Master Thesis European and International Tax Law University of Amsterdam
“The general legal principle of EU law in relation to the OECD
Principal Purpose Test”
A study on the general legal principle that EU law cannot be relied on for abusive or fraudulent ends, as defined by the ECJ in the Danish cases, in relation to the Principal Purpose Test as developed by the OECD.
Author A.M.E. Vulto
Student no. 10379460
Email address ankjevulto@hotmail.com
Telephone number +316 276 222 43
Masters European and International Tax Law
Thesis supervisor Prof. dr. S. van Weeghel
2
Abstract
On 26 February 2019, the ECJ delivered its groundbreaking judgements in the Danish cases. In these cases, the ECJ defined a general legal principle that EU law cannot be relied on for abusive or fraudulent ends in the field of direct taxation. This general legal principle of EU law resembles the PPT as introduced by the OECD in Article 29(9) of the 2017 OECD Model Tax Convention. Both anti-abuse concepts consist of a subjective and an objective element. By conducting a qualitative literature review, the research in this thesis focuses on the question to what extent the general legal principle of EU law is consistent with the PPT and how these anti-abuse concepts relate to one another. On the basis of this research, several conclusions can be drawn. It can be established that the general legal principle of EU law, as defined by the ECJ in the Danish cases, is consistent with the PPT to the extent that both alternative anti-abuse concepts contain a subjective and an objective element. The objective element in both concepts overlaps to a large extent. However, the subjective element differs in several aspects. The subjective element in the general legal principle of EU law focuses more on the intentions of the taxpayer, whereas the subjective element in the PPT appears completely objectifiable. Furthermore, the principal allocation of the burden of proof is different in both cases and the concept of beneficial ownership, of which the absence can indicate abuse, is interpreted in a broader sense in the Danish cases than it is in OECD context. Taking into consideration all differences, it can be concluded that the general legal principle that EU law cannot be relied on for abusive or fraudulent ends has a broader scope than the PPT. If the PPT in tax treaties were to be interpreted EU conform in accordance with the established case law in the Danish cases, this could imply that the PPT is attributed a broader meaning than was originally intended by the OECD.
3
List of abbreviations
BEPS Base Erosion and Profit Shifting
BO Beneficial Ownership
EU European Union
ECJ Court of Justice of the European Union IBFD International Bureau of Fiscal Documentation IRD Interest and Royalty Directive
MLI Multilateral Instrument
OECD Organization for Economic Cooperation and Development OECD Model OECD Model Tax Convention on Income and on Capital PPT Principal Purpose Test
PSD Parent Subsidiary Directive
4
Table of contents
1 Introduction ... 5
1.1 Introductory remarks and motivation of study ... 5
1.2 Research question(s) ... 6
1.3 Research methodology ... 6
2 The Principal Purpose Test in OECD context ... 7
2.1 Introductory remarks ... 7
2.2 The OECD Model, the BEPS project & the MLI ... 7
2.3 History of the Principal Purpose Test ... 8
2.4 The application of the Principal Purpose Test ... 9
2.4.1 The subjective test ... 10
2.4.2 The objective test ... 12
2.4.3 The burden of proof ... 14
2.5 Conclusion ... 16
3 The concept of Beneficial Ownership in OECD Context ... 17
3.1 Introductory remarks ... 17
3.2 History of the concept of Beneficial Ownership ... 17
3.3 The application of the concept of Beneficial Ownership ... 19
3.4 Case law on the concept of Beneficial Ownership ... 19
3.5 Relation between the concept of Beneficial Ownership and the PPT ... 22
3.6 Conclusion ... 23
4 The Danish cases ... 24
4.1 Introductory remarks ... 24
4.2 The interest cases: joined cases C-115/16 (N Luxembourg 1), C-118/16 (X Denmark A/S), C119/16 (C Danmark I) and C-299/16 (Z Denmark Aps) ... 24
4.3 The dividend cases: joined cases C-116/16 (T Danmark) and C-117/16 (Y Denmark Aps) ... 26
4.4 The conclusion of the Advocate General in the Danish Cases ... 27
4.5 The ECJ Judgements in the Danish Cases ... 28
4.6 The concept of Beneficial Ownership in the Danish cases ... 28
4.7 The constituent elements of the concept of abuse of rights in the Danish cases ... 29
4.7.1 The objective element ... 30
4.7.2 The subjective element ... 32
4.7.3 The burden of proof ... 33
4.8 Conclusion ... 34
5 A comparison between the Danish cases and the OECD PPT ... 36
5.1 Introductory remarks ... 36
5.2 A comparison of the subjective component ... 36
5.3 A comparison of the objective component ... 38
5.4 A comparison of the burden of proof ... 39
5.5 A comparison of the concept of beneficial ownership ... 40
5.6 The practical consequences of the Danish cases for interpretation of tax treaties ... 41
5.7 Conclusion ... 42 6 Conclusion ... 44 6.1 Introductory remarks ... 44 6.2 Conclusion research ... 44 6.3 Recommendations ... 45 Bibliography ... 47
5
1 Introduction
1.1 Introductory remarks and motivation of study
On 26 February 2019, the Court of Justice of the European Union (“ECJ”) delivered its judgements in joined cases 115/16, 118/16, 119/16 and 299/16 and joined cases C-116/16 and C-117/16 on the request for a preliminary ruling from the Supreme Court of Denmark. These remarkable judgements, hereinafter referred to as the ‘Danish cases’, concerned the interpretation of Council Directives 2003/49/EC (Interest and Royalty Directive) and 2003/123/EC (Parent Subsidiary Directive) and more specifically, on what grounds an exemption of Danish withholding tax on interest and dividend could be refused by the Danish tax authorities.
In order to apply the withholding tax exemption on interest payments, the Interest and Royalty Directive (“IRD”) requires that the recipient of the payment qualifies as beneficial owner. According to the ECJ, the beneficial owner is the entity that economically benefits from a distribution of income and accordingly has the power to freely determine how to put the income to use. Even though joined cases C-116/16 and C-117/16 concerned the application of the Parent Subsidiary Directive (“PSD”), in which the concept of beneficial ownership is not explicitly included as requirement for the exemption of withholding tax, this has not prevented the ECJ to rule similarly in all cases, namely that no exemption was applicable. This was achieved through the application of a general principle of EU law which encompasses that EU law cannot be relied upon for fraudulent or abusive practices.
The ECJ substantiated the existence of this broad principle of EU law with the argument that an abuse of EU rights should always be prevented. It was confirmed that it is not required that this general principle of EU law is codified in domestic law or in tax treaties in order for it to have legal force. The principle can cover situations that may not fall within the scope of the existing legislation. The ECJ also elaborated on the constituent elements of which an abuse of rights comprises.
According to the ECJ, an abuse of rights consists of an objective and a subjective element. The first element requires a combination of objective circumstances which, despite formal compliance with EU provisions, nonetheless leads to the purpose of those provisions not being achieved. The second element entails the intention to obtain benefits by artificially creating the conditions that allow for these specific benefits to be granted. The ECJ considers that a structure that is purely one of form, of which the principal objective or one of the principal objectives is to obtain a tax advantage contrary to the aim or purpose of the applicable provision providing the benefit, qualifies as artificial.
