Conceptual Problems of Beneficial Ownership in Respect of Agents and Nominees

Abstract

The Conduit Companies Report implies that the presence of dominion shows that an interposed company is the beneficial owner. The reason why the Conduit Companies Report adopts this approach is that it refers to the official commentary on the OECD Model as it stood in 1977. The official commentary on articles 10, 11 and 12 used “a nominee or agent” as an example of a conduit. For this reason, the Conduit Companies Report misinterpreted the commentary to suggest that the presence of dominion justifies treating passive income as held by someone who is beneficially entitled to that income for treaty purposes as well as for legal purposes.

The commentary has not only mislead the Conduit Companies Report, but also misdirected courts in certain conduit company cases. Such cases can be divided into two categories: (1) cases in which an interposed company is unaffiliated to other companies in the tax planning scheme; and (2) cases in which an interposed company is affiliated to other companies in the tax planning scheme. This article focuses on the first category. The Copyright Management Companies case and the Royal Dutch Shell case fall into the first category.

In Copyright Management Companies, the Central Economic-Administrative Tribunal denied treaty benefits to recipient companies because the recipient companies were not the owners of passive income. While the tribunal came to the correct conclusion, the problem is that its reasoning implies that the presence of dominion is causally related to the presence of beneficial ownership. That is, an immediate recipient is necessarily a beneficial owner, and therefore, is necessarily entitled to treaty benefits, if it does not operate as an agent or if it has dominion over property that generates passive income.

This implication is explicit in the Royal Dutch Shell case. In this case, the Dutch Supreme Court considered a recipient company the beneficial owner solely on the basis of the fact that the recipient company received passive income as the owner of the income, not as a nominee or agent. The court seems to commit an error of logic, which is known as “denying the antecedents”. If a person acts in the capacity of a nominee or agent in relation to passive income, he or she is not the beneficial owner of that income for the purpose of tax treaties. However, it does not follow that a person who is not acting in the capacity of a nominee or agent necessarily qualifies as the beneficial owner of passive income for the purpose of tax treaties.

Keywords: Beneficial Ownership, Dominion, Conduit Companies Report, withholding tax, Royal Dutch Shell