There have been significant discussions around the world on taxpayers’ methods of minimizing taxes. Expressions like

• beneficial owner,
• economic substance
• management and control,
• place of effective management,
• resident,

have been triggering discussions throughout the world as they are closely related with people’s tax minimization.

How tax minimization used to be effected?

Intermediary company?

Residents of non – treaty countries have been able to obtain the benefits of the conventions between two treaty countries usually by forming intermediary company (flow-through company), in a treaty country in order to obtain treaty benefits.

Court cases

Multinational companies like:

• Vodaphone
• Google
• Starbacks
• Prevost (Volvo)
• Other

have been scrutinised and defamed of using tax ‘efficient’ structures

Prevost (Volvo) was scrutinised as owning a holding company registered in Netherlands with no employees in order to get the benefits of Netherlands’ low withholding tax rates.

When a company may be considered a “paper” intermediary company?

If a third party i.e. fiduciary provider or administrator seems to act on behalf of a beneficial owner?

Consequences

Be taxed in the source country, thus lifting the veil of incorporation of the intermediary company.

On the contrary,

A intermediary company is an entity itself and is distinct from its shareholders. Some of  intermediary company’s powers may be exercised by its directors without the interference of itsshareholders. Directors may also be advised from other experts and in many cases they have sufficient powers to make decisions.

What might then be a definition of a beneficial ownership?

A person that, either directly or indirectly, has the power to influence decisions?

Organisation for Economic Co-operation and Development (OECD) attempt was to describe the term of the beneficial owner which relates to the receipts and payments of dividends, interest and royalties mainly by intermediary companies.

Organisation for Economic Co-operation and Development (OECD) attempt

A intermediary company is not a beneficial owner if:

• The right to use and enjoy the dividend is constrained by a contractual or legal obligation to pass the payment on,
• In substance, the recipient does not have the right to use and enjoy the dividend unconstrained and,
• If the obligation relates to the payment received,
• Each case will be treated on the interpretation of legal documents, facts and circumstances.

Economic substance (OECD)

Sufficient economic substance should be present at the level of intermediary Company and therefore allocation of risks should be consistent with the economic substance (i.e. of that intermediary company)

Important considerations/examples

• The entity owning the most valuable intangibles and performing the most important functions within a corporate structure will typically be entitled to the largest share of the profits or losses;
• The income should arise to the intermediary Company itself and be reported in its bank account and financial statements. The intermediary company should freely deal with inflow of funds representing the dividend received at its full discretion;
• Appointing qualified directors residing in the country of the intermediary company which will have the ability to make decisions and really understand the nature of business;
• Maintaining group head offices in the intermediary country, having fully fledged offices with business telephone lines, telephone answering and call forwarding machines, own website and employ full time or part time employees;

Our conclusion

1. There is no standard approach on the above terms
2. Each case will be treated on:
   • The interpretation of legal documents, facts and circumstances
   • The size and numbers

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