Interestingly, the subjective and objective element introduced by the ECJ as part of the general legal principle of EU law, seem to resemble the subjective and objective component as defined by the Organization for Economic Cooperation and Development (“OECD”) in the Principal Purpose Test (“PPT”) of article 29(9) of the 2017 OECD Model Tax Convention on Income and on Capital (“the OECD Model” or “the Convention”). This PPT consists of two parts: the subjective test and the objective test. The first part entails the denial of treaty benefits in cases where it is reasonable to conclude that the obtaining of a benefit was one of the principal purposes of the arrangement or transaction. The second part allows the tax authorities to return to the granting of benefits if it is established that this would be in accordance with the object and purpose of the applicable provision of the convention in the relevant circumstances.
In this context, the question arises to what extent the general legal principle that EU law cannot be relied upon for abusive or fraudulent ends, as defined by the ECJ in the Danish cases, is consistent with and how it relates to the PPT as developed by the OECD.
This research is conducted by first discussing the PPT and its development in OECD context. Secondly, the concept of beneficial ownership in OECD context is touched upon, as
6
this concept is also part of the EU legal principle. Thirdly, the Danish cases are discussed in detail. Finally, a comparison is made between the OECD PPT and the concept of abuse of rights as defined by the ECJ in the Danish cases to determine whether both concepts are consistent with one another and how they relate to one another. This study aims to formulate an answer to the research question and attempts to make a contribution to the academic debate on this subject by providing practical guidance, where possible.
1.2 Research question(s)
The research question that provides the basis for the research conducted in this thesis is:
To what extent is the general legal principle that EU law cannot be relied on for abusive or fraudulent ends, as defined by the ECJ in the Danish cases, consistent with and how does it relate to the PPT as developed by the OECD?
To provide sufficient background information, the research sub questions listed below will be answered in the following chapters.
1. How has the PPT, as defined in article 29(9) of the 2017 OECD Model, developed over time and how can it be applied?
2. What does the concept of Beneficial Ownership encompass and what is the role of this concept in light of the PPT as developed by the OECD?
3. What were the relevant facts and circumstances in the Danish cases and how did the ECJ rule in these cases?
4. To what extent are the constituent elements of an abuse of rights, as established by the ECJ in the Danish cases, consistent with and how do they stand in relation to the components of the OECD PPT?
1.3 Research methodology
The research in this thesis is conducted on the basis of qualitative literature review. In this regard, several legal resources (i.e. books, articles, international (OECD, EU, IBFD) publications, case law, treaties, domestic legislation and other legal documents) have been consulted in order to come to a well-substantiated conclusion.
7
2 The Principal Purpose Test in OECD context 2.1 Introductory remarks
The global battle against tax avoidance and evasion finds its origin in several international initiatives in which countries have united to combat problems on a cross-border level. Many of these programs have been initiated by the OECD, of which the members include some of the largest economies in the world. The global introduction of the PPT, as it has widely become known, is one of the recent achievements of the OECD. The PPT has an extensive history, before it was first introduced in its current form in the OECD BEPS project. This chapter will elaborate on the travaux préparatoires of the PPT and its application in international OECD context by answering the first research question: How has the PPT, as defined in article 29(9) of the OECD Model, developed over time and how can it be applied?
2.2 The OECD Model, the BEPS project & the MLI
Model tax treaties have a long history beginning in the nineteenth century with models developed by the League of Nations. The OECD Model was roughly based on these models and in turn most current tax treaties are based on the OECD Model.1
The first OECD Model was published in 1963 accompanied by the Commentaries on the Articles of the Model Tax Convention (“the Commentary”). The OECD Model was introduced to provide an instrument to settle the most common problems that arose in the field of international taxation on a uniform basis, e.g. removing the obstacle of double taxation to enhance the development of economic relations between countries and to standardize the fiscal position of taxpayers engaged in activities in different countries. From the first version on, the OECD Model was constantly updated to address new tax issues arising from the evolution of the global economy and several new versions were published in the years up to and including 2017.2
Around the year 2010, following the financial crisis and subsequent reaction of society on aggressive tax planning of large multinationals, the international political climate changed. A change in attitude was expressed by world leaders at the G20 in 2013, demanding that all taxpayers pay their fair share of taxes. From thereon, the prevention of tax avoidance, accomplished through harmful practices and aggressive tax planning, became an important point of focus.3 The consensus reached at the 2013 G20 OECD meeting laid the foundations for the Base Erosion and Profit Shifting (“BEPS”) project. This project addressed tax avoidance strategies that exploit gaps and mismatches in domestic systems of taxation to facilitate tax evasion.4 In October 2015, the OECD and G20 countries eventually adopted the BEPS Action Plan. This was a program, consisting of 15 Action Points, that functioned as a package for reform of the international tax system in order to tackle international tax avoidance.5
The OECD BEPS project also provided the basis for the Multilateral Convention to Implement Tax Treaty Related Measures to Prevent Base Erosion and Profit Shifting (“MLI”), which was a key part of the implementation strategy of the 15 Action Point BEPS project.6 The MLI was set up as an instrument to implement a series of tax treaty measures to update international tax treaties and mitigate the opportunities for tax avoidance by multinationals. It offers a simple solution for countries to implement the results from the BEPS project into
1 R.S. Avi-Yonah, Double Tax Treaties: An Introduction (Dec. 3, 2007), Oxford: Oxford University Press.
2 OECD Model Tax Convention on Income and on Capital (21 Nov. 2017), Models IBFD (hereinafter: OECD Model (2017)).
3 C. Berghedal, Anti-Abuse Measures in Tax Treaties Following the OECD Multilateral Instrument – Part 1, Bulletin for International Taxation (Feb. 2018); G20, G20 Leaders’ Declaration of September 2013 para. 50 (G20 2013).
4 https://www.oecd.org/tax/beps/ (Accessed on 2 Jan. 2020).
5 https://www.oecd.org/ctp/beps-2015-final-reports.htm (Accessed on 2 Jan. 2020).; C. Elliffe, The Meaning of the Principal Purpose Test:
One Ring to Bind Them All? World Tax Journal (Feb. 2019) IBFD.
8
bilateral tax treaties worldwide.7 Moreover, it can be concluded that the OECD has remained anything but inactive over the past years in the international battle against tax avoidance and still continues to provide guidance on this subject.
2.3 History of the Principal Purpose Test
Although it should be noted here that the OECD PPT is assumed to have originated from a similar concept that was part of the United Kingdom treaty practice since the mid 1900s, this is outside the scope of this research.8 The history of the PPT discussed here, will be limited to the mere OECD developments.
The 1977 OECD Model was the first version that referred to treaty abuse by addressing improper use of the Convention in Article 1.9 The Commentary on this article provided that tax treaties should not facilitate tax avoidance or evasion and that States should adopt provisions in domestic legislation to counter maneuvers of taxpayers exploiting the differences in domestic taxation laws.10 Although the 1977 Commentary mentioned improper use of the Convention, it did not provide for potential solutions on this subject. It did, however, introduce the concept of beneficial ownership in Articles 10, 11 and 12 to deal with some of the cases of improper use of the Convention.11
In 1987, the Conduit Companies Report was published to address the theme of treaty shopping. This report provided that improper use of the Convention could only be prevented through specific treaty provisions, written for this cause.12
Subsequently, examples of such treaty provisions were provided for in the Commentary on Article 1 of the 1992 OECD Model. It should be noted that, contrary to the previous requirement of mere formal provisions, it was established that no explicit notion in the text of the Convention was required for the underlying principles to apply. However, still no explicitly clear remedies for improper use of the Convention were presented.13 Between 1992 and 2002, two more reports were published containing recommendations concerning the entitlement to treaty benefits, but the major changes came in 2003.14
The 2003 OECD Model introduced the guiding principle.15 This principle, which is still a part of the 2017 OECD Model, provides that the benefits of the Convention should not be available where a main purpose for entering into a transaction or arrangement is to secure a more favorable tax position, if obtaining that more favorable tax position is contrary to the object and purpose of the relevant provisions of the convention.16 Besides that, another important change in the 2003 OECD Model resulted from an amendment of the preamble. This amendment comprised of an addition which contained that the purpose of tax conventions was also to prevent tax avoidance and evasion, besides the prevention of double taxation. Although it remains uncertain whether this addition provided for an actual change in interpretation or only provided for a clarification of the purpose of the Convention, it became clear that tax treaty benefits should not be granted in cases of abuse.17
7 https://www.oecd.org/tax/treaties/multilateral-convention-to-implement-tax-treaty-related-measures-to-prevent-beps.htm (Accessed on 2 Jan. 2020).
