venerdì, Giugno 14, 2024
Tax Driver

The meaning of beneficial ownership in tax treaties

Articolo a cura di Bocconi students Advocacy&Litigation

The treaty shopping represents an insidious form of transnational abuse implemented through the undue use of bilateral conventions against double taxation on income. The tool to oppose  this phenomenon is contained in almost all the treaties themselves and it is the so-called clause of the beneficial owner. Despite the term “beneficial ownership” is included in numerous tax treaties concluded between countries today, the majority of these treaties do not define the term. This continues to lead to numerous interpretative doubts, which have been objects of study for a long time of the most authoritative doctrine, while from recent times is becoming a growing body of jurisprudence coming from the most prestigious courts of the international scene.

Moreover, the definition of beneficial ownership is becoming more and more relevant in not only the local, but also in the international arena. Cross border transactions which take place on a daily basis open the possibility for excessive tax avoidance in order to obtain lower tax rates by using double tax agreements for not only dividends but also for royalties and interest.


A major objective of most tax treaties is to provide for reduced rates of withholding tax levied by the source State on dividends, interest and royalties paid to residents of the other Contracting State. This objective has been addressed in Articles 10 (dividends), 11 (interest) and 12 (royalties) of the OECD Model  Convention .

These provisions cover the allocation of tax jurisdiction of income received by both private individuals and enterprises. With regard to dividends, the standard of the MC is that the tax jurisdiction is shared. The state of source has been granted a limited tax jurisdiction. Its taxation is credited by the recipient’s State of residence, even when it otherwise applies the exemption method. Shared taxation in connection with an ordinary tax credit is also the system applied to interest. However, tax jurisdiction in respect to royalties is exclusively allocated to recipient’s State of residence.

The structure and the wording of some parts of Articles 10-12 are rather similar. Therefore, these provisions have a significant number of common interpretation issues, the most important of which is the concept of BO.


The OECD model divides the dividend tax between the State of residence of the shareholder and that of the company which distributes the dividends (source State).

The art. 10 of the OECD model provides that dividends may be taxed also in the State of residence of the distributing company in accordance with the legislation of that State. Yet if the BO is resident in the other contracting State, the tax may not exceed the 15% measure. It adds that the tax charged to the source cannot exceed the 5% measure whether the BO is a company resident in the other Contracting State which owns directly at least 25% of the capital of the company paying the dividends. This provision responds to the need to mitigate the double taxation on intra-group dividends and to facilitate international investments. A similar rule is contained in artt. 11 and 12 with reference to interest and royalties.

Originating from the common law family of states, the concept of beneficial ownership was borrowed into the model convention and can now be said to form a part of this treaty tradition. This concept was introduced for the first time in the 1977 Convention Model, but originally the meaning of that term was not sufficiently defined neither in the text of art. 10, nor in the commentary of the OECD model. In particular, the 1977 version of the commentaries on the articles of the model (the OECD commentary) did not specify an object and a purpose of the OECD model that could be considered in the interpretation of BO. This has meant that there have been continuous interpretative evolutions over the years, addressed by the various changes to the commentary attached to the OECD Model Convention.

As not one country has made any reservation or observation as to its meaning in the model convention, the commentary should be taken as a starting point when interpreting the concept of beneficial ownership . Indeed, the OECD has not been totally indifferent to this uncertainty.

In the 2010 version of the commentary is specified that: “the term beneficial owner is not used in a narrow technical sense, rather, it should be understood in its context and in light of the object and purposes of the Convention, including avoiding double taxation and the prevention of fiscal evasion and avoidance”. That seemed to suggest that the term BO must be interpreted in a contextual way. The commentary further states that: “Where an item of income is received by a resident of a Contracting State acting in the capacity of agent or nominee it would be inconsistent with the object and purpose of the Convention for the State of source to grant relief or exemption merely on account of the status of the immediate recipient of the income as a resident of the other Contracting State”.

In 2011 the OECD started a discussion to clarify the meaning of BO by releasing public discussion drafts that proposed to set forth a definition of BO in the OECD commentary: ‘‘Clarification of the Meaning of ‘Beneficial Owner’ in the OECD Model Tax Convention; Discussion Draft’’ (the first discussion draft) and ‘‘OECD Model Tax Convention: Revised Proposals Concerning the Meaning of ‘Beneficial Owner’ in Article 10, 11 and 12’’ (the second discussion draft; and collectively, the discussion drafts).

