Double Taxation Conventions and Beneficial Ownership Clauses

1
Double Taxation Conventions andBeneficial
Ownership Clauses

• Congresso Internacional de Direito Tributario
  Rio de Janeiro
• Philip Baker QC
• Grays Inn Tax Chambers

2
Outline

• Background - the beneficial ownership
  limitation provision and its meaning
• The Indofood case
• The Bank of Scotland case
• Indofood and Bank of Scotland compared
• Some conclusions and implications

3
1) Background

• E.g. Article 10 (2)
• such dividends may also be taxed in the
  Contracting State of which the company paying the
  dividends is a resident and according to the laws
  of that State, but if the beneficial owner of the
  dividends is a resident of the other Contracting
  State, the tax so charged shall not exceed .

4
1) Background

• Found in the Dividends, Interest, Royalties and
  Other Income Articles
• Very important for reduced withholding tax claims
• Originated in 1977 OECD Model
• Used previously in e.g. US and UK DTCs

5
1) Background

• Note has a technical meaning in common law
  systems beneficial ownership contrasted with
  legal ownership
• The need for an international fiscal meaning
• French bénéficiaire effectif

6
1) Background

• What is the meaning of beneficial ownership
• The original OECD Commentary mere nominees or
  agents
• The Conduit Companies Report (1986) mere
  fiduciary or administrator
• Commentary amended 1995 and 2002
• A limited anti-shopping provision

7
2) The Indofood case

• English High Court 7th October 2005
• English Court of Appeal 2nd March 2006
• Why was the case brought in the English courts?

8
The Indofood case
Indofood TBK (Indonesia) Parent Guarantor
280 m. 10.375
Indofood International Finance Ltd
(Mauritius) Issuer
280 m. 10.375
JP Morgan Chase Bank NA Trustee
9
The Indofood case
Indofood TBK (Indonesia) Parent Guarantor
Indofood International Finance Ltd
(Mauritius) Issuer
Netherlands NewCo
280 m. 10.375
Indofood International Finance Ltd
(Mauritius) Issuer
280 m. 10.375
JP Morgan Chase Bank NA Trustee
10
The Indofood case

• Background termination of the Indonesia-Mauritius
  DTC
• Proposal to insert a Dutch SPV
• Was this a reasonable measure
• The knock-out blows
• A) the Dutch SPV would not be the beneficial
  owner of the interest
• B) The Dutch SPV would not be a resident of the
  Netherlands

11
The Indofood case

• The meaning of beneficial ownership
• CA An international fiscal meaning
• Beneficial ownership meant the full privilege
  to directly benefit from the income taken from
  the Indonesian Dir-Gen of Income Tax

12
The Indofood case

• The Dutch SPV would not be the beneficial owner
  as
• A) It was obliged to pay on the interest in 1 day
• B) Precluded (by the note conditions) from
  finding the money from any other source
• Regard is to be had to the substance of the
  matter

13
The Indofood case

• Conclusion
• The Dutch SPV would not be the beneficial owner
• The interposition was not a reasonable measure

14
What Indofood decided

• UK law or Indonesian law?
• International fiscal meaning vs. Art. 3(2)
• OECD Commentary

15
What Indofood decided

• Is the decision really that surprising?
• The egregious facts
• Same loan in and out
• Same interest in and out
• Fixed timetable
• Issuer was omitted from cash flows
• The Note Conditions precluded funds from any
  other source

16
Implications of the case

• Limited confirmation of meaning of beneficial
  ownership
• Question remains how far does it extend?
• Initial HMRC reaction Draft Guidance
• Group finance subs (multiple loans in and out)
• CDOs waterfall arrangements

17
3) The Bank of Scotland case

• French Conseil dEtat, 29th December 2006
• UK-France Double Taxation Convention of 1968

18
3) The Bank of Scotland case
Merrell Dow Inc US
3-year usufruct for Frs. 267m
Bank of Scotland - UK
Dividends of Frs. 270m. Plus Repayment of tax
credits and withholding tax of Frs. 74.25m
Marion Merrell Dow - Fr
Marion Merrell Dow Fr
19
3) The Bank of Scotland case

• Legal background
• 25 non-treaty withholding tax reduced to 15
  by Art. 9(6) of the UK-France DTC (with a bo
  limitation)
• Right to repayment of dividend tax credit under
  Art. 9(7) (no bo limitation)
• No right to repayment of the dividend tax credit
  under the France-US double taxation convention

20
3) The Bank of Scotland case

• The Conseil dEtat decided
• The transaction was not a usufruct there was an
  abuse of legal form it was in reality a loan to
  the US parent from the Bank, repaid by the French
  subsidiary
• The beneficial ownership limitation applied also
  to the repayment of the dividend tax credit it
  was a general requirement in tax treaties

21
3) The Bank of Scotland case

• Note the Bank was not nominee or mere fiduciary
• However, the Conseil dEtat confirmed that the
  beneficial ownership limitation reflected a
  general, abuse of law doctrine to deny treaty
  shopping
• The repayment of the excess withholding tax and
  dividend tax credit was denied

22
4) Indofood and Bank of Scotland compared

• Both cases suggest a wider use of the beneficial
  ownership limitation to counter treaty shopping
  not a narrow anti-avoidance measure
• The exact meaning of beneficial ownership left
  unclear by the English Court of Appeal,
  especially the role of the OECD Commentary

23
4) Indofood and Bank of Scotland compared

• The Conseil dEtat suggest a very wide use of the
  beneficial ownership limitation
• Note the Bank was clearly not a nominee or agent
  or mere fiduciary / conduit (except in a broad
  factual sense)

24
5) Consequences of the Indofood and Bank of
Scotland cases

• HMRC draft Guidance on finance structures more
  challenges to claims for reduced / zero
  withholding taxes likely
• France possibly more challenges on treaty
  shopping (a change from the traditional approach
  in France)
• Background of protecting source country taxation

25
5) Consequences of the Indofood and Bank of
Scotland cases

• Possibility that other countries will follow
• E.g. Indonesian Supreme Court case 17th October
  2006
• Changes to OECD Commentary?
• Do we need more clarification of the meaning of
  the beneficial ownership limitation
• Are detailed anti-abuse measures needed in DTCs?

26
Double Taxation Conventions andBeneficial
Ownership Clauses

• Congresso Internacional de Direito Tributario
  Rio de Janeiro
• Philip Baker QC
• Grays Inn Tax Chambers