The implications of the term beneficial ownership as used in the OECD model tax convention : in the light of the decision of the UK courts in the indofood case

Abstract

The notion of beneficial ownership is fundamental to the application of certain provisions of double taxation treaties based on the OECD Model Tax Convention on Income and on Capital, curiously however, we have very little guidance as to the meaning of this term. The lack of a uniform and commonly accepted definition of the term has led to much uncertainty in determining when a recipient of certain items of income is indeed the beneficial owner thereof for the purposes of double taxation treaties. The only point of consensus reached, is that formal agents and nominees are not beneficial owners of income, however, there is no accord as to who else, if anyone, is excluded. Differences in opinion appear not only between different states but also been expressed by persons commenting on he same legal system. Treaties typically do not define beneficial ownership for the purpose of the treaty, however, the treaty itself normally provides guidance as to the reference that must be made to seek the meaning of the undefined term. For example, Article 3(2) of the treaty entered into between Malta and Germany states: ‘As regards the application of this Agreement by either of the States, any term not otherwise defined shall, unless the context otherwise requires, have the meaning which it has under the laws of that State relating to the taxes which are the subject of this Agreement.’ This work explores the different approaches to the interpretation of beneficial ownership by different countries and commentators as evidenced by decisions of the domestic courts and published material on the subject. Specifically the landmark cases namely the Indofood case and the Prévost case were analysed with a view to the drawing of conclusions concerning the meaning of this term which is of such fundamental relevance to the interpretation and application of tax treaties in practice.