focusing solely on whether the finance subsidiaryin fact paid or was required to pay as dividendsamounts attributable to interest paid by the U.S. taxpayer,the IRS appeared to accept that, so long as atax-favoured intermediary retained the use and enjoymentof the payment at issue, the facts that the participationof the intermediary was prompted primarily bythe desire to minimise U.S. taxes and that the sourceof its funds was an affiliate did not prevent givingeffect to its involvement, at least under the commonlaw substance over form doctrine. Whether that is thecurrent IRS position remains to be seen.C. Statutory and regulatory doctrines1. Conduit financing rulesInternal Revenue Code section 7701(l), enacted in1993, authorises the Treasury Department to issueregulations ‘‘recharacterising’’ any ‘‘multiple-party financingtransaction as atransaction directly amongany 2ormore of such parties where the [IRS] determinesthat such recharacterisation is appropriate toprevent avoidance of any [income or withholding]tax.’’ The legislation was intended to supplement theIRS’sauthority under ‘‘common law’’principles. Regulationsspecifically dealing with conduit financing arrangementsin the context of cross-bordertransactions were issued under the authority of section7701(l) in 1995.The conduit financing regulations so issued providethat the IRS may disregard, for purposes of determiningthe tax due under Code section 881 (and collectedby withholding under Code sections 1441 and 1442),the participation of one or more intermediate entitiesin a‘‘financing arrangement’’ where such entities areacting as conduit entities. For this purpose, a‘‘financingarrangement’’ isanoverall arrangement in whichthere are two or more financing transactions throughwhich one party (termed the ‘‘financing entity’’) advancesmoney or property to another party (the intermediateentity), which then advances money orproperty to athird party (the ‘‘financed entity’’). Generallyspeaking, the financed entity is aU.S. resident,the intermediate entity is aresident of acountry withan income tax treaty that minimises U.S. tax on thepayments involved 30 and the ‘‘financing entity’’ isanaffiliate of the financed entity and/or the intermediateentity.The parties need not all be related for afinancing arrangementto be present. If the intermediate entity isnot related to either the financed entity or the financingentity, itwill not be treated as aconduit entity tobe disregarded unless it would not have participatedin the arrangement on substantially the same termsexcept for the fact that the financing entity engaged inthe financing transaction with it. 31 No such limitationapplies when the intermediate entity is related toeither the financed or the financing entity.When a‘‘financing arrangement’’ispresent, the IRSmay disregard the participation of the intermediateentity where its participation materially reduces theamount of U.S. federal income tax and is undertakenpursuant to aplan that has as one of its principal purposesthe reduction of such tax. 32 In contrast to thecommon law substance over form doctrine, which canbe read as focusing on whether the tax-favoured intermediaryhad sufficient ‘‘dominion and control’’ overthe payment in question, the conduit financing regulationslook to see whether atax avoidance motive ispresent. Because such atax avoidance purpose needonly be one of the principal purposes —and not theprincipal purpose —for the interposition of the intermediaryin order for the regulations to apply, inmanycases it will be extremely difficult for taxpayers thathave afinancing arrangement in place that results inany significant reduction in the U.S. tax burden toavoid having the intermediate entity’s involvement ignoredfor tax purposes.In most circumstances, whether and the extent towhich the involvement of an intermediate entity reducesthe U.S. tax burden will be obvious. But whenthe financing arrangement involves alicense of U.S.rights (alone or as part of the license of worldwiderights) to IP from the financing entity to the intermediateentity and the sublicense of U.S. rights by the intermediateentity to the financed entity, the conduitfinancing regulations provide that there is no reductionin U.S. tax —even if the financing entity is aresidentof acountry that does not have an income taxtreaty with the United States. 33 The rationale for thisis that the IRS takes the position that even royaltiespaid by anonresident licensee-sublicensor of U.S. IPrights to anonresident licensor are U.S.-sources royaltiestaxable under Code section 881 and subject to a30% withholding tax under Code section 1441 or1442, barring relief under atreaty between the UnitedStates and the country of which the licensor is aresident.34 The IRS takes this position notwithstandingthe fact that the TaxCourt rejected it in the only casein which the issue was ever litigated, SDI NetherlandsB.V. v.Commissioner. 35 In that case, the TaxCourt declinedto require aDutch corporation that licensedworldwide IP rights from its Bahamian parent corporationto withhold the 30% U.S. withholding tax onthe portion of the Dutch corporation’s royalty paymentsthat were attributable to royalties (exemptfrom withholding tax under the United States–Netherlands tax treaty) from the sublicense of theproperty in the United States. The court reasoned that—barring treatment of the Dutch corporation as amere conduit, which was not warranted given thefacts —the worldwide license royalties could not beconsidered U.S.-source income and, even if they couldbe, it would be inequitable to impose withholding taxon them because that would allow the IRS to imposewithholding taxes on both the sublicense royalties andthe license royalties attributable to the sublicense royalties.3612/12 TaxManagement International Forum BNA ISSN 0143-7941 93

Even if the interposition of an intermediate entitysignificantly reduces U.S. taxes in relation to thosethat would apply to payments made directly from thefinanced entity to the financing entity, there are twosituations specified by the regulations in which aprincipaltax avoidance purpose may not be present —orat least may not be presumed to be present —inafinancingarrangement among related parties. The firstis where the financing transaction between the intermediateentity and the financed entity is undertakenin the ordinary course of complementary or integratedbusinesses conducted by those entities. 37When the relevant intermediate entity-financed transactionis aloan, this will apply only if trade receivablesare financed or the parties are actively engaged in abanking, financing, insurance or similar business. Thesecond situation that may overcome apresumption ofaprincipal tax avoidance purpose is where the intermediateentity performs ‘‘significant financing activities.’’Inthe case of afinancing transaction that takesthe form of aloan from the intermediate entity to thefinanced entity, the intermediate entity must, throughits own officers and employees, actively and materiallyparticipate in arranging the financing, activelymanage and conduct its day-to-day activities, and activelymanage the material market risks from such financingactivities on an ongoing basis to qualify forthis potential defense. 38 In the case of a financingtransaction that takes the form of aroyalty transaction,the intermediate entity’s activities must amountto the conduct of an active trade or business as definedfor purposes of determining whether acontrolled foreigncorporation generates active royalties. Thus, theintermediate entity must either produce or add substantialvalue to the licensed property through ongoingresearch or engineering operations or activelymarket the property through asubstantial staffofemployees.39 Managing and protecting rights to IP, nomatter how extensively done, does not appear to besufficient to constitute substantial financing activities.Another factor in determining whether aprincipaltax avoidance purpose is present is the length of timeseparating the financing transactions. 