Post by Sapphire Capital on Jul 12, 2008 20:57:06 GMT 4
Treaty Shopping and Beneficial Ownership - The Canadian view
Multinational groups with cross border activities often use intermediary holding companies that own local subsidiaries to conduct local activities. The location of the intermediary holding company may produce a tax advantage through reducing withholding taxes on distributions by the local subsidiary via the intermediary holding company to the ultimate owner or parent company. However, in virtually all double tax treaties, the benefits of the reduced withholding tax rates are only granted if the recipient of the dividend income is the 'Beneficial Owner' of the dividend. In situations where an intermediary holding company is used, tax authorities sometimes claim that the structure is used only to obtain a tax benefit and that it cannot be considered to be the Beneficial Owner.
The term Beneficial Owner is not defined in the tax treaties and, to further complicate matters, States applying tax treaties give different meanings to the term. The Commentary to the OECD Model Conventions provide that a conduit company cannot normally be regarded as the beneficial owner if it has, as a practical matter, very narrow powers that render it a mere fiduciary or administrator acting on account of the interested parties. Some of our readers may remember the UK Indofood case where the Civil Court in the UK decided that a Dutch intermediary company receiving interest from a UK resident could not be regarded as the Beneficial Owner. An important factor in this case was that the Dutch company never received the interest: the debtor of the interest paid the interest due directly to the beneficial owner. As a result of the decision, HMRC was entitled to ignore the reduced withholding tax rate under the relevant tax treaty. Although this decision is considered to be controversial, HMRC announced that they would follow the decision and have since published guidelines on the 'International meaning of the term Beneficial Owner'.
The issue was more recently tested in a Canadian case (Prévost Car Inc v HM The Queen). In this case, the Tax Court of Canada was asked to consider the meaning of Beneficial Owner in the Canada-Netherlands tax treaty. Volvo of Sweden and Henlys of the UK owned, via a Dutch intermediary JV company (Prevost Holding BV), a Canadian subsidiary (Prevost Car Inc). Revenue Canada argued that the Dutch company was not the beneficial owner but was merely a conduit (effectively agent or nominee) for the shareholders of the Dutch company. Revenue Canada based their arguments on the fact that there was a shareholders’ agreement which provided for required distributions from the company and the fact that there was no real substance in the Dutch company.
In rejecting Revenue Canada’s assertions, the Tax Court determined that the Dutch company was indeed the beneficial owner of the relevant dividends, since it was the person who received the dividends for its own use and enjoyment. The shareholders’ agreement governed the relationship between the shareholders only, not the relationship between the Dutch company and the shareholders. The Dutch holding company was not party to the shareholders agreement and neither Henlys nor Volvo could take action against the Dutch company for failure to follow the dividend policy described in the shareholders agreement. Financial statements of the Dutch company show that it owned the relevant assets and had liabilities, and it was a requirement, if dividends were to be declared to the shareholders, that the directors had to declare such dividends and the shareholders subsequently to approve them. Until such time as dividends were declared, the dividends receivable were an asset of the Dutch company and were available to any creditors.
These two apparent contradictory decisions (the UK and the Canadian perspective) will not resolve the different interpretations of the term Beneficial Owner used in double tax treaties. They do, however, provide interesting guidelines and it would seem that it is still possible to use an intermediary conduit company located in a jurisdiction that has the most favourable tax treaty in respect of withholding taxes on dividend, interest or royalty income. This of course is on the proviso that beneficial ownership will only be satisfied where the intermediary company legally (Prevost) and practically (Indofood) is the owner of the income. Naturally, one can expect HMRC to adhere to its published guidelines and will continue to challenge conduit situations irrespective of the legal and practical circumstances.
Multinational groups with cross border activities often use intermediary holding companies that own local subsidiaries to conduct local activities. The location of the intermediary holding company may produce a tax advantage through reducing withholding taxes on distributions by the local subsidiary via the intermediary holding company to the ultimate owner or parent company. However, in virtually all double tax treaties, the benefits of the reduced withholding tax rates are only granted if the recipient of the dividend income is the 'Beneficial Owner' of the dividend. In situations where an intermediary holding company is used, tax authorities sometimes claim that the structure is used only to obtain a tax benefit and that it cannot be considered to be the Beneficial Owner.
The term Beneficial Owner is not defined in the tax treaties and, to further complicate matters, States applying tax treaties give different meanings to the term. The Commentary to the OECD Model Conventions provide that a conduit company cannot normally be regarded as the beneficial owner if it has, as a practical matter, very narrow powers that render it a mere fiduciary or administrator acting on account of the interested parties. Some of our readers may remember the UK Indofood case where the Civil Court in the UK decided that a Dutch intermediary company receiving interest from a UK resident could not be regarded as the Beneficial Owner. An important factor in this case was that the Dutch company never received the interest: the debtor of the interest paid the interest due directly to the beneficial owner. As a result of the decision, HMRC was entitled to ignore the reduced withholding tax rate under the relevant tax treaty. Although this decision is considered to be controversial, HMRC announced that they would follow the decision and have since published guidelines on the 'International meaning of the term Beneficial Owner'.
The issue was more recently tested in a Canadian case (Prévost Car Inc v HM The Queen). In this case, the Tax Court of Canada was asked to consider the meaning of Beneficial Owner in the Canada-Netherlands tax treaty. Volvo of Sweden and Henlys of the UK owned, via a Dutch intermediary JV company (Prevost Holding BV), a Canadian subsidiary (Prevost Car Inc). Revenue Canada argued that the Dutch company was not the beneficial owner but was merely a conduit (effectively agent or nominee) for the shareholders of the Dutch company. Revenue Canada based their arguments on the fact that there was a shareholders’ agreement which provided for required distributions from the company and the fact that there was no real substance in the Dutch company.
In rejecting Revenue Canada’s assertions, the Tax Court determined that the Dutch company was indeed the beneficial owner of the relevant dividends, since it was the person who received the dividends for its own use and enjoyment. The shareholders’ agreement governed the relationship between the shareholders only, not the relationship between the Dutch company and the shareholders. The Dutch holding company was not party to the shareholders agreement and neither Henlys nor Volvo could take action against the Dutch company for failure to follow the dividend policy described in the shareholders agreement. Financial statements of the Dutch company show that it owned the relevant assets and had liabilities, and it was a requirement, if dividends were to be declared to the shareholders, that the directors had to declare such dividends and the shareholders subsequently to approve them. Until such time as dividends were declared, the dividends receivable were an asset of the Dutch company and were available to any creditors.
These two apparent contradictory decisions (the UK and the Canadian perspective) will not resolve the different interpretations of the term Beneficial Owner used in double tax treaties. They do, however, provide interesting guidelines and it would seem that it is still possible to use an intermediary conduit company located in a jurisdiction that has the most favourable tax treaty in respect of withholding taxes on dividend, interest or royalty income. This of course is on the proviso that beneficial ownership will only be satisfied where the intermediary company legally (Prevost) and practically (Indofood) is the owner of the income. Naturally, one can expect HMRC to adhere to its published guidelines and will continue to challenge conduit situations irrespective of the legal and practical circumstances.