Beneficial Ownership and the Contractual Obligation to Pass on Income

Abstract

The absence of dominion shows that a recipient company is a nominee or agent, and therefore, is not entitled to treaty benefits. The presence of dominion, however, does not necessarily make a recipient company entitled to treaty benefits. Under property law a recipient company, which is not a nominee or agent, is not obliged to pass on income. It possesses dominion over passive income by definition. For this reason, dominion cannot be considered to be a conclusive test for deciding conduit company cases.

A possible reason why a recipient company passes on passive income is that it is contractually obliged to do so. The Conduit Companies Report describes such a company as having narrow powers in respect of the passive income it receives. That is, the recipient company is not free to decide how to use that income. In such a case, the presence of narrow powers is a result of the existence of a contractual obligation, not an obligation in property law.

The absence of a contractual obligation to pass on passive income does not necessarily show that a recipient company is the beneficial owner. The existence of such an obligation is a strong indicator that a recipient company is passing on treaty benefits to residents of a third state. It should not, however, be considered to be a decisive criterion for refusing treaty benefits. The arrangement should be examined as a whole.

Reasoning of the judicial forums in Aiken Industries v Commissioner of Internal Revenue, Indofood International Finance Limited v JPMorgan Chase Bank NA, London Branch, and the Cook case supports this argument. In these cases, the judicial forums found that the recipient companies were contractually obliged to pass on passive income to residents of a third state. However, they decided not to base their decision on this finding. They examined the substance of the arrangement as a whole, and determined whether the arrangement complied with the object and purpose of the double tax treaty in question.

Keywords: Beneficial ownership, Dominon, withholding tax, Aiken Industries v Commissioner of Internal Revenue, Indofood International Finance Limited v JP Morgan Chase Bank NA, London Branch, the Cook case