40 That the financingtransactions are close in time is evidence of atax avoidance plan. The regulations contain an examplethat concludes that financing transactions thatoccur one year apart from each other are sufficientlyclose in time to constitute evidence that the intermediateentity’s participation is pursuant to atax avoidanceplan. 41 No indication is given as to how far apartfinancing transactions must be to be evidence that notax avoidance plan is present.Not all transactions in which funds are providedeither to or by an intermediate entity are ‘‘financingtransactions.’’ The regulations define a ‘‘financingtransaction’’ asadebt, certain types of stock in acorporation,leases and licenses, and certain other transactionswhere aperson advances money or propertyto atransferee that is obligated to repay or return asubstantial portion of the money or property. 42While debt, leases and licenses involving an intermediateentity are generally financing transactions,stock in acorporation constitutes afinancing transactiononly if such stock is redeemable automatically orat the option of the holder or at the issuer’soption butin the case of an option only if, based on all the factsand circumstances as of the date the stock is issued, itis probable that the stock will be redeemed. 43However, where afinancing arrangement would bepresent but for the interposition of astock investmentthat would break the chain of financing transactionsthat link the financing entity, all of the intermediateentities and the financed entity, the IRS will treat theintermediate entities as asingle intermediate entity ifany one of the principal purposes for interposing thestock investment is the avoidance of financing arrangementstatus. 44 Thus, where aparent companylends money to asubsidiary, the subsidiary contributesthe loan proceeds to its subsidiary for stock, andthe second subsidiary loans the equity contribution tothe taxpayer, the IRS can in effect ignore the intermediateequity contribution if one of the principal purposesfor it was to avoid application of the conduitfinancing rules. 45 As aresult, arrangements similar tothe one in Del Commercial are covered under theseregulations.In Field Service Advice 200227006 (discussedabove), which involved anon-U.S. parent companythat purchased stock in afinance subsidiary located inajurisdiction whose income tax treaty with the UnitedStates exempted U.S.-source interest payments paidto treaty country residents from U.S. tax, the IRS heldthat the parent company’s purchase of the financingsubsidiary’s stock was not a‘‘financing transaction.’’As aresult, the FSA concluded that the arrangementwhereby the funds were paid to the finance subsidiaryand then loaned by the finance subsidiary to the U.S.taxpayer was not a‘‘financing arrangement’’under theregulations. Because there was no evidence that theparent company had borrowed the funds used in thearrangement (which borrowing would have constitutedthe required second ‘‘financing transaction’’),the arrangement would not have been a‘‘financing arrangement’’had the parent not purchased the financesubsidiary stock.2. Codified economic substance doctrineAlthough the economic substance doctrine, which isoften viewed as an offshoot from or abranch of thesubstance over form doctrine, is ajudge-made doctrine,in 2010 Congress enacted Internal RevenueCode section 7701(o), which provides, ‘‘in the case ofany transaction to which the economic substance doctrineis relevant,’’ that the transaction will be consideredto have economic substance —i.e., will be giveneffect for tax purposes —only if two conditions aremet: (1) the transaction changes the taxpayer’s economicposition (other than its U.S. federal income taxposition) in some material way; and (2) there is asubstantialbusiness purpose other than federal incometax reduction for the transaction. The adoption of section7701(l) was done in part to unify the standard forapplying the doctrine. Prior to 2010, some courts hadtaken the position that the doctrine could not be appliedto deny atax benefit with respect to atransactionunless the taxpayer neither changed its non-tax economicposition in any material way nor had asubstantialnon-tax business purpose for entering thetransaction. 46In enacting section 7701(o), Congress did not attemptto define or redefine the circumstances in which94 12/12 Copyright 2012 by The Bureau of National Affairs, Inc. TM FORUM ISSN 0143-7941

the economic substance doctrine is or could be ‘‘relevant.’’47 As aresult, the scope of this provision is notentirely clear. Based on prior judicial applications ofthe doctrine, however, the provision is not likely to berelevant to the determination of whether apayment toatax-favoured intermediary should be treated as suchfor purposes of giving effect to the desired tax exemptionor reduction under the Internal Revenue Code orpotentially applicable tax treaty. The economic substancedoctrine has historically been invoked primarilyto determine whether or not atransaction shouldbe given effect for tax purposes. The determination ofwho is the beneficial owner of income generally presupposesthat the transaction giving rise to suchincome has sufficient substance to be taken into accountfor tax purposes. 48 Of course, when atransactionlacks the substance to be given effect, therecipient of any payment made pursuant thereto isnot treated as the beneficial owner of that payment fortax purposes, but such apayment would never be subjectto U.S. tax in any event. 49III. Application of common law and regulatoryprinciplesA. Dividends paid by HCo to FHoldCoUnder the common law substance over form doctrine,it is conceivable that the IRS might argue thatFHoldCo is not the ‘‘beneficial owner’’ofthe dividendspaid by HCo because FHoldCo promptly redistributesvirtually all of them to Parent within 90 days of receipt.Thus, the IRS might argue that FHoldCo lackssufficient ‘‘dominion and control’’ over the dividendsfor its receipt of those dividends to be given effectunder the United States–Country Xtax treaty.If, however,FHoldCo could point to any material reinvestmentor temporary use of the dividends during the 90-day period or any retention of amaterial portion ofthe HCo dividends significantly beyond the 90-dayperiod, particularly if such use or retention happenedmore than on an isolated basis and for FHoldCo’sown— as opposed to Parent’s — business purposes,FHoldCo could conceivably be considered the beneficialowner of the HCo dividends generally. HCo mightbe able to argue that, because FHoldCo serves as aholding company for several operating subsidiaries —i.e., because FHoldCo’s ownership of the HCo stockhas legal and economic significance beyond serving asavehicle for the collection and redistribution of dividendspaid by HCo —the IRS should not be able tochallenge FHoldCo’s status as the true owner of thosedividends.The conduit financing rules in Treasury Regs. Section1.881-3 would not apply to the HCo dividendspaid to FHoldCo. Under the facts set forth, it does notappear that Parent has the right or FHoldCo has theobligation to redeem the FHoldCo stock or that thereare any other ‘‘financing transactions,’’ much less theminimum of two required to trigger the conduit financingrules.B. Interest paid by HCo to FFinCoIt is likely that FFinCo would not be denied ‘‘beneficialowner’’status with respect to the interest paid by HCounder the United States–Country Ztax treaty underthe common law substance over form doctrine. Althoughit is possible that the IRS might argue that DelCommercial applied the doctrine to a back-to-backloan transaction similar to the arrangement in thiscase in which the tax-favoured intermediate entityearned amark-up, the precise import of Del Commercialis somewhat in doubt given that, for most of theperiod at issue in the case, there was no such mark-up.Moreover, the intermediate entity in Del Commercial—unlike FFinCo —conducted no real activity with respectto the arrangement and, for most of the timeframe at issue in the case, never even had possessionof the interest