8 I. Zahra, The Principal Purpose Test: A Critical Analysis of Its Substantive and Procedural Aspects – Part 1, Bulletin for International Taxation,
2019 (Volume 73), No. 11.
9 S. van Weeghel, A Deconstruction of the Principal Purposes Test, World Tax Journal (Feb. 2019) IBFD; OECD Model (1963).
10 This version also referred to the possibility to benefit from tax advantages to using artificial legal constructions to benefit from tax
advantages under both domestic law and tax treaties, but this reference was deleted in the 2017 version; Paragraph 8, OECD Commentary on Article 1 OECD Model (1977).
11 Van Weeghel, supra n. 9, at p. 7; Zahra, supra n. 8, at p. 611.
12 OECD, Report on Double Taxation Conventions and the Use of Conduit Companies (OECD 1987) [hereinafter: Conduit Companies Report].
13 OECD, OECD – Double Taxation Conventions and the use of Conduit Companies – Report: adopted by the OECD Council on 27 November 1986 para. 43 (OECD 1986), Primary Sources IBFD; Zahra, supra n. 8, at p. 611.
14 The 1998 Report on Harmful Tax Competition and the 2002 Report restricting the Entitlement to Treaty Benefits. 15 Para. 9.5 OECD Commentary on Article 1 OECD Model (2003).
16 Para. 61 OECD Commentary on Article 1 OECD Model (2003). 17 Van Weeghel, supra n. 9, at p. 9; Zahra, supra n. 8, at p. 611.
9
The next particularly relevant development with regard to the PPT came years later with the publication of the BEPS project in 2013. The PPT was introduced as a part of Action 6 of the BEPS initiative. Action 6 focused on tax treaty abuse and intended to establish effective anti-avoidance rules.18 The PPT was proposed in the context of developing model treaty provisions and providing recommendations for domestic provisions to prevent the granting of treaty benefits in inappropriate circumstances, in other words ‘treaty shopping’. Treaty shopping was defined as a number of arrangements through which a person who was not a resident of a contracting state could attempt to obtain benefits that a tax treaty only granted to residents of that state.19 The Final Report on Action 6 was published in 2015 and recommended to include a clear statement in tax treaties clarifying the purpose of the convention, i.e. preventing tax avoidance and the creation of opportunities for treaty shopping. It also suggested to include a General Anti Abuse Rule (“GAAR”) that should be linked to the principal purpose of a transaction or arrangement.
Following the publication of the Final Report on Action 6, the PPT was included in Article 29(9) of the 2017 OECD Model.20 There is a connection between the 2017 OECD Model PPT and the ‘guiding principle’ included in the Commentary on Article 1. The 2017 OECD Commentary provides that the PPT mirrors the guidance provided for earlier in the Commentary on Article 1 and merely confirms the guiding principle as set out therein.21 It could therefore be argued that the PPT incorporates this principle. However, it is important to note that, even though the earlier Commentary and present PPT show similarities, there are some remarkable differences. First of all, the guiding principle mentions a ‘main purpose’, whereas application of the PPT requires that ‘one of the principal purposes’ is the obtaining of a tax benefit. Secondly, instead of the ‘obtaining of a benefit’ under the PPT, the guiding principle speaks of obtaining a ‘more favorable tax position’.22 Also, the PPT seems to be broader in application as the burden of proof does not require ‘clear evidence’, but merely that it is ‘reasonable to conclude’ that abuse has taken place.23 These are relevant differences, but will not have major effects in practice, as the guiding principle has not been excluded in the 2017 OECD Model. The reason for this is that the PPT has not been included in all treaties yet. In addition, the OECD explicitly notes in the 2017 Commentary that the PPT merely mirrors and confirms the guiding principle, but does not extent, amend or modify it.24 Therefore, both the guiding principle and the PPT continue to exist alongside each other.
In order to efficiently incorporate the BEPS project into bilateral tax treaties on a global level, the OECD developed the MLI as part of Action 15.25 The PPT of Action 6 Final Report BEPS was incorporated in Article 7 of the MLI as a general default anti-abuse rule. It was adopted by all signatories to the MLI, giving it the status of minimum standard.26 This means that the PPT shall apply for all tax treaties that have been designated as ‘Covered Tax Agreement’ by the States that are party to that treaty and that have ratified the MLI.
2.4 The application of the Principal Purpose Test
According to Action 6 BEPS, tax treaty abuse can be divided into two subclasses. It either consists of an abuse of law or an abuse of rights. The first encompasses avoidance of the law
18 S. Buriak, Chapter 2: The Application of the Principal Purpose Test under Tax Treaties in Tax Treaty Entitlement (M. Lang et al. eds., IBFD 2015), Online Books IBFD.
19 Action 6 Final Report BEPS (2015).
20 B. Kuźniacki, The Principal Purpose Test (PPT) in BEPS Action 6 and the MLI: Exploring Challenges Arising from Its Legal Implementation
and Practical Application, World Tax Journal (May 2018) IBFD.
21 Para. 61 OECD Commentary on Article 1 OECD Model (2003); Elliffe, supra n. 5, at p. 53.
22 A. Baéz Moreno, GAARs and Treaties: From the Guiding Principle to the Principal Purpose Test – What Have We Gained from BEPS Action
6? 45 Intertax 6/7).
23 Buriak, supra n. 18, at pp. 10-11.
24 Para. 169 OECD Commentary on Article 29(9) OECD Model (2017).
25 http://www.oecd.org/tax/beps/beps-actions/action15/ (Accessed on: 2 Jan. 2020) 26 Kuźniacki, supra n. 20, at p. 238; Action 6 Final Report BEPS (2015).
