Conceptual Problems of Beneficial Ownership and Corporate Veil

Abstract

The presence of dominion cannot logically be considered to indicate conclusively the presence of beneficial ownership. However, courts have applied dominion as a decisive test to certain conduit company cases. In such cases, courts have been misdirected by the official commentary on the OECD Model as it stood in 1977. 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 second category. The reason for discussing the second category of cases separately is that, in these cases, courts have drawn an illogical analogy between the beneficial ownership test and the doctrine of piercing the corporate veil.

The doctrine of piercing the corporate veil is different from the beneficial ownership test. When applying the doctrine of piercing the corporate veil, courts analyse facts from the perspective of an approach that has been developed as a technical doctrine of company law. Whereas, the application of the beneficial ownership test requires courts to investigate facts for purposes of determining entitlement to benefits under tax treaties.

Nevertheless, in the Canadian cases of Prévost Car and Velcro, courts drew an analogy between the beneficial ownership test and the doctrine of piercing the corporate veil. In both cases, courts used the dominion test. They drew an analogy between nominees and agents on one hand, and conduit companies on the other. They found that the recipient company was not a nominee or agent. As a consequence of applying the dominion test, courts adopted a formal legalistic approach, which in turn, led them to draw an analogy between the doctrine of piercing the corporate veil and the beneficial ownership test. They found that because the recipient company was not a nominee or agent, it received passive income as the owner of the income, and therefore, had the freedom to decide how to use the income. That is, the recipient company had dominion. For this reason, in the opinion of the courts, it was inappropriate to pierce the corporate veil. The courts completely overlooked the issue of whether the arrangement was consistent with the object and purpose of the double tax treaties in question.

Keywords: Beneficial Onwership, Dominion, withholding tax, Prévost Car Inc. v. Her Majesty the Queen, Velcro Canada Inc. v. The Queen