payments it purportedly earned. The interestmarkup charged by FFinCo, its active financingactivities and its apparent retention of the interestpayments for use in its business would seem to makethe case more similar to the facts in Northern IndianaPublic Service Co., inwhich the Netherlands Antillesintermediate entity was treated as the true earner ofinterest. Furthermore, although it is not entirely clear,there is some reason to believe that the conduit financingregulations issued in 1995 now pre-empt thecommon law substance over form doctrine in the caseof back-to-back loan arrangements.The arrangement among the banks, FFinCo andHCo is a‘‘financing arrangement’’ within the meaningof those conduit financing regulations because it involvestwo fairly contemporaneous financing transactions—the bank loans to FFinCo and FFinCo’sloan toHCo. FFinCo’s involvement in the arrangement doeslead to areduction in U.S. tax equal to 30% of the interestpayments made by HCo, so that its involvementdoes lead to asignificant reduction in tax. It is not entirelyclear whether FFinCo’s involvement is pursuantto atax avoidance plan within the purview of thoseregulations. HCo might be able to argue that FFinCo’sfinancing activities constitute ‘‘significant financingactivities’’ within the meaning of the regulations so asto qualify for apresumption that no tax avoidanceplan was present. However, itwould appear that, becausethe foreign currency risk on FFinCo’s loan toHCo is fully hedged up front, FFinCo would not beconsidered to be conducting the kind of ongoing riskmanagement that the regulations seem to require tosatisfy the presumption unless FFinCo actively reviewedthe hedge on aregular basis throughout theterm of the loan for purposes of determining whetherto close out its position or otherwise change its exposure.Even if FFinCo did not qualify for the presumption,its reasonably substantial activities and otherfactors might allow it to show that tax avoidance wasnot one of the principal purposes for its involvementin the overall arrangement.C. Royalties paid by HCo to FIPCoFor reasons similar to those applicable to the treatmentof interest paid by HCo to FFinCo, it is unlikelythat FIPCo would not be treated as the ‘‘beneficialowner’’ ofthe royalties paid by HCo for purposes ofthe United States–Country Q tax treaty under thecommon law substance over form doctrine, at least inthe absence of evidence that FIPCo routinely distributedits net proceeds to Parent shortly after receivingthe royalties. FIPCo does earn agross profit on the12/12 TaxManagement International Forum BNA ISSN 0143-7941 95

license-sublicense arrangement and it conducts atleast amodicum of activity with respect to the IP thatit sublicenses to HCo. Thus, the facts are arguablycloser to those in Northern Indiana Public Service Co.and SDI Netherlands than they are to those in DelCommercial. Moreover, itislikely that the conduit financeregulations pre-empt application of thecommon law substance over form doctrine with respectto back-to-back license-sublicense arrangements.Due to the IRS’s position with respect to royaltiespaid to non-U.S. licensors of worldwide IP rights, theconduit financing regulations would not apply to treatHCo’s royalty payments under the sublicense as beingmade to Parent, even though many of the elements forthe application of those rules would be present. Theback-to-back licensing-sublicensing arrangementwould be a ‘‘financing arrangement’’ because it involvestwo contemporaneous financing transactions—the license from Parent to FIPCo and the sublicensefrom FIPCo to HCo. Although FIPCo does performsome administrative and management functions withrespect to the IP sublicensed to HCo, those activitiesdo not appear to add substantial value to the IP andtherefore would not be considered ‘‘significant financingactivities’’ the presence of which would create apresumption that FIPCo’sinvolvement was not pursuantto atax avoidance plan. However, the conduit financingregulations provide that, under the factspresent in the HCo-FIPCo-Parent arrangement, theinvolvement of FIPCo does not reduce U.S. tax. Thatis because the IRS takes the position that FIPCo isliable for the 30% U.S. withholding tax with respect tothe portion of the royalties it pays to Parent that areattributable to U.S. rights sublicensed to HCo. Thefact that HCo may not be liable for U.S. withholdingtaxes on sublicense royalties payable to FIPCo thereforedoes not result in any reduction in U.S. tax.NOTES1 Internal Revenue Code, secs. 1471-1474. Unless otherwiseindicated, all statutory references are to the InternalRevenue Code of 1986, as amended, and all references toregulations refer to the U.S. Treasury Department regulationsissued thereunder.2 Code, secs. 871(h)(2)(B)(ii)(I), 871(h)(5)(A), and 881(c)(2)(B)(ii)(I).3 United States Model Income Tax Convention (2006),Arts. 10(3) (dividends), 11(2) (interest) and 12(3) (royalties).4 See United States Model Income TaxConvention (2006),Art. 22.5 336 U.S. 422 (1949).6 485 U.S. 340, 346-47 (1988).7 Lucas v. Earl, 281 U.S. 111 (1930); Helvering v. Horst,311 U.S. 112 (1940).8 See Helvering v. Eubank, 311 U.S. 122 (1940) (assignmentof right to insurance renewal commissions beforeinsurance policies were renewed was ineffective for taxpurposes).9 Compare Blair v. Commissioner,300 U.S. 5(1937) (trustincome beneficiary was not taxable on income assignedto another person where what she assigned representedall of her interest in the trust) with Harrison v. Schaffner,312 U.S. 579 (1941) (trust income beneficiary was taxableon future year income despite assignment where herright to income under the trust extended beyond the assignmentperiod).10 Commissioner v. Sunnen, 333 U.S. 591, 618 (1948),where an inventor who held the patent on his inventionand licensed it to his controlled corporation on anonexclusivebasis terminable by either party upon notice wastaxable on royalty payments earned under the licensenotwithstanding that he had assigned his right in the licenseagreement to his wife. The Court held that he hadeffective control over the royalties through his controlover the corporate licensee and his right as licensor to terminatethe license upon notice.11 Those assignees would, of course, be considered beneficialowners of the payments they received. However,the character of those payments —e.g., as gifts, compensationfor services or consideration for property —woulddepend on the assignees’ relationship and dealings withthe assignor, and not on their relationship with the payorof the dividends, interest or royalties.12 There have also been some cases under Code, sec. 482(which permits the IRS to reallocate income among commonlycontrolled entities to clearly reflect income and isthe main statute authorising U.S. transfer pricing rules),in which an entity’s receipt of income has not been giveneffect for U.S. tax purposes because the relevant entitywas not the ‘‘true earner’’ ofthe income. E.g., PhillippBros. Chemicals, Inc. v. Commissioner,52T.C. 240 (1969),aff’dinrelevant part, 435 F.2d 53 (2d Cir. 1970). However,these cases are in effect applications of the anticipatoryassignment of income doctrine in that they involved attemptsto deflect income that was —atleast from asubstantiveor economic point of view —earned by anotherentity. Inany event, the authority of the IRS to reallocateincome under the assignment of income doctrine is asufficientbasis for disregarding the nominal recipient of theincome in these types of cases.13 See Gregory v. Helvering, 293 U.S. 465 (1935). Anothercommon law anti-avoidance doctrine sometimes foundin U.S. tax law that can affect whether the recipient ofincome is considered the owner of that income for taxpurposes is one that disregards a legal entity on theground that it is asham. However, under longstandingprinciples, acorporation or other legal entity is generallygiven effect for tax purposes so long as it conducts any activitiesin its own name or there is any non-tax purposefor its separate existence. See Moline Properties, Inc. v.Commissioner, 319 U.S. 436 (1943). Given that lowthreshold, the real issue in cases that are decided underthe ‘‘sham entity’’ doctrine is whether agiven entity hadsufficient dominion and control over any income it mighthave received to give effect to apayment to it.14 Id. at 469. (‘‘The legal right of ataxpayer to decrease theamount of what would otherwise be his taxes, or altogetherto avoid them, by means which the law permits,cannot be doubted. But the question for determination iswhether what was done, apart from the tax motive, wasthe thing that the statute intended.’’) (Citations omitted.)15 56 T.C. 925 (1971).16 56 T.C. at 934.17 1984-2 C.B. 381.18 1984-2 C.B. 383.19 Rev. Rul. 95-56, 1995-2 C.B. 322.20 115 F.3d 506 (7th Cir. 1997).21 (May 3, 1991)22 251 F.3d 210 (D.C. Cir.2001), aff’g T.C. Memo 1999-41123 The decision in the case made no distinction betweeninterest payments made at atime when the interest payableto the Dutch corporation was one percentage point96 12/12 Copyright 2012 by The Bureau of National Affairs, Inc. TM FORUM ISSN 0143-7941