10
whereby the taxpayer circumvents the object and purpose of a provision and the second concerns situations in which rights are invoked to an end contrary to that defined by the legislator.27 The PPT was developed to serve as a general anti-abuse rule in order to prevent abuse of law (treaty shopping), but it has been argued that it is also capable of preventing abuse of rights.28 If the PPT applies, the denied benefit can include all possible limitations on taxation (e.g. tax reductions, exemptions, deferrals or refunds) that would otherwise be granted. This also includes the relief of double taxation and other forms of protection afforded to residents of the relevant contracting state.29 The PPT can be found in Article 29(9) of the 2017 OECD Model:
“Notwithstanding the other provisions of this Convention, a benefit under this Convention shall
not be granted in respect of an item of income or capital if it is reasonable to conclude, having regard to all relevant facts and circumstances, that obtaining that benefit was one of the principal purposes of any arrangement or transaction that resulted directly or indirectly in that benefit, unless it is established that granting that benefit in these circumstances would be in
accordance with the object and purpose of the relevant provisions of this Convention.”30
As discussed under 2.3, the OECD Commentary on Article 29 provides that Paragraph 9 mirrors the guidance provided for in Paragraphs 61 and 76 to 81 on Article 1 OECD Commentary, which include the guiding principle. It also provides that the PPT incorporates the other principles underlying the Commentary on Article 1 into the convention. This enables States to address cases of improper use of the convention even if their domestic law does not facilitate this. It merely confirms the principles underlying the Commentary on Article 1 for States that already have domestic law on the subject.31
The PPT consists of a cumulative test that comprises of two components which have become commonly known as the subjective and the objective test. A clear distinction between the two tests is difficult, as these are highly intertwined.32 However, for the purpose of this research both elements, as well as the burden of proof, will be addressed separately as this allows for a better comparison between the PPT and the EU general anti abuse principle.
2.4.1 The subjective test
The subjective test of the PPT provides that a benefit under the Convention is unavailable “(…)
if, it is reasonable to conclude, having regard to all relevant facts and circumstances, that obtaining that benefit was one of the principal purposes of any arrangement or transaction that resulted directly or indirectly in that benefit (…)”. A mere grammatical interpretation of this
wording would entail that any benefit will be denied if, within the limits of what it would be sensible or rational to expect on the basis of relevant facts, the conclusion would be justified that the principal intention or motive of a taxpayer in undertaking a transaction or arrangement was the mere obtaining of this benefit.33 This would, however, be too narrow an approach. Since, in accordance with established case law, taxpayers in principle are free to arrange their affairs in the most favorable way. This includes the obtaining of the most favorable tax
27 P. Piantavigna, The Role of the Subjective Element in Tax Abuse and Aggressive Tax Planning, World Tax Journal (May 2018), IBFD; Para. 169 OECD Commentary on Article 29(9) OECD Model (2017).
28 Buriak, supra n. 18, at p. 3; R. J. Danon, Treaty Abuse in the Post-BEPS World: Analysis of the Policy Shift and Impact of the Principal Purpose
Test for MNE Groups, Bulletin for International Taxation (January 2018) IBFD; Action 6 Final Report (2015); paras. 58-60; paras. 180 and 182
OECD Commentary on Article 29 OECD Model (2017).
29 Para. 175 OECD Commentary on Article 29 OECD Model (2017); Elliffe, supra n. 5, at p. 67.
30 I. Mitroyanni, European Union, GAARs – A Key Element of Tax Systems in the Post-BEPS Tax World, at p. 26 (M. Lang et al. eds., IBFD 2016), Online Books IBFD.
31 Para. 169 OECD Commentary on Article 29 OECD Model (2017) 32 Van Weeghel, supra n. 9, at p. 11.
11
position.34 Although there is a fine line between taxpayers attempting to limit tax liabilities which results in tax treaty abuse and legitimate reduction of these tax liabilities, it is clear that a purely grammatical interpretation does not justify the depths of the PPT. Several factors should be taken into account when assessing the subjective test. For the purpose of assessing the subjective test, scholars often make a distinction between the ‘reasonableness test’ and ‘principal purpose part’. These parts should be applied jointly.35
The ‘reasonableness test’ of the PPT can be found in the first part of the subjective test: “(…) if it is reasonable to conclude, having regard to all relevant facts and circumstances (…)”. The Commentary on Article 29 states that the determination of a principal tax purpose requires reasonableness, which suggests that the possibility of different interpretations of events should be objectively considered.36 In practice, the establishment of a tax avoidance purpose, is often based on objective evidence rather than inference regarding the personal intentions of the taxpayer. In that regard, the subjective test can be said to focus on finding a reasonable conclusion on the basis of objective criteria, relating to the principal purpose of the transaction or arrangement.37 The Commentary confirms this by providing that an objective analysis should be made of the aims and objects of all persons involved in an arrangement or transaction. This includes weighing all evidence of the case to determine whether it is reasonable to conclude that an arrangement or transaction is undertaken for the principal purpose of obtaining a benefit.38 Through such an analysis, the principle purpose can be completely objectified by the reasonableness test.39
For completeness sake, it should be noted that not all scholars agree on how the ‘reasonable to conclude’ passage should be interpreted. On the one hand, it is argued that the reasonableness test entails that a conclusion should be drawn on the basis of an objective analysis, as set out above. On the other hand, scholars have argued that the use of the wording ‘reasonable’ merely refers to the severity of the burden of proof. In that case, the wording would insinuate that the threshold for the tax authorities to deliver proof of abuse is relatively low.40 Both alternative views are taken into account for the comparison with the EU general principle of abuse of law.
The second part of the subjective test encompasses what can be referred to as the ‘principal purpose part’. A benefit will be denied if it is concluded “(…) that obtaining that
benefit was one of the principal purposes of any arrangement or transaction that resulted directly or indirectly in that benefit (…)”. The OECD Commentary provides that the ‘principal
purpose’ requirement seeks to ensure that the sole or dominant purpose of a particular arrangement or transaction was not the obtaining of a benefit under the relevant treaty. If, however, at least one of the principal purposes of a certain action was to obtain a benefit under the relevant treaty, this can be enough to trigger the PPT.41 As an exception, the Commentary provides that an arrangement that is inextricably linked to a core commercial activity of the taxpayer and the form of the arrangement has not been driven by considerations of obtaining a benefit, it is unlikely that the principal purpose was to obtain such a benefit.42 This suggests that a certain degree of substance or presence in the form of a core commercial activity could
34 NZ: PC, 1971, Mangin v. Commissioner of Inland Revenue, [1971] NZLR 591, 598.
35 D.M. Weber, The reasonableness test of the Principal Purpose Test Rule in OECD BEPS Action 6 (Tax Treaty Abuse) versus the EU principle
of legal certainty and the EU abuse of law case law, Erasmus Law Review (August 2017), pp. 48-59; M.L. Gomes, The DNA of the Principal Purpose Test in the Multilateral Instrument, 47 Intertax 1, p. 79 (2019); Van Weeghel, supra n. 9, at p. 11; Elliffe, supra n. 5, at p. 64.
36 Para. 179 OECD Commentary on Article 29(9) OECD Model (2017) 37 Elliffe, supra n. 5, at p. 66; Weber, supra n. 34, at p. 49.
38 Para. 178 and 179 OECD Commentary on Article 29(9) OECD Model (2017); Action 6 Final Report BEPS (2015), Part B, para. 10 at p 57. 39 Elliffe, supra n. 5, at p. 64; Weber, supra n. 34, at p. 49.
40 Weber, supra n. 34, at p. 51 ; M. Lang, BEPS Action 6: Introducing an anti-abuse rule in tax treaties, 74 Tax Notes International 7(19 May 2014); A. Bhargava, ‘The Principal Purpose Test: Functioning, Elements and Legal Relevance’, in Blum and Seiler (eds.), Preventing Treaty Abuse, Series on International Tax Law (2016) at p. 318; E. Pinetz, ‘Use of the Principal Purpose Test to Prevent Treaty Abuse’, in Lang et al. (eds.), Base Erosion and Profit Shifting (BEPS), Series on International Tax Law (2016).
