The term beneficial owner was introduced to tax terminology in 1977 when the OECD model tax convention was updated. For many years most tax commentators assumed that the term was without practical relevance. However in 2007 Danish tax authorities accused multinational groups of evading Danish withholding taxes by paying dividends or interest payments to conduit companies, which were not the beneficial owner of the income received. As a result numerous cases have been brought before the Danish courts in order to decide whether or not the foreign holding companies could be regarded as beneficial owners. Danish tax authorities have directed their claims for payable taxes against the paying Danish companies, arguing that the Danish companies have neglected their duty to withhold taxes when paying out dividends or interest. The term beneficial owner has its origin in the OECD model tax convention and both foreign and national courts have agreed upon that the term is to be interpreted autonomously based upon the meaning in the OECD model tax convention. The OECD model tax convention states that agents, nominees and conduit companies cannot be regarded as beneficial owners. Regarding conduit companies the tax convention states that a company is a conduit company if the company has very narrow powers over the income concerned. There have been several court cases, both nationally and internationally, concerning the interpretation of the beneficial owner term. Tax authorities have argued that foreign holding companies are not beneficial owner of received income, due to the companies not having the powers to decide on the use of the income and the companies not having substance in the form of employees and physical premises. So far the outcome of the beneficial owner cases has been mixed. In 3 out of 4 cases ruled by foreign courts, the foreign holding companies have been recognized as the beneficial owner. In the Indofood case the foreign holding company was not recognized as the beneficial owner, which can most likely be attributed to the fact that the transaction structure in the case was an obvious example of treaty abuse. When ruling the cases the foreign courts have analyzed as to whether the foreign holding companies had a legal or de facto obligation to pass on received income. Furthermore foreign courts have analyzed on the situation for the conduit company’s owners in the event of the conduit company’s bankruptcy. In Denmark there have been 7 court rulings and in 3 of 7 cases, the foreign holding companies have been recognized as the beneficial owner. When ruling the cases the courts have analyzed as to whether: · The income has been passed on from the conduit company to its owners · There is a net taxable income in the conduit company · The conduit company has physical premises and employees · Loan agreements between the Danish company and the conduit company and between the conduit company and its owners have the same terms and conditions · The conduit company’s decision of use of the income has been predetermined from the start of the group establishment Side 5 af 63 In 2011/12 OECD released 2 discussion drafts with the objective to clarify the term beneficial owner. The proposed definition in the discussion drafts has been approved by the OECD member countries July 16, 2014. The new definition states that in order for a company to be classified as a conduit company, the company must be subject to an obligation to pass on the received income. Such an obligation may arise from legal documents or a de facto obligation. However the updated definition states that for a de facto obligation to exist it must be related to the income received by the conduit company. Based on the new definition of the beneficial owner term, it is my assessment that it will be very difficult for Danish tax authorities to prove that foreign holding companies should not be recognized as the beneficial owner. However Danish tax authorities may still be able to require Danish companies to withhold taxes when paying dividends or interest to foreign holding companies, if tax authorities can prove that foreign holding companies constitute treaty abuse. So far Danish courts do not appear to have distinguished between the beneficial owner term and treaty abuse term. In future court rulings it should be expected that Danish courts will make a distinction between the 2 terms and treat the terms as 2 separate matters. It is my assessment that if Danish tax authorities fails to prove that foreign holding companies constitute treaty abuse, the term beneficial owner will no longer have any practical relevance in Danish tax law.
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