higher than the interest payable on the Canadian parent’sobligation to the Canadian bank and the interest paymentsmade after the Canadian bank loan rate was increased.24 However, interest payments made to the Dutch corporationduring the first 18 months of the arrangement weretreated in the same way as interest payments made to itthereafter.25 See also Gaw v. Commissioner, T.C. Memo 1995-531,aff’d without written opinion, 111 F.3d 962 (D.C. Cir.1997), in which the TaxCourt concluded that aU.S. taxpayerhad not carried his burden of proving that therewas any significant non-tax business reason for an arrangementwhereby aHong Kong parent corporation lentfunds to aNetherlands subsidiary that were re-lent to theU.S. taxpayer.26 115 F.3d 506 (7th Cir. 1997).27 115 F.3d 506 (7th Cir. 1997), aff’g 105 T.C. 341 (1995).28 See also SDI Netherlands B.V.v.Commissioner,107 T.C.161 (1997), in which the court applied asimilar analysisin determining whether the portion of worldwide licenseroyalties attributable to sublicense royalties attributableto U.S. rights could be considered U.S.-source income.Because the royalties paid by the licensee-sublicensorrepresented only 93-95% of the sublicense royalties itpaid, the court held that it could not be treated as amereconduit with respect to the royalties attributable to the licenseof U.S. rights.29 (July 5, 2002). AField Service Advice (FSA) is internaladvice that the IRS National Office provides to IRS FieldOffices, including audit teams, as to how to handle particularissues. Although such advice is not necessarily theofficial litigating position of the IRS, it generally reflectsIRS thinking on the issue addressed.30 The intermediate entity could also be anonresidentthat —unlike the financing entity —qualifies for favourabletreatment under the Internal Revenue Code, such aswith respect to interest under Code, sec. 881(c).31 Treasury Regs. §1.881-3(a)(4)(i)(C)(2).32 Treasury Regs. §1.881-3(a)(4)33 Treasury Regs. §1.881-3(e), Example (11).34 Rev. Rul. 80-362, 1980-2 C.B. 208.35 107 T.C. 161 (1996).36 In fairness to the IRS, most commentators agree thatsublicense royalties attributable to U.S. intangible propertyrights are U.S.-source income and, as atechnicalmatter at least, subject to U.S. withholding tax when paidto non-U.S. licensors even when the licensee-sublicensoris not aU.S. person. E.g., Gary Sprague and Lothar Determann,‘‘Source of Royalty Income and Place of IntangibleProperty,’’ 36Tax Mgmt. Int’l J. 351, 366 (2007) (‘‘Puttingaside enforcement and possibly policy considerations,the source of income conclusion of [Rev. Rul. 80-362]would seem to be technically correct, and arguably unassailable,as amatter of statutory interpretation ....’’)37 Treasury Regs. §1.881-3(b)(2)(iv).38 Treasury Regs. §1.881-3(b)(3)(ii)(B). For this purpose,ongoing means continuous with respect to the financingtransaction at issue. Thus, afinance subsidiary with 50employees that was responsible for coordinating allgroup finances, maintained acentralised cash managementsystem for all intragroup financial transaction, disbursedand received all cash payments for groupmembers’ transactions with third parties, and enteredinto interest rate and foreign currency contracts as necessaryto manage risks with respect to cash inflow and outflowimbalances was not considered to have performedsignificant financing activities with respect to the lendingon by way of aU.S. dollar loan of the proceeds of aJapaneseyen bank borrowing where the finance subsidiaryentered into anine-year yen-dollar currency swap for thefull loan amount at the time the borrowing and relendingtook place. Treasury Regs. §1.881-3(e), Example (23).39 Treasury Regs. §1.881-3(b)(3)(ii)(A), referencing thestandards of Treasury Regs. §1.954-2(d).40 Treasury Regs. §1.881-3(b)(3)(ii)(B).41 Treasury Regs. §1.881-3(e), Example (17).42 Treasury Regs. §1.881-3(a)(2)(ii)(A).43 Treasury Regs. §1.881-3(a)(2)(ii)(B).44 Treasury Regs. §1.881-3(a)(2)(iii).45 Treasury Regs. §1.881-3(e), Example (6).46 E.g., IES Industries, Inc. v. United States, 253 F.3d 350(8th Cir. 2001).47 See IRS Notice 2010-62, 2010-40 I.R.B. 111, in whichthe IRS said that it would not apply sec. 7701(o) in situationsin which the courts, prior to the enactment of thestatute, declined to apply the economic substance doctrine.48 See Northern Indiana Public Service Co. v. Commissioner,115F.3d 506, 512 (7th Cir.1997), which, in decliningto apply the substance over form doctrine,distinguished Knetsch v. United States, 364 U.S. 361(1960) and other cases that applied the economic substancedoctrine to deny tax deductions for paymentsmade in transactions that neither changed the taxpayer’seconomic circumstances nor had anon-tax business purpose.49 The United States also has astatutory rule governingthe eligibility of payments to and from hybrid entities(entities that are fiscally transparent under U.S. law butsubject to tax in their own right under the laws of thecountry in which they are resident, or vice versa) fortreaty relief. Code, sec. 894(c). Regulations promulgatedunder this statute provide that, in the absence of aspecifictreaty override, U.S.-source income paid to atreatycountry resident entity that is fiscally transparent underU.S. rules is not treated as ‘‘derived by’’ aresident of thetreaty country: (1) unless the entity is not fiscally transparentin the treaty country with respect to such income;or (2) if the entity is fiscally transparent, except to theextent that owners of interests in the entity that are residentin the treaty country are not fiscally transparent withrespect to such income. Treasury Regs. §1.894-1(d). Althoughthe provision is couched in terms of whetherincome is ‘‘derived by’’ a treaty country resident andtherefore serves to limit the use of intermediaries toobtain treaty benefits, the rules do not attempt to addressbeneficial ownership. Instead, the rules assume that therelevant entity is the beneficial owner of the income inquestion but deny treaty benefits on the theory that noU.S.-treaty country double taxation arises with respect tothat income.12/12 TaxManagement International Forum BNA ISSN 0143-7941 97