41 Para. 180 OECD Commentary on Article 29 OECD Model (2017); Zahra, supra n. 8, at p. 614. 42 Para. 181 OECD Commentary on Article 29 OECD Model (2017).
12
function as relevant indicator as to whether or not a principal purpose for obtaining a benefit exists.43 This point of view is substantiated by several examples provided for in the OECD Commentary on Article 29.44
An important component of the term ‘one of the principal purposes’ is the noun ‘purpose’. This wording implies that the objective, an inherent part of the concept of having a ‘purpose’, which a taxpayer seeks to achieve should be taken into consideration for the assessment of the subjective test.45 If no objectified result should be taken into account, the Commentary might as well have read ‘intention’ or ‘motive’ instead of ‘purpose’, as both should be interpreted in a narrower manner.46 A purpose is often the objectified conclusion a taxpayer has in mind, whereas there will be no purpose without an intention to achieve that specific result.47 Following this line of reasoning, the principal purpose of a transaction or arrangement could be unraveled by examining the overall objective behind the transaction, without having to place great emphasis on the taxpayer’s intention. In other words, the use of this specific wording reinforces the objective assessment of an arrangement or transaction and diminishes the relative importance of the subjective intention of the taxpayer, which might be favorable for legal certainty. Since it is much easier to conduct an assessment on the basis of objectified effects of certain actions, whereas it can be difficult to consider a taxpayer’s intention or motive in certain undertakings.48 On the other hand, this might also result in a disadvantage for taxpayers. In the sense that it is easier for tax authorities to substantiate their point of view with objective facts instead of having to prove a taxpayer’s intention.
Summarizing, it can be stated that the subjective element is applied in a rather objectified sense. The application of the subjective test has a proviso, namely that the PPT shall not apply if granting the benefit is in accordance with the object and purpose of the Convention.49 This exception is shaped in an objective test.
2.4.2 The objective test
The objective test operates as an exception to the application of the main rule of the PPT which provides that a benefit shall not be granted if the subjective test is met.50 The objective test encompasses that a benefit will not be granted on the basis of the subjective test “(…) unless it
is established that granting that benefit in these circumstances would be in accordance with the object and purpose of the relevant provisions of this Convention.” The most important
component that can be identified in this test is the meaning of the phrase ‘object and purpose’. In order to establish whether the objective test is met, it should be determined what exactly this component covers.
The OECD Commentary is relatively brief about the wording ‘object and purpose’ as used in the PPT. It provides that, with regard to the interpretation of the phrase ‘object and purpose’, the PPT should be read in i) the context of Paragraphs 1 to 7 of Article 29, ii) in the context of the rest of the Convention and iii) in the context of the preamble of the Convention.51
First of all, the ‘object and purpose’ can be examined in the context of paragraphs 1 to 7 of Article 29. The Commentary explicitly states that the PPT supplements and does not restrict in any way the other paragraphs of Article 29.52 In addition, the guidance provided for on the
43 Zahra, supra n. 8, at p. 614.
44 Para. 182 OECD Commentary on Article 29 OECD Model (2017), Examples G, H and I; Para. 187 OECD Commentary on Article 29 OECD
Model (2017), Example F. 45 Elliffe, supra n. 5, at p. 66.
46 Piantavigna, supra n. 26, at. pp. 203-206 and p. 213. 47 Elliffe, supra n. 5, at p. 67; Zahra, supra n. 8, at p. 614. 48 Elliffe, supra n. 5, at pp. 66-67.
49 Elliffe, supra n. 5, at pp. 68-69. 50 Zahra, supra n. 8, at p. 616.
51 Para. 173 OECD Commentary on Article 29 OECD Model (2017). 52 Para. 171 OECD Commentary on Article 29 OECD Model (2017).
13
PPT should not be used to interpret the other paragraphs of Article 29 and vice versa.53 On the other hand, a benefit granted under the other paragraphs of Article 29 can still be denied under the PPT, as the first paragraphs focus primarily on legal nature, ownership and general activities of residents, whereas this does not rule out the possibility of improper use of the applicable treaty under the PPT.54 Summarizing, the object and purpose of paragraphs 1 to 7 of Article 29 are to establish a specific legal qualification for the entitlement to treaty benefits. In contrast, the PPT could still deny benefits if e.g. the benefits would be granted in case of a conduit finance arrangement.55
Secondly, the ‘object and purpose’ should be read in the context of the rest of the Convention. In understanding the context of the Convention, the Vienna Convention on the Law of Treaties (“VCLT”) is an important source. The VCLT provides guidance on the interpretation of tax treaties and is regarded as the most important lead for interpretation of treaties.56 Article 31(1) of the VCLT contains the general rule for interpretation of treaties. It prescribes that a treaty shall be interpreted in good faith and that the interpretation shall follow the ordinary meaning given to the provisions in light of their context and the object and purpose of the treaty.57 In order to determine the context and object and purpose of a treaty, the common intention which can be ascribed to the parties should be identified.58 Furthermore, the VCLT provides a list of primary resources from which the context of a treaty can be derived. The common feature of these resources is that all are based on the mutual intent or shared understanding of the parties involved, which can be expressed either actively or through passive consent.59 This list includes the text of the treaty, agreements made between the parties in connection with the treaty and any subsequent agreement between the parties regarding the interpretation or application of the treaty. For tax treaties based on the OECD Model, it is widely assumed that the Commentary is an admissible source for interpretation.60 The Commentary provides that the PPT is intended to ensure that tax treaties are applied in accordance with the purpose for which they were entered into, i.e. to provide benefits in respect of bona fide exchanges of goods and services, and movements of capital and persons.61 The ‘object and purpose’ would then refer to the legislative intention of the applicable rule or provision.62 Also interesting in this regard, is the relation between the application of the PPT and the guiding principle as set out in the Commentary on Article 1. Whereas the guiding principle intends to ensure that benefits are denied if granting these would be contrary to the object and purpose of the relevant provisions, the PPT will only grant benefits if these are in accordance with the object and purpose of the relevant provisions.63 Questions have been raised as to whether granting a benefit that is not contrary to the object and purpose of the convention, by definition would also be in accordance with the object and purpose of the Convention.64 The Commentary on Article 1 is not conclusive on this subject as it solely provides that the guiding principle should be applied independently from the PPT and that the PPT merely confirms it.65 This, however, does insinuate that the guiding principle and the PPT see to the same object and
53 Para. 171 OECD Commentary on Article 29 OECD Model (2017). 54 Para. 172 OECD Commentary on Article 29 OECD Model (2017). 55 Para. 173 OECD Commentary on Article 29 OECD Model (2017). 56 Zahra, supra n. 8, at p. 617.
57 Article 31(1) reads: “A treaty shall be interpreted in good faith in accordance with the ordinary meaning to be given to the terms of the treaty in their context and in the light of its object and purpose”.
58 Article 26 VCLT; UK: Supreme Court, 1 July 2015, [2015] UKSC 44, Anson v. Commissioners for Her Majesty’s Revenue and Customs, para. 56.
59 V. Kolosov, Guidance on the Application of the Principal Purpose Test in Tax Treaties, 71 Bulletin of International Taxation 3/4 (2017) IBFD, at pp. 1-8.
60 Kolosov, supra n. 58, at p. 5; Compare: S. Douma & F. Engelen (eds.), The legal status of the OECD Commentaries, IBFD (2008). 61 Para. 174 OECD Commentary on Article 29 OECD Model (2017).
