Evolution of the beneficial ownership concept: more than half of century of uncertainty and what history can tell us

• Author: Bruno da Silva
• Pages: 501-523

FRONTIERS OF LAW IN CHINA

VOL. 12 DECEMBER 2017 NO. 4

DOI 10.3868/s050-006-017-0028-5

FOCUS

NEW CHALLENGES AND UNDERTAKINGS FOR ADMINISTRATIVE AND

REGUL ATORY REFORM: A GLOBAL WATCH WITH CHINESE PERSPECTIVE

EVOLUTION OF THE BENEFICIAL OWNERSHIP CONCEPT:

MORE THAN HALF OF CENTURY OF UNCERTAINTY AND

WHAT HISTORY CAN TELL US

Bruno da Silva*

Abstract The beneficial ownership concept has constituted for more than half a

century one of the most fundamental and debated issues in the application of tax treaties.

This article goes back to routes of this term explaining the reason of its original

inclusion in the OECD Model Tax Convention and why ultimately such inclusion may

have not been necessary. Then it analyses the historical developments of beneficial

ownership in the OECD Model Tax Convention. For that purpose it considers different

interpretations adopted by jurisdictions (particularly in China) and local courts delving

into some of the landmark cases on the subject. Finally it provides a detailed analysis of

the current meaning of beneficial ownership considering the most recent developments

in the Commentary to the OECD Model Tax Convention.

Keywords beneficial ownership, OECD Model Tax Convention Commentary,

interpretation, case-law, China

INTRODUCTION .................................................................................................................... 502

I. THE EVOLUTION OF THE MEANING OF THE TERM “BENEFICIAL OWNER” IN THE

OECD MTC AND ITS COMMENTARY ...................................................................... 502

A. The Origins........................................................................................................ 503

B. The 1977 Amendments to the OECD MTC........................................................ 503

C. The 1986 Conduit Companies Report ...............................................................504

D. The 1999 Partnership Report............................................................................ 506

E. The 2003 Amendments to OECD MTC Commentary........................................ 506

II. RELEVANCE OF DOMESTIC LAW OR AUTONOMOUS INTERPRETATION?.................. 508

A. Domestic References .........................................................................................508

B. The Development in China................................................................................ 509

* Bruno da Silva, Ph.D. in International Tax Law, Faculty of Law, University of Amsterdam, Amsterdam,

The Netherlands; Tax lawyer at Loyens & Loeff N.V.; Lecturer, University of Amsterdam/Amsterdam Centre

for Tax Law, Amsterdam, The Netherlands. Contact: bruno.da.silva@loyensloeff.com

502 FRONTIERS OF LAW IN CHINA [Vol. 12: 501

C. (Ir)Relevance of Domestic Law......................................................................... 511

III. INTERPRETATION BY LOCAL COURTS: RELEVANT CASE-LAW .............................. 512

A. Prevost Case .................................................................................................... 512

B. Velcro Case ...................................................................................................... 514

C. Indofood Case.................................................................................................. 515

D. Real Madrid Case............................................................................................ 516

IV. INTERIM CONCLUSIONS......................................................................................... 516

VI. THE 2014 AMENDMENTS TO THE OECD MTC..................................................... 517

A. The 2014 Expanded Commentary.................................................................... 517

B. The Elements of Beneficial Ownership............................................................ 519

C. Beneficial Ownership Not to Be Confused with a Substance Requirement .....521

CONCLUSION........................................................................................................................ 522

INTRODUCTION

Since it was first introduced in 1977 in the OECD Model Tax Convention (OECD

MTC) the meaning of beneficial ownership has been surrounded by great uncertainty.1

An unknown term in the domestic laws of many jurisdictions, the term has been subject

to different interpretations by local authorities and courts. Meanwhile the OECD either

through the amendments to the OECD Model Commentary,2 or through other OECD

reports tried to provide some guidance about the meaning of beneficial ownership.

In this article I will first look back to the evolution of the beneficial ownership term

from an historical perspective. In this context, an analysis will be made to the significant

amendments to the OECD Model Commentary and the reports dealing with this issue.

Then, a brief description will be made about some of the landmark cases dealing with the

interpretation and application of the beneficial ownership and how the term has been

understood differently by courts of different jurisdictions.

Finally, it will be analyzed (on the basis of the 2014 Commentary) what the

significance is of any particular meaning the term “beneficial owner” has in a treaty

state’s domestic law, for the meaning the term may have for treaty purposes. Thereafter,

the various elements of the notion “beneficial ownership” as laid down in the 2014

Commentary will be described and analyzed.

I. THE EVOLUTION OF THE MEANING OF THE TERM “BENEFICIAL OWNER” IN THE

OECD MTC AND ITS COMMENTARY

The notion “beneficial ownership” was introduced in 1977 in the Articles 10–12 of the

1 See for an overview, LI Jinyan, Beneficial Ownership in Tax Treaties: Judicial Interpretation and the

Case for Clarity, Comparative Research in Law & Political Economy, Research Paper No. 4/2012, at

188–192, available at http://digitalcommons.osgoode.yorku.ca/clpe/4 (last visited Oct. 5, 2017).

2 With respect to beneficial ownership, the original 1977 Commentary was expanded and clarified twice:

in 2003 and in 2014.