Forum Membersand ContributorsCHAIRMAN & CHIEF EDITOR: Leonard L. SilversteinBuchanan Ingersoll & Rooney PC, Washington, D.C.ARGENTINAManuel Benites*Peréz Alati, Grondona, Benites, Arntsen & Martínez de Hoz, BuenosAiresManuel M. Benites, a founding partner of Peréz Alati, Grondona, Benites,Arntsen & Martínez de Hoz, focuses his practice on tax law. Admitted to thebar in 1980, he is a graduate of the University of Buenos Aires (JD, 1980);master in laws, Southern Methodist University, Dallas, Texas (LLM, 1987).He is professor of Corporate Income Tax at Universidad Torcuato Di Tellaand professor of Tax-free Corporate Reorganisations, Universidad CatólicaArgentina, School of Law. He is a member of the Argentine Association ofFiscal Studies, IFA, the Tax Committee of the International Bar Associationand of the Buenos Aires City Bar Association. He is the author of severalarticles on tax law and a lecturer and panellist at national and internationalcongresses and seminars.Alejandro E. Messineo *M. & M. Bomchil, Buenos AiresAlejandro E. Messineo is a lawyer and partner in charge of the tax departmentof the law firm, M. & M. Bomchil, where he deals with both tax litigationand tax planning. He has recognised experience in international taxissues and corporate reorganisations. He lectures in Universidad AustralLaw School on international taxation. He is a member of IFA, the BuenosAires City Bar, the Public Bar of Buenos Aires and the Argentine Associationof Fiscal Studies (and a former member of its board).BELGIUMHoward M. Liebman *Jones Day, BrusselsHoward M. Liebman is a partner of the Brussels office of Jones Day. He isa member of the District of Columbia Bar and holds A.B. and A.M. degreesfrom Colgate University and a J.D. from Harvard Law School. Mr. Liebmanhas served as a Consultant to the International Tax Staff of the U.S. TreasuryDepartment. He is presently Chairman of the American Chamber ofCommerce in Belgium’s Legal & Tax Committee. He is also the co-authorof the BNA Portfolio 999-2nd T.M., Business Operations in the EuropeanUnion (2005).Jacques Malherbe *Liedekerke Wolters Waelbroeck Kirkpatrick, BrusselsJacques Malherbe is a partner with Liedekerke in Brussels and ProfessorEmeritus of commercial and tax law at the University of Louvain. He is theauthor or co-author of treatises on company law, corporate taxation andinternational tax law. He teaches at the Brussels Tax School and at ED-HEC (Ecole des Hautes Etudes Commerciales) in France, as well as in thegraduate programmes of the Universities of Bologna, Vienna, Hamburg andTilburg.Marilyn JonckheereJones Day, BrusselsMarilyn Jonckheere is an associate in the Brussels office of Jones Day. Sheis a member of the Brussels Bar and holds a Master in Laws degree fromGhent University and an LL.M. degree from American University, WashingtonCollege of Law.BRAZILGustavo M. Brigagão *Ulhôa Canto, Rezende e Guerra, Advogados, Rio de JaneiroGustavo M. Brigagão lectures on tax law in the Advanced Tax Law and IndirectTax courses of Fundação Getúlio Vargas (FGV), and in the MagistrateSchool of the State of Rio de Janeiro (EMERJ). He is a general council memberof IFA; secretary general of the Brazilian Association of Financial Law(ABDF); executive national director of the Center of Studies of Law Firms(CESA); president of the British Chamber of Rio de Janeiro (BRITCHAM-RJ);chairmen of the Legal Committee of BRITCHAM-RJ; and a partner (boardmember) of Ulhôa Canto, Rezende e Guerra, Advogados.Henrique de Freitas Munia e Erbolato *CFA Advogados, São PauloHenrique Munia e Erbolato is a senior associate at the tax department ofCFA Advogados in São Paulo, Brazil. Henrique concentrates his practiceon international tax and transfer pricing. He is a member of the BrazilianBar. Henrique received his LL.M with honours from Northwestern UniversitySchool of Law (Chicago, IL, USA) and a Certificate in Business Administrationfrom Northwestern University — Kellogg School of Management (bothin 2005). He holds degrees from Postgraduate Studies in Tax Law —InstitutoBrasileiro de Estudos Tributários — IBET (2002) — and graduated fromthe Pontifícia Universidade Católica de São Paulo (1999). He has writtennumerous articles on international tax and transfer pricing. He served asthe Brazilian “National Reporter” of the Tax Committee of the InternationalBar Association (IBA)-2010/2011. Henrique speaks English, Portuguese andSpanish.9812/12 Copyright © 2012 by The Bureau of National Affairs, Inc. TM FORUM ISSN: 0143-7941

CANADAJay Niederhoffer *Deloitte & Touche LLP, TorontoJay Niederhoffer is an international corporate tax partner of Deloitte &Touche based in Toronto. Over the last 15 years he has advised numerousCanadian and foreign-based multinationals on mergers and acquisitions,international and domestic structuring, cross-border financing and domesticplanning. Jay has spoken in Canada and abroad on cross-bordertax issues including technology transfers and financing transactions. Heobtained his Law degree from Osgoode Hall Law School and is a member ofthe Canadian and Ontario Bar Associations.Brian M. Schneiderman *Borden Ladner Gervais, LLP, MontréalBrian M. Schneiderman is senior counsel at the Montréal office of BordenLadner Gervais LLP, a member of the Québec and Ontario Bars, a graduateof the University of Montréal law school and holds a Bachelor of Arts degreefrom McGill University. Prior to joining Borden Ladner Gervais, he served asa tax litigator with the Canadian Department of Justice. He is a governor ofthe Québec Bar Foundation, a past president and current member of Councilof the Canadian branch of IFA, a former member of the Canada RevenueAgency’s Appeals Advisory Committee, and a member of the Transfer PricingCommittee of the American Bar Association Section of Taxation. He focuseshis practice on international taxation, transfer pricing and corporate reorganisations.Andrew LamDeloitte & Touche LLP, TorontoAndrew Lam is an international tax senior manager based in Toronto. Andrewadvises Canadian-based private and public companies on variouscross-border and domestic taxation matters, including tax structuring,financing and mergers and acquisitions. Andrew has a Bachelor of Lawsdegree from Osgoode Hall Law School, and a Masters of Taxation degreefrom the University of Waterloo.PEOPLE’S REPUBLIC OF CHINAStephen Nelson *DLA Piper Hong KongStephen Nelson is a partner in DLA Piper’s Asia Tax team. He is a leading taxpractitioner with more than 25 years experience in China, with a practicecovering foreign investments, mergers and acquisitions and other broadcorporate matters. Over the past several years his practice has focusedon advising multi-national clients on the tax-effective establishment andrestructuring of operations in China. He is a well respected PRC tax practitionerspecialising in tax planning from both a PRC and home country taxperspective. He also has significant experience in foreign investment andM&A in China, with an industry focus in the TMT sector. He has been namedas a leading lawyer in the fields of PRC taxation, corporate and projects inthe Asia Pacific Legal 500, Chambers Global, Chambers Asia and the InternationalTax Review. He has published numerous articles and contributedtowards many books on PRC tax and investment, and regularly speaks atmajor international conferences on PRC tax and investment. He is admittedto the bar in California, USA and Hong Kong. He speaks English and Chinese(Mandarin).Peng Tao *DLA Piper Hong Kong, PRCPeng Tao is Of Counsel in DLA Piper’s Hong Kong office. He focuses hispractice on PRC tax and transfer pricing, mergers and acquisitions, foreigndirect investment, and general corporate and commercial issues in Chinaand cross-border transactions. Before entering private practice, he workedfor the Bureau of Legislative Affairs of the State Council of the People’sRepublic of China from 1992 to 1997. His main responsibilities were to draftand review tax and banking laws and regulations that were applicable nationwide.He graduated from New York University with an LLM in Tax.Alan Winston GranwellDLA Piper, Washington DCAlan W. Granwell is a member of DLA Piper’s tax group, based in the WashingtonD.C. office. He has practiced in the area of international taxation for40 years. He represents multinational groups and high net worth individualsinvesting or conducting business in the United States and abroad. Hispractice focuses on matters involving tax planning and related complianceand tax controversies, and he maintains an active administrative practicerepresenting clients before the US Internal Revenue Service and the USTreasury Department, and advising on tax legislation. From 1981 through1984, Mr Granwell was the International Tax Counsel and Director, Office ofInternational Tax Affairs at the US Department of the Treasury.DENMARKNikolaj Bjørnholm *Hannes