62 Piantavigna, supra n. 26, at p. 194.
63 Van Weeghel, supra n. 9, at p. 11; J. van der Wolk, Purposive Interpretation of Tax Statutes: Recent UK Decisions on Tax Avoidance
Transactions, Bulletin for International Fiscal Documentation, Docn. 2, Vol. 56, at p. 70, 2002.
64 Van Weeghel, supra n. 9, at p. 14.
14
purpose, but that it cannot be excluded that the PPT has an even broader scope. This would be in line with the interpretation of the first part of the PPT: “Notwithstanding the other provisions
of this Convention (…)”, as it is argued that this part makes it clear that the PPT can apply in
spite of the application of any other provision of the Convention.66
Lastly, the Commentary expressly refers to the preamble as source for the context of interpretation. This is in accordance with Article 31(2) of the VCLT which provides that the context for the purpose of the interpretation of a treaty shall include its preamble. The preamble might be the clearest element of guidance recommended in the Commentary for obtaining a better understanding of the ‘object and purpose’ of the Convention. A preamble is an amendable and descriptive section of a legal document that often comes before the substantive sections. The preamble of the OECD Model expressly states that the conclusion of a tax convention should enable States to eliminate double taxation without creating opportunities for non-taxation or reduced non-taxation through tax evasion or avoidance.67 Three purposes of the Convention can be identified in the preamble: the elimination of double taxation, the prevention of tax evasion and the prevention of tax avoidance.68 For a long time, the primary and sole objective of tax treaties was the elimination of double taxation. The objective of avoiding treaty abuse qualified as more controversial. The reason for this was that tax treaties in principle aimed to assign taxing rights between contracting states but did not obligate these states to actually levy tax.69 However, since the prevention of tax evasion and avoidance was added in the preamble of the OECD Model, this objective became more important and widely accepted. Tax evasion refers to the illegal attempt to reduce taxes payable by fraudulent means, whereas tax avoidance is understood as lawful minimization of taxes payable realized through financial planning.70
Although the preamble seems to express all the beforementioned as purposes of equal interest, the Commentary on Article 1 appoints the elimination of double taxation as principal purpose of the Convention and attributes mere limited importance to the purposes of prevention of tax avoidance and evasion.71 This is understandable provided that not all cases in which the elimination of double taxation is achieved are also compliant with the prevention of tax avoidance.72 In that regard, it could be argued that the PPT is not merely a confirmation or dilation of the guiding principle of Article 1, but the reference to the preamble gives the PPT an even slightly different scope. The PPT reduces the importance of the principal purpose defined in the guiding principle, being the avoidance of double taxation, in favor of the purposes of the prevention of tax avoidance and evasion.73
In order to determine whether the PPT is applicable the circumstances, demonstrating that the objective of a relevant provision cannot be attained, should be present.74 The allocation of the burden of proof is an important factor in this case. This determines whether the taxpayer or the tax authorities are required to come up with the relevant evidence substantiating the granting or denial of benefits.
2.4.3 The burden of proof
Benefits are denied under the PPT if the subjective test is met unless it becomes clear that the objective test is met.75 To determine whether the subjective and/or objective test are met,
66 Zahra, supra n. 8, at p. 620.
67 Preamble OECD Model and para. 54 OECD Commentary on Article 1 OECD Model (2017). 68 Van Weeghel, supra n. 9, at p. 17.
69 C. Peng & J. Schuch, Tax Treaty Entitlement, Chapter 1: The Relevance of the Preamble for Treaty Entitlement, IBFD (May 2019). 70 C. Peng & J. Schuch, supra n. 68, at p. 9.
71 Van Weeghel, supra n. 9, at p. 17.
72 C. Elliffe, The Lesser of Two Evils: Double Tax Treaty Override or Treaty Abuse? British Tax Review, No 1 (2016) at pp. 62-88. 73 Van Weeghel, supra n. 9, at p. 18.
74 Piantavigna, supra n. 26, at p. 211. 75 Elliffe, supra n. 5, at p. 68.
15
evidence should be provided by the taxpayer or the tax authorities. This burden of delivering proof should be divided between the taxpayer and the tax authorities. The Commentary does not specifically elaborate on the burden of proof or its allocation. However, it can be deduced from the text of the PPT that the subjective test is likely to be applied by the tax authorities and that the objective test should be applied by the taxpayer. Many scholars have confirmed that this means a heavier burden of proof is allocated to the taxpayer.76
Before analyzing the division of the burden of proof, it should be noted that some scholars have argued that no such thing as a ‘burden of proof’ exists in the context of the PPT. This perspective follows from the presumption that the law is the law and the law cannot be proven. A judge should merely apply the law.77 However, for the PPT to function in practice, some form of evidence should be made available. For example, to determine whether certain actions are in line with object and purpose of the applicable provision. A judge cannot be expected to determine whether specific circumstances call for application of the PPT ex officio. Therefore, it is assumed that the concept of a burden of proof exists and that the burden of proof should be allocated between the taxpayer and the tax authorities.
The PPT gives tax authorities a rather large discretion in the form of a subjective test.78 The Commentary provides that it is not necessary to find conclusive proof of the intent of a taxpayer, but it must be reasonable to conclude that one of the principal purposes is to obtain a benefit.79 Although the Commentary continues by stating that the principal purpose of obtaining a benefit should not be lightly assumed, several scholars argue that it is relatively easy to reasonably conclude that obtaining a benefit under a treaty is one of the principal purposes of an arrangement.80 The fact that the PPT encompasses the term ‘one of the principal purposes’, instead of terminology used in alternative GAARs or the guiding principle such as ‘main purpose’ or ‘predominant purpose’, provides for a broad scope which enables tax authorities to comply with the requirements of the subjective test more easily.81 In addition, it is not even required that conclusive proof of the intent of the taxpayer is provided, but reasonable proof seems to be sufficient. By comparison, the guiding principle requires ‘clear evidence’ of the intention of a taxpayer to obtain a benefit. This is in any case a stricter requirement.82 For completeness sake, it should be noted here, that other scholars have argued that the ‘reasonable to conclude’ passage does not affect the severity allotted to the burden of proof, as discussed under 2.4.1.83
If it is established that one of the principal purposes of an arrangement or transaction is to obtain a benefit under the Convention, the taxpayer to whom the benefit would otherwise be denied is allowed the possibility of proving that the obtaining of the benefit is in accordance with the object and purpose of the relevant provision of the Convention.84 The taxpayer should ‘establish’ that the obtaining of a certain benefit is in accordance with object and purpose of a treaty.85 The requirements for delivering proof for the taxpayer are different from those for the tax authorities. The tax authorities need not provide conclusive proof of their tax position, whereas the taxpayer is required to establish its tax position.86 Therefore, the burden of proof allocated to the taxpayer is assumed to be heavier.
76 E. Pinetz, Final Report on Action 6 of the OECD/G20 Base Erosion and Profit Shifting Initiative: Prevention of Treaty Abuse, 70 Bull. Intl. Taxn. 1/2 (2016), Journals IBFD; Lang, supra n. 39, at p. 656; L. de Broe & J. Luts, BEPS Action 6: Tax Treaty Abuse, 43 Intertax 2, at p. 134 (2015); Bhargava, supra n. 39, at p. 318.
77 G. Aaronron QC, ACTL Conference, The Principal Purposes Test, Amsterdam (3 May 2019).
78 Weber, supra n. 34, at p. 59; F. Debelva et al., LOB Clauses and EU-Law Compatibility: A Debate Revived by BEPS?, 24 EC Tax Review 3, at p. 133 (2015).
