Conceptual Aspect of Beneficial Ownership in the Context of Property Law

Abstract

The Conduit Companies Report draws an analogy between cases involving nominees and agents on one hand, and conduit companies cases on the other, based on the fact that, they all pass income to a third party. The Conduit Companies report transposes the dominion test from cases concerning nominee and agents to conduit company cases. It is, however, illogical to draw such an analogy.

Nominees or agents receive income on behalf of its owner. For this reason, in property law a nominee or agent must pass passive income on to the person on whose behalf the nominee or agent receives it. It follows that nominees or agent lack dominion.

By contrast, in conduit company cases, passive income originates as the property of the recipient company. The recipient company is not obliged under property law to pass on the passive income to a resident of a third state. When the recipient company passes the income on to the resident of a third state, the recipient transacts does so as the owner of the income. Moreover, under corporate law, companies are independent and able to control their property. That is, a recipient company has dominion over passive income simply by virtue of being a corporation. A receipt company possesses dominion over passive income by definition. It follows that if conduit company cases are decided on the basis of dominion, a recipient company will always qualify for treaty benefits regardless of whether it acts as a conduit. It follows that dominion is not an appropriate test to decide conduit company cases.

Real Madrid F.C v Oficina Nacional de Inspección and Ministre de l’Economie, des Finances et de l’Industrie v Bank of Scotland support this argument. In both cases, courts acknowledged that the recipient company was neither a nominee nor an agent. The recipient company received passive income as its owner, and was not obliged under property law to pass on the passive income to residents of a third country. For this reason, the recipient company possessed dominion over passive income by definition. The courts were of the view that, if they would apply the dominion test to such a situation, the recipient company would certainly qualify as the beneficial owner. For this reason, they regarded dominion as an indecisive test to determine whether an interposed company is a beneficial owner. They applied the beneficial ownership test as a general anti-avoidance rule. They did not concretize the law by basing their decisions on the absence or presence of a specific criterion. They investigated the arrangement as a whole and determined whether the arrangement contradict the object and purpose of the double tax treaty in question.

Keywords: Beneficial Ownership, Conduit Companies Report, Dominon, Withholding Tax, Real Madrid F.C v Oficina Nacional de Inspección, Ministre de l’Economie, des Finances et de l’Industrie v Bank of Scotland