Snellman, CopenhagenNikolaj Bjørnholm is a Copenhagen-based equity partner of Pan-Nordic lawfirm Hannes Snellman. He concentrates his practice in the area of corporatetaxation, focusing on mergers, acquisitions, restructurings and international/ EU taxation. He represents US, Danish and other multinationalgroups and high net worth individuals investing or conducting business inDenmark and abroad. He is an experienced tax litigator and has appearedbefore the Supreme Court more than 10 times since 2000. He is ranked as aleading tax lawyer in Chambers, Legal 500, Who’s Who Legal, Which Lawyerand Tax Directors Handbook among others. He is a member of the InternationalBar Association and was an officer of the Taxation Committee in 2009and 2010, the American Bar Association, IFA, the Danish Bar Associationand the Danish Tax Lawyers’ Association. He is the author of several tax articlesand publications. He graduated from the University of Copenhagen in1991 (LLM) and the Copenhagen Business School in 1996 (Diploma in Economics)and spent six months with the EU Commission (Directorate GeneralIV (competition)) in 1991/1992. He was with Bech-Bruun from 1992-2010.Christian Emmeluth *CPH LEX Advokater, CopenhagenChristian Emmeluth obtained an LLBM from Copenhagen University in 1977and became a member of the Danish Bar Association in 1980. During 1980-81, he studied at the New York University Institute of Comparative Law andobtained the degree of Master of Comparative Jurisprudence. Having practicedDanish law in London for a period of four years, he is now based inCopenhagen.FRANCEStéphane Gelin *CMS Bureau Francis Lefebvre, ParisStéphane Gelin is an attorney, tax partner with CMS Bureau Francis Lefebvre,member of the CMS Alliance. He specialises in international tax andtransfer pricing.Thierry Pons *FIDAL, ParisThierry Pons is a partner with FIDAL in Paris. He is an expert in French andinternational taxation. His practice covers all tax issues, including litigation,mainly in the banking, finance and capital market industries, concerningboth corporate and indirect taxes. He has wide experience in advisingcorporate clients on international tax issues.Frédéric RouxCMS Bureau Francis LefebvreFrédéric Roux is a tax lawyer and member of the International Tax team ofCMS Bureau Francis Lefebvre, Paris.GERMANYDr. Jörg-Dietrich Kramer *BruhlDr. Jörg-Dietrich Kramer studied law in Freiburg (Breisgau), Aix-en-Provence, Gottingen, and Cambridge (Massachusetts). He passed his twolegal state examinations in 1963 and 1969 in Lower Saxony and took his12/12 Tax Management International Forum BNA ISSN 0143-7941 99

L.L.M. Degree (Harvard) in 1965 and his Dr.Jur. Degree (Göttingen) in 1967.He was an attorney in Stuttgart in 1970-71 and during 1972-77 he waswith the Berlin tax administration. From 1997 until his retirement in 2003he was on the staff of the Federal Academy of Finance, where he becamevice-president in 1986. He has continued to lecture at the academy sincehis retirement. He was also a lecturer in tax law at the University of Giessenfrom 1984 to 1991. He is the commentator of the Foreign Relations Tax Act(Außensteuergesetz) in Lippross, BasiskommentarSteuerrecht, and of theGerman tax treaties with France, Morocco and Tunisia in Debatin/Wassermeyer,DBA. He maintains a small private practice as a legal counsel.Dr. Rosemarie Portner *Deloitte & Touche GmbH Wirtschaftsprüfungsgesellschaft, DüsseldorfBefore joining private practice as a lawyer and tax adviser in 1993, Dr.Rosemarie Portner, LLM, worked as a civil servant for several State andFederal tax authorities, including in the Tax Counsel International’s office ofthe Federal Ministry of Finance. Her areas of practice are employee benefitsand pensions with a focus on cross-border transactions, and internationaltaxation (at the time she worked as a civil servant she was member of theGerman delegation which negotiated the German/US Treaty of 1989). She ismember of the Practice Counsel of New York University’s International TaxProgramme and a frequent writer and lecturer in her practice area.INDIAKanwal Gupta *Deloitte Haskins & Sells, MumbaiKanwal Gupta is a director in Deloitte’s Mumbai office . He is a memberof the Institute of Chartered Accountants of India and has experience incross-border tax issues and investment structuring including mergers andacquisitions. He is engaged in the tax knowledge management and litigationpractice of the firm and advises clients on various tax and regulatorymatters.Jayesh Thakur *PricewaterhouseCoopers Pvt. Ltd., MumbaiJayesh Thakur is a fellow of the Institute of Chartered Accountants of India(ICAI) with post qualification experience of more than 20 years. He isan associate director with PricewaterhouseCoopers Pvt. Ltd., heading theknowledge management function at PwC Tax & Regulatory Services. Heis a commerce graduate of Mumbai University and holds a Diploma in InformationSystem Audit (DISA) from the ICAI. He is a frequent speaker atseminars in India, has presented several papers on tax-related subjectsand authored books on tax subjects for the Bombay Chartered Accountants’Society (BCAS) and the Chamber of Tax Consultants (CTC).K VenkatachalamPricewaterhouseCoopers Pvt. Ltd, ChennaiVenkat is an Executive Director in the Tax and Regulatory Services Practicebased in Chennai. He has consulting experience across industries and aspectrum of Corporate tax, Foreign Investment into India, Exchange Controland Corporate laws. He has advised several large Indian and multinationalcorporate groups on various aspects of domestic and cross border taxation,Tax Treaty interpretation and litigation. He is an alumnus of the PwCleadership programme at Genesis Park Washington D.C, USA. He holds aBachelor of Commerce, University of Delhi (1983), a Bachelor of Law (General),University of Pune (1986); is a Chartered Accountant, The Institute ofChartered Accountants of India (1988) and an Information systems auditor,the Institute of Chartered Accountants of India (2003)Dinesh KhatorPricewaterhouseCoopers Pvt. Ltd, PuneDinesh is a Senior Manager in the Tax and Regulatory Services Practicebased in Pune. Dinesh is a qualified Chartered Accountant and has over 10years of consulting experience across industries in the areas of Corporatetax, Foreign Investment into India, Exchange Control and Corporate laws.He has advised several large Indian and multinational corporate groupson various aspects of domestic and cross border taxation, Tax Treaty interpretationand litigation. He holds a Bachelor of Commerce, Universityof Rajasthan (1999), is a credentialled Company Secretary, The Instituteof Company Secretaries of India (2000) and a Chartered Accountant, TheInstitute of Chartered Accountants of India (2002).IRELANDPeter Maher *A&L Goodbody, DublinPeter Maher is a partner with A&L Goodbody and is head of the firm’s TaxDepartment. He qualified as an Irish solicitor in 1990 and became a partnerwith the firm in 1998. He represents clients in every aspect of tax work, withparticular emphasis on inbound investment, cross border financings andstructuring, capital market transactions and US multinational tax planningand business restructurings. He is regularly listed as a leading adviser inEuromoney’s Guide to the World’s Leading Tax Lawyers, The Legal 500, Who’sWho of International Tax Lawyers, Chambers Global and PLC Which Lawyer.He is a former co-chair of the Taxes Committee of the International BarAssociation and of the Irish Chapter of IFA. He is currently a member of theTax Committee of the American Chamber of Commerce in Ireland.Joan O’Connor *Deloitte, DublinJoan O’Connor is an international tax partner with Deloitte in Dublin.ITALYDr. Carlo Galli *Clifford Chance, MilanCarlo Galli is a partner at Clifford Chance in Milan. He specialises in Italiantax law, including M&A, structured finance and capital markets.Giovanni Rolle *WTS R&A Studio Tributario Associato, Member of WTS Alliance,Turin – MilanGiovanni Rolle is a partner of R&A Studio Tributario Associato, a memberof WTS Alliance. He