79 Para. 178 OECD Commentary on Article 29 OECD Model.
80 Lang, supra n. 39, at p. 655; Pinetz, supra n. 39, at p. 271; Bhargava, supra n. 39, at p. 318. 81 R. Kok, The Principal Purpose Test in Tax Treaties under BEPS 6, 44 Intertax 5, at p. 408 (2016). 82 Buriak, supra n. 18, at p. 2.
83 Weber, supra n. 34, at p. 51.
84 Para. 169 and 170 OECD Commentary on Article 29 OECD Model (2017). 85 Article 29(9) OECD Model (2017); Buriak, supra n. 18, at p. 13. 86 Para. 178-181 OECD Commentary on Article 29 OECD Model (2017).
16
Furthermore, scholars have argued that the PPT bears a presumption of abuse whereby the bias is always in favor of the tax authorities.87 This follows from the observation that the granting of a benefit is assumed to be contrary to the object and purpose of the Convention, whereby the word ‘unless’ carries the presumption of abuse.88 According to some scholars, placing the onus on the taxpayer causes the rule to become disproportionate.89 If, however, the first part of the PPT would be read in conjunction with the second part, this could result in a more balanced allocation of the burden of proof. The assumption would then be that the burden of proof is merely divided between the tax authorities and the taxpayer, which means that the tax authorities are to proof that there is abuse and the taxpayer has the burden of proving the contrary.90 Although, even in that case the objectified subjective test eases the burden for the tax authorities by merely requiring that they substantiate their assessment of a taxpayer’s intention with objective facts and circumstances.91
How exactly the burden of proof of the PPT will be divided between the tax authorities and taxpayers, will be a matter for the National Courts to decide on in practice. However, it is predominantly assumed that the burden of proof allocated to the taxpayer is heavier.
2.5 Conclusion
The PPT is applicable if one of the principal purposes of an arrangement or transaction is the obtaining of a benefit under the convention (subjective test). The consequence of the PPT being applicable is that benefits under the relevant tax convention will be denied. However, a benefit will not be denied if the obtaining of the benefit is in accordance with the object and purpose of the relevant provisions of the convention (objective test).
It is assumed that the subjective test consists of a reasonableness test and a principal purpose part. The reasonableness test secures that an analysis is made based on objective circumstances and the principal purpose part bears the word ‘purpose’ which insinuates that the result of an arrangement or transaction is also taken into account for the assessment of the subjective test. In conclusion, this entails that the subjective test is rather objectified.
The most important part of the objective test is found in the meaning of the wording ‘object and purpose’. Several resources can be consulted to identify the object and purpose of the Convention. The main guidance is likely to be found in the preamble which provides that the purposes of the Convention include the elimination of double taxation and the prevention of tax evasion and tax avoidance. In conclusion, it can be established that the ‘object and purpose’ of the PPT cover a wide scope.
With regard to the allocation of the burden of proving either the subjective or the objective test, it can be stated that this should ideally be divided evenly between the tax authorities and the taxpayer. However, this is not the case for the PPT. The substantive proof to be provided by the tax authorities is assumed to be easier to obtain than the proof that should be provided by the taxpayer. Practice should indicate to what extent this will impair the taxpayer.
87 Lang, supra n. 39, at p. 660; Elliffe, supra n. 5, at p. 69.
88 O. Koriak, The Principal Purpose Test under BEPS Action 6: Is the OECD Proposal Compliant with EU Law? European Taxation (December 2016) IBFD, pp. 552-559.
89 Elliffe, supra n. 5, at pp. 69-70. 90 Buriak, supra n. 18, at p. 12. 91 Weber, supra n. 34, at p. 51.
17
3 The concept of Beneficial Ownership in OECD Context 3.1 Introductory remarks
The concept of beneficial ownership was first introduced in the OECD Model as a specific anti-abuse rule (“SAAR”). As a consequence, several Member States implemented the concept in domestic law as well and the ECJ incorporated the concept in its judgements. However, it remained difficult to establish a clear and universal definition of the concept. The ECJ also incorporated the concept of beneficial ownership in its judgements in the Danish cases as part of the general principle of abuse of EU law. Therefore, the concept of beneficial ownership is discussed here, although in essence it is not part of the PPT. Since the concept of beneficial ownership was defined by the OECD, it is interesting to determine what meaning can be assigned to the concept in light of OECD developments. The question to be answered in this chapter is: What does the concept of Beneficial Ownership encompass and what is the role of this concept in light of the PPT as developed by the OECD? Besides relevant OECD documentation, case law will be consulted to come to a conclusive answer to the second research question.
3.2 History of the concept of Beneficial Ownership
The concept of Beneficial Ownership was first introduced in the 1977 OECD Model as an anti-abuse component that was part of the articles on dividends, interests and royalties.92 The Commentary in this regard stated that a limitation of tax in the source state would not be available where an intermediary, such as an agent, nominee or mandatary was interposed between the ultimate beneficiary and the distributor of certain income.93 The original purpose of introducing the concept was to simply clarify that intermediaries with minimal ownership rights were not to be recognized as recipients for the purpose of reducing withholding tax rates under a treaty. Ever since its first introduction, the concept and its meaning have been surrounded by great uncertainty.94
Approximately ten years later, in 1986, the Conduit Company Report was published and elaborated on the concept of beneficial ownership in light of treaty shopping practices.95 The report concluded that the beneficial ownership concept could be used to tackle conduit company scenarios.96
The conclusions of this report were incorporated in the 2003 OECD Model.97 In the 2003 Commentary, the focus was on the taxation of income at the level of the recipient and reference was made to the fact that conduit companies, in practice, have very limited power over the income they receive.98 The 2003 Commentary provided that a recipient was not the beneficial owner if it did not have the full right to use and enjoy the income and this income was not its own, because the powers of this recipient were constrained by an obligation to pass on the received payment to another person.99 Furthermore, it was provided that the beneficial ownership concept could function as an anti-abuse tool, whereby it should not be interpreted in a narrow technical sense, but it should be understood in its context and in light of the object and
92 C. Poiret, Beneficial Ownership: Concept, History and Perspective, European Taxation, July (2016) IBFD, pp. 274-283; S. Huibregtse, R. Offermanns & L. Verdoner, A Cross-Country Perspective on Beneficial Ownership – Part 1, 50 Eur. Taxn. 9 (2010), Journals IBFD
93 Articles 10, para. 2, art. 11, para. 2 and art. 12, para. 1 OECD Model (2017); D.G. Duff, Chapter 1: Beneficial Ownership: Recent Trends in
Beneficial Ownership: Recent Trends (M. Lang et al. eds., IBFD 2013), Online Books IBFD.
94 B. da Silva, Evolution of the Beneficial Ownership Concept: More than Half of Century of Uncertainty and What History Can Tell Us, 12 Frontiers L. China 501 (2017).
95 Double Taxation Conventions and the Use of Conduit Companies (OECD 1986), International Organizations’ Documentation IBFD; Poiret,
supra n. 91, at p. 275.
96 F. Navisotschnigg, Chapter 4: The Beneficial Ownership Test in Tax Treaty Entitlement (M. Lang et al. eds., IBFD 2015), Online Books IBFD. 97 Article 10 OECD Model (2017); Poiret, supra n. 91, at p. 275; Navisotschnigg, supra n. 95, at p. 1.