is a chartered accountant who has long focused exclusivelyon international and EU tax, corporate reorganisation and transferpricing, and thus has significant experience in international tax planning,cross-border restructuring, and supply chain projects for both Italian andforeign multinationals. He is a member of IFA, of the Executive Committee ofthe Chartered Institute of Taxation – European Branch, and of the InternationalTax Technical Committee of Bocconi University, Milan. A regular contributorto Italian and foreign tax law journals, he is also a frequent lecturerin the field of international, comparative, and European Community tax law.JAPANYuko Miyazaki *Nagashima Ohno and Tsunematsu, TokyoYuko Miyazaki is a partner of Nagashima Ohno & Tsunematsu, a law firmin Tokyo, Japan. She holds an LLB degree from the University of Tokyo andan LLM degree from Harvard Law School. She was admitted to the JapaneseBar in 1979, and is a member of the Dai-ichi Tokyo Bar Association and IFA.Eiichiro Nakatani *Anderson Mōri & Tomotsune, TokyoEiichiro Nakatani is a partner of Anderson Mōri & Tomotsune, a law firm inTokyo. He holds an LLB degree from the University of Tokyo and was admittedto the Japanese Bar in 1984. He is a member of the Dai-ichi Tokyo BarAssociation and IFA.Akira TanakaAnderson Mōri & TomotsuneAkira Tanaka is an associate of Anderson Mōri & Tomotsune. He holds anLL.B. degree from the University of Tokyo. He was admitted to the JapaneseBar in 2008. Mr. Tanaka is a member of the Daini Tokyo Bar Association.100 12/12 Copyright © 2012 by The Bureau of National Affairs, Inc. TM FORUM ISSN: 0143-7941

MEXICOTerri Grosselin *Ernst & Young LLP, Miami, FloridaTerri Grosselin is a director in Ernst & Young LLP’s Latin America BusinessCenter in Miami. She transferred to Miami after working for three years inthe New York office and five years in the Mexico City office of another BigFour professional services firm. She has been named one of the leadingLatin American tax advisors in International Tax Review’s annual survey ofLatin American advisors. Since graduating magna cum laude from West VirginiaUniversity, she has more than 15 years of advisory services in financialand strategic acquisitions and dispositions, particularly in the Latin Americamarkets. She co-authored Tax Management Portfolio — Doing Businessin Mexico, and is a frequent contributor to Tax Notes International and othermajor tax publications. She is fluent in both English and Spanish.José Carlos Silva *Chevez, Ruiz, Zamarripa y Cia., S.C., Mexico CityJosé Carlos Silva is a partner in Chevez, Ruiz, Zamarripa y Cia., S.C., a taxfirm based in Mexico. He is a graduate of the Instituto Tecnológico Autónomode México (ITAM) where he obtained his degree in Public Accounting in1990. He has taken graduate Diploma courses at ITAM in business law andinternational taxation. He has been a member of the faculty at the Schoolof Administration and Finance of the Universidad Panamericana. He is theauthor of numerous articles on taxation, including the General Report on theIFA’s 2011 Paris Congress “Cross-Border Business Restructuring” publishedin Cahiers de Droit Fiscal International. He sits on the Board of Directorsand is a member of the Executive Committee of IFA, Grupo Mexicano, A.C.,an organisation composed of Mexican experts in international taxation, theMexican Branch of the International Fiscal Association. He presided overthe Mexican Branch from 2002-2006 and has spoken at several IFA AnnualCongresses. He is a member of the Nominations Committee of IFA.Enrique Ramirez FigueroaChevez, Ruiz, Zamarripa y Cia., S.C., Mexico CityEnrique Ramirez Figueroa is a partner with Chevez, Ruiz, Zamarripa y Cía,S.C. He obtained his degree in Law from the Universidad Panamericana (UP)(1991). His primary professional experience is as a tax litigation attorney,having litigated several cases in representing the largest companies in thecountry over the past 15 years. He was a member of the Tax Committee ofthe Mexican College of Public Accountants, A.C. He is a member of the Committeeon Public Finance and Tax Law of the Mexican Bar Association-Collegeof Attorneys at Law. Mr Ramirez has been chairperson on the subjectsof tax law and procedural tax law at the Law School of the UniversidadPanamericana, as well as on the subjects of Tax Law I and Tax Law II atthe Center for Economic Research and Teaching. He is a member of theCommittee of Tax Studies of the Mexican Institute of Finance Executives,A.C. acting as President from 2009 through 2011. Mr. Ramirez also writesand publishes frequently and regularly on aspects of tax law, and is a frequentspeaker at forums organised by the Mexican Bar Association-Collegeof Attorneys at Law, by the College of Public Accountants of Mexico and bythe International Fiscal Association. He has been repeatedly recognised invarious magazines, including “Chamber Global (The World´s Leading Lawyersfor Business)”, “Chambers Latinoamerica (Latin America´s LeadingLawyers for Business)”, “Latin Lawyer 250 Latin America´s leading businesslaw firms”, and “PLC Which lawyer?”.Layda Carcamo SabidoChevez, Ruiz, Zamarripa y Cia., S.C., Mexico CityLayda Carcamo Sabido is a tax consultant at Chevez, Ruiz, Zamarripa y Cía,S.C., where she has worked since 1990. She earned her CPA from InstitutoTecnologico Autónomo de México (ITAM) in 1990 and has done post-graduateprograms in Busisiness Law and International Taxation. She has taughtand lectured at the ITAM for over 20 years, has been a guest speaker in variousnational and international forums, and has published several articles inmagazines specialising in Mexican and/or international tax. She has been amember of the Mexican Academy of Tax Studies since 1999, and a memberof the Mexican Institution of CPAs.THE NETHERLANDSMartijn Juddu *Loyens & Loeff, AmsterdamMartijn Juddu is a senior associate at Loyens & Loeff based in their Amsterdamoffice. He graduated in tax law and notarial law at the Universityof Leiden and has a post-graduate degree in European tax law from theEuropean Fiscal Studies Institute, Rotterdam. He has been practicing Dutchand international tax law since 1996 with Loyens & Loeff, concentratingon corporate and international taxation. He advises domestic businessesand multinationals on setting up and maintaining domestic structures andinternational inbound and outbound structures, mergers and acquisitions,group reorganisations and joint ventures. He also advises businesses inthe structuring of international activities in the oil and gas industry. He isa contributing author to a Dutch weekly professional journal on topical taxmatters and teaches tax law for the law firm school.Maarten J. C. Merkus *KPMG Meijburg & Co., AmsterdamMaarten J. C. Merkus is a tax partner at KPMG Meijburg & Co, Amsterdam.He graduated in civil law and tax law at the University of Leiden, and hasa European tax law degree from the European Fiscal Studies Institute, Rotterdam.Since joining KPMG Meijburg & Co., he has practiced in the areaof international taxation with a focus on M&A /corporate reorganisationsand the real estate sector. He regularly advises on the structuring of crossborder real estate investments and the establishment of real estate investmentfunds. Among his clients are Dutch, Japanese, UK and US (quoted)property investment groups as well as large privately held Spanish andSwedish property investment groups. He also taught commercial law at theUniversity of Leiden.SPAINLuis F. Briones *Baker & McKenzie Madrid SLPLuis Briones is a tax partner with Baker & McKenzie, Madrid. He obtained adegree in law from Deusto University, Bilbao, Spain in 1976. He also holds adegree in business sciences from ICAI-ICADE (Madrid, Spain) and has completedthe Master of Laws and the International Tax Programme at HarvardUniversity. His previous professional posts in Spain include inspector offinances at the Ministry of Finance, and executive adviser for InternationalTax Affairs to the Secretary of State. He has been a member of the TaxpayerDefence Council (Ministry of Economy and Finance). A professor since 1981at several public and private institutions, he has written numerous articlesand addressed the subject of taxation at various seminars.Eduardo Martínez-Matosas *Gómez-Acebo & Pombo SLP, BarcelonaEduardo Martínez-Matosas is an attorney at Gómez-Acebo & Pombo, Barcelona.He obtained a Law Degree from ESADE and a master of BusinessLaw (Taxation) from ESADE. He advises multinational, venture capital andprivate equity entities on their acquisitions, investments, divestitures orrestructurings in Spain and abroad. He has wide experience in LBO andMBO transactions, his areas of expertise are international and EU tax, internationalmergers and acquisitions, cross border investments and M&A,financing and joint ventures, international corporate restructurings, transferpricing, optimisation of multinational’s global tax burden, tax controversyand litigation, and private equity. He is a frequent speaker for theIBA and other international forums and conferences, and regularly writesarticles in specialised law journals and in major Spanish newspapers. Heis a recommended tax lawyer by several International law directories andconsidered to be one of the key tax lawyers in Spain by Who’s Who Legal. Heis also a member of the tax advisory committee of the American Chamberof Commerce in Spain. He has taught international taxation for the LLMin International Law at the Superior Institute of Law and Economy (ISDE).12/12 Tax Management International Forum BNA ISSN 0143-7941 101

SWITZERLANDWalter H. Boss *Poledna Boss Kurer AG, ZürichWalter H. Boss is a graduate of the University of Bern and New York UniversitySchool of Law with a Master of Laws (Tax) Degree. He was admittedto the bar in 1980. Until 1984 he served in the Federal Tax Administration(International Tax Law Division) as legal counsel; he was also a delegate atthe OECD Committee on Fiscal Affairs. He was then an international tax attorneywith major firms in Lugano and Zürich. In 1988, he became a partnerat Ernst & Young’s International Services Office in New York. After havingjoined a major law firm in Zürich in 1991, he headed the tax and corporatedepartment of another well-known firm in Zürich from 2001 to 2008. On July1, 2008 he became one of the founding partners the law firm Poledna BossKurer AG, Zürich, where he is the head of the tax and corporate department.Dr. Silvia Zimmermann *Pestalozzi Rechtsanwälte AG, ZürichSilvia Zimmermann is a partner and member of Pestalozzi’s Tax and PrivateClients group in Zürich. Her practice area is tax law, mainly internationaltaxation; inbound and outbound tax planning for multinationals, as well asfor individuals; tax issues relating to reorganisations, mergers and acquisitions,financial structuring and the taxation of financial instruments. Shegraduated from the University of Zürich in 1976 and was admitted to thebar in Switzerland in 1978. In 1980, she earned a doctorate in law from theUniversity of Zürich. In 1981-82, she held a scholarship at the InternationalLaw Institute of Georgetown University Law Center, studying at GeorgetownUniversity, where she obtained an LL.M. degree. She is chair of the tax groupof the Zürich Bar Association, and chair or a member of other tax groups;a board member of some local companies which are members of foreignmultinational groups; a member of the Swiss Bar Association, the InternationalBar Association, IFA, and the American Bar Association. She is fluentin German, English and French.Stefanie MongePoledna Boss Kurer AG, LuganoStefanie M. Monge is a graduate of the University of Zürich (1998) and theUniversity of Michigan Law School with a Master of Laws Degree (2004).Mrs. Monge was admitted to the Zürich bar in 2001 and the New York barin 2005. From 1998 until 1999 she served as a judicial clerk with the DistrictCourt of Uster (ZH). She then was a legal trainee and associate witha Zürich law firm. In 2004 she joined Greenberg Traurig, LLP, Chicago, as alaw clerk. From 2005 to 2008 she was part of the corporate and tax departmentof a well-known law firm in Zürich. On July 1, 2008, she joined the lawfirm Poledna Boss Kurer AG as an international tax attorney.UNITED KINGDOMLiesl Fichardt *Berwin Leighton Paisner LLP, LondonLiesl Fichardt is a partner in Berwin Leighton Paisner LLP, practicing fromtheir London office. She advises on all areas of international tax includingthe EU treaty, double taxation conventions and EC directives in relation todirect tax and VAT. She has extensive experience in contentious tax mattersand tax litigation in the Tribunal, the High Court and the Court of Appeal,the Supreme Court and the European Court of Justice. She advises multi-nationals,corporates and high net worth individuals on contentious issuesrelating to corporation tax, income tax and VAT. She is dual qualified as Solicitorand Solicitor-Advocate (England and Wales). She previously acted asa Judge in the High Court of South Africa and is qualified in that country asa Barrister. She is honorary secretary of the British branch of IFA and sits onthe International Taxes Committee of the Law Society of England and Wales.James Ross *McDermott, Will & Emery UK LLP, LondonJames Ross is a partner in the law firm of McDermott Will & Emery UK LLP,based in its London office. His practice focuses on a broad range of internationaland domestic corporate/commercial tax issues, including corporaterestructuring, transfer pricing and thin capitalisation, double tax treatyissues, corporate and structured finance projects, mergers and acquisitionsand management buyouts. He is a graduate of Jesus College, Oxford and theCollege of Law, London.UNITED STATESPatricia R. Lesser *Buchanan Ingersoll & Rooney PC, Washington, D.C.Patricia R. Lesser is associated with the Washington, D.C. office of thelaw firm Buchanan Ingersoll & Rooney PC. She holds a licence en droit, amaitrise en droit, a DESS in European Community Law from the Universityof Paris, and an MCL from the George Washington University in Washington,D.C. She is a member of the District of Columbia Bar.Herman B. Bouma *Buchanan Ingersoll & Rooney PC, Washington, D.C.Herman B. Bouma is Counsel with the Washington, D.C. office of BuchananIngersoll & Rooney PC. He has over 25 years’ experience in US taxation of incomeearned in international operations, assisting major US companies andfinancial institutions with tax planning and analysis and advising on suchmatters as the structuring of billion-dollar international financial transactions,the creditability of foreign taxes, Subpart F issues, transfer pricing,and foreign acquisitions, reorganisations and restructurings. He wascounsel to the taxpayer in Exxon Corporation v. Comr., 113 T.C. 338 (1999)(creditability of the UK Petroleum Revenue Tax under sections 901/903), andin The Coca-Cola Company v. Comr., 106 T.C. 1 (1996) (computation of combinedtaxable income for a possession product under section 936). He beganhis legal career as an attorney-advisor in the IRS Office of Chief Counsel,Legislation and Regulations Division (International Branch) in Washington,D.C. He was the principal author of the final foreign tax credit regulationsunder sections 901/903, and participated in income tax treaty negotiationswith Sweden, Denmark, and the Netherlands Antilles. He is a graduate ofCalvin College and the University of Texas at Austin School of Law.John P. WarnerBuchanan Ingersoll & Rooney PC, Washington, D.CJohn P. Warner is a member of Buchanan Ingersoll & Rooney PC based inWashington, D.C. He is a graduate of the George Washington Universityin Washington, D.C. and of the University of California (Boalt Hall) Schoolof Law at Berkeley. He is a past Chair of the American Bar Association TaxSection Transfer Pricing Committee and was co-author of the BNA Portfolio887 TM, Transfer Pricing: The Code and the Regulations.* Permanent Members102 12/12 Copyright © 2012 by The Bureau of National Affairs, Inc. TM FORUM ISSN: 0143-7941

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