98 Para. 12.1 OECD Commentary on Article 10 OECD Model (2003); Poiret, supra n. 91, at p. 279. 99 Para. 12.4 OECD Commentary on Article 10 OECD Model (2003).
18
purpose of the Convention.100 This caused more uncertainty about the interpretation of the concept, that had still not been defined in the OECD Model. Article 3(2) of the OECD Model provides that any term not defined therein, unless the context otherwise requires, shall have the meaning that it has under the domestic law of the State to which the Convention applies.101 In addition, the Commentary on Article 3(2) requires a dynamic interpretation of terms that are not defined in the Convention. This means that a term should have the meaning that it has under the laws of a certain state at the time of application of the Convention.102 When the concept was introduced, none of the OECD Member States had included it in domestic law, but various countries did so in the years thereafter.103 It was assumed, that in the absence of a definition in the OECD Model, Member States were authorized to interpret the concept in light of domestic legislation. However, the Commentary provided that the concept should not be interpreted in a narrow technical sense such as the meaning given to it under domestic law, but that it should be interpreted in its treaty context.104 The new developments led to many court cases on beneficial ownership, but the differences in judgements were substantial.105 As a consequence of which, the OECD decided to provide further clarification.
In 2011 and 2012, two discussion draft documents entitled ‘Clarification of the meaning of beneficial owner in the OECD Model Tax Convention’ and ‘OECD Model Tax Convention: Revised Proposals Concerning the Meaning of “Beneficial Owner” in Articles 10, 11 and 12’ were published by the OECD in an attempt to come to a common understanding of the concept of beneficial ownership.106 Among other things, these reports shifted the focus from the existence of an obligation to pass on certain income to the nature of such an obligation. Not all
cases in which an obligation to spend income existed, immediately led to disqualification of the recipient as beneficial owner.107 The publications caused even more questions to be raised with respect to the interpretation and practical application of the concept.108
Eventually, several proposed changes were incorporated in the 2014 OECD Model. A beneficial owner was defined as a recipient of income which has the full right to use and enjoy received income unconstrained by a contractual or legal obligation to pass on the payment received to another person. Such an obligation may be derived from relevant legal documents or may be found in facts and circumstances showing that the recipient does not have the full right to use and enjoy the income.109 The updated Commentaries confirmed that the assessment of the obligation to pass on the payment should not include contractual or legal obligations that were not related to the payment received.110 The focus should be on the nature of the obligation rather than on the existence of the obligation, otherwise all back-to-back positions would no longer qualify for beneficial ownership. With respect to the enjoyment of the income, it appeared that the emphasis should be on the power to control the income, rather than on the use of the income.111 The 2017 OECD Model update did not contain material changes in this regard.
100 Para. 12 OECD Commentary on Article 10 OECD Model (2003). 101 Article 3(2) OECD Model (2017).
102 Para. 11 and 12 OECD Commentary on Article 3(2) OECD Model (2017). 103 Da Silva, supra n. 93, at p. 508.
104 Article 10 OECD Model (2003); Poiret, supra n. 91, at p. 275. 105 Navisotschnigg, supra n. 95, at p. 1.
106 OECD, Clarification of the Meaning of “Beneficial Owner” in the OECD Model Tax Convention Discussion Draft (2011), International Organizations’ Documentation IBFD; OECD, OECD Model Tax Convention: Revised Proposals Concerning the Meaning of “Beneficial Owner” in Articles 10, 11 and 12: 19 Oct. 2012 to 15 Dec. 2012 (OECD 2012).
107 Poiret, supra n. 91, at p. 276.
108 Article 10 OECD Model (2003); Poiret, supra n. 91, at p. 276.
109 Para. 12.4 OECD Commentary on Article 10 OECD Model (2003 and 2014).
110 OECD, OECD Model Tax Convention: Revised Proposals Concerning the Meaning of “Beneficial Owner” in Articles 10, 11 and 12: 19 Oct. 2012 to 15 Dec. 2012 (OECD 2012).
19
3.3 The application of the concept of Beneficial Ownership
The concept of beneficial ownership in Articles 10, 11 and 12 of the Convention refers to a condition that is imposed on a taxpayer that wishes to benefit from a reduced rate of withholding tax on dividend, interest or royalties in the source state.112 These articles can be referred to as
the articles on passive income.113 The articles require that a recipient of passive income need
not only be resident, for application of the relevant treaty, but also the beneficial owner of the income, in order to qualify for a reduction of withholding tax.114
Although no clear definition of the term ‘beneficial owner’ existed for a long time, the concept was regularly used in practice. Once the Commentary stated that the concept should not be interpreted in light of domestic law, as the context of the Convention required otherwise, a broad consensus was that the concept needed to be interpreted autonomously.115 The scope of
interpretation, however, differed tremendously amongst States, since no express definition of the concept was provided by the OECD before 2014. Before the OECD 2014 update, judges did not rule uniformly on the concept of beneficial ownership. Two different lines of reasoning could be identified before the changes in the Commentary of 2014: the legal approach and the economic approach.116 The legal approach focuses on the contractual obligation to forward a
payment received and the economic approach entails that a factual obligation to forward the income is also harmful to the qualification of a beneficial owner. Hereafter, some important case law of national courts will be discussed to provide comprehensive background information on the developments of the concept of beneficial ownership.
3.4 Case law on the concept of Beneficial Ownership
Market maker case (1994)
The Dutch Supreme Court was one of the first to define the concept of beneficial ownership in case law.117 This case concerned a stock broker from the United Kingdom that acquired several
dividend coupons, with the entitlement to dividends, but not the ownership of the underlying shares. When the dividends were paid, the stock broker claimed a partial refund of the charged withholding tax under the Netherlands-United Kingdom Income Tax Treaty. The Dutch Supreme Court ruled that the taxpayer qualified as beneficial owner to the dividends through purchasing the dividend coupons and acquiring the right to freely dispose of them and of the dividend distributions received.118 This decision endorses a strict and formal legal interpretation
of the beneficial ownership concept, whereby a recipient does not qualify as beneficial owner if it is legally obligated to pass on the income, whereas the right to use and enjoy the income in substance is not taken into account.119
Luxembourg Holdings case (2001)
In the Luxembourg Holdings case, the Swiss Federal Administrative Court concluded that a holding company incorporated in Luxembourg did not qualify as beneficial owner of dividends received from a Swiss entity, because the company passed on the total amount of dividend to its parent company in the form of a deductible interest payment that was offset against any tax liability that arose in Luxembourg. The Swiss Court adopted a broad interpretation of the term
112 H. Pijl, The Definition of “Beneficial Owner” under Dutch Law, (2000) IBFD, pp. 256-260. 113 Navisotschnigg, supra n. 95, at p. 1.
114 Article 10, 11 and 12 OECD Model (2017) 115 Article 3(2) OECD Model (2017) 116 Navisotschnigg, supra n. 95, at pp. 7-8.
117 NL: HR, 6 Apr. 1994, Case No. 28.638, BNB 1994/217, Tax Treaty Case Law IBFD.
118 NL: HR, 6 Apr. 1994, Case No. 28.638, BNB 1994/217, Tax Treaty Case Law IBFD; Pijl, supra n. 111, pp. 257-258.
119 D.S. Smit, Chapter 5: The Concept of Beneficial Ownership and Possible Alternative Remedies in Netherlands Case Law in Beneficial