The concept was further explained in detail at the 2014 update of the Commentary, which elaborates a more restrictive meaning, as outlined below “ Since the term ‘beneficial owner’ was added to address potential difficulties arising from the use of the words ‘paid to… a resident’ in paragraph 1, it was intended to be interpreted in this context and not to refer to any technical meaning that it could have had under the domestic law of a specific country… The term ‘beneficial owner ‘ is therefore not used in a narrow technical sense, rather it should be understood in its context, in particular in relation to the words ‘paid .. to a resident’, and in light of the object and purposes of the Convention, including avoiding double taxation and the prevention of fiscal evasion and avoidance”. Such a reconstruction thus tends to favor a factual approach based on the prevalence of the economic substance (or rather, the actual ownership of the same) linked to the income streams, in comparison with a merely formal charge of them to the recipients. However the paragraph precises that the domestic meaning should not be automatically irrelevant, rather it should be applicable as long as is consistent with the commentary. In other words, the scope of the concept is set out by the Commentary without room for domestic law to suggest a diverging interpretation.

Then, after various changes and additions, the 2014 edition of the OECD Model Convention (articles 10, 11 and 12) and its related Commentary provide now that a subject is considered to be the real beneficiary of the income streams when the income-earner benefits from the mere right to use the income streams (the right to use and enjoy) and consequently he is not obliged to return the same to another party, on the basis of contractual or legal obligations, also de facto extrapolated (unconstrained by a contractual or legal obligation to pass on the payment received to another person).


In spite of the particular importance of the clause of the BO, however, it is not possible to find its express definition, with the exception of the Convention between Italy and Germany, where point 9 of the Protocol states that “the recipient of the dividends, interest and royalties is the beneficial owner within the meaning of Articles 10,11 and 12 if he is entitled to the right upon which the payments are based and the income derived there-from is attributable to him under the lax laws of both States”; the definition is based on two tests: entitlement to the right with respect to which payment of income is made (non-tax test), and attribution of the income for tax purposes ( tax-test).

The default situation in a case like that is that Article 3(2) of the OECD Model provides as follows: “As regards the application of the Convention at any time by a Contracting State, any term not defined therein shall, unless the context otherwise requires, have the meaning that it has at that time under the law of the State for the purpose of the taxes to which the Convention applies, any meaning under the applicable tax laws of that State prevailing over a meaning given to the term under other laws of that State”.

The general interpretation is that any undefined tax treaty term has the meaning that it has under the laws of the state applying the treaty, unless the context otherwise requires. This means that if the context requires, the domestic meaning of the term ‘beneficial owner’ is not relevant. Moreover, the OECD Model Convention Commentary seemed to suggest that the term must be interpreted in a contextual way, and many authors feels the context requires that the term must be interpreted autonomously within the context of the treaty. Therefore, in spite of the clear wording of article 3(2) there is strong support for the view that terms being well established in international tax law, such as a BO, should be interpreted in a purely treaty framework and not by reference to domestic law.

This position was confirmed by the 2011 OECD discussion draft paper that upheld that the term is an international term and that a domestic meaning is only relevant to the extent that is it consistent with the general guidance included in the OECD MC Comm. The international nature of the term was further strengthened in the 2012 OECD discussion draft, since the reference to a domestic meaning was deleted and the autonomous treaty meaning of the term was emphasized.

Then, in the OECD MC 2014 Comm., the international nature of the term has been worded very explicitly.

As will be discussed in the further paragraph, in case law, it has also been held that the term only has an international meaning and that domestic meanings are irrelevant; however some courts left it an open question.

The literature now also agrees that the term has assumed its own autonomous international meaning for convention purposes, which has to be extracted from the object and purpose of the Treaty. Vogel, for example, stated that the beneficial owner: “is he who is free to decide whether or not the capital or other assets should be used or made available for use by others or how the yields therefrom should be used, or both”.

This is confirmed by Philip Baker who wrote a report presented to the Committee of Experts on International Cooperation in Tax Matters, in the fourth session in Geneva (20-24 October 2008): “My personal view on these two issues is as follows. The term “beneficial owner” should bear an “international fiscal meaning” and not take the meaning under the domestic law of the contracting states concerned; this is a case where “the context otherwise requires” Article 3 (2) not to apply. I take this view largely because the term was introduced into international fiscal usage through the work of the OECD, picked up and inserted and the UN model, and is employed in double taxation conventions entered into by countries some of which employ the term “beneficial owner” in the domestic law, others of which do not. The term also has to be given the meaning consistent with its cognates in other languages: for example, the French version of the OECD model (which bears equal authority with the English version) uses the term “le beneficiareeffectif”. Baker says that the term is simply not given any meaning under the applicable tax laws of many of the states which have entered into treaties to which the term is applied (particularly those with civil law jurisdictions).

Not only is there uncertainty in respect of whether there is a well-known domestic meaning for the term “beneficial owner”, a direct English translation of the foreign-language term discloses that there is also an inconsistency in terminology. Du Toit in his book sets out a table of 20 states selected with no a prior rule. Seen in this light there is a forceful argument that an autonomous tax treaty meaning is to be preferred given the different terminology in the different translations, as it allows a broad encapsulation of the various language terms and meanings. Moreover the purpose of using this concept is to prevent treaty shopping, which is better achieved by common interpretation across countries.

Be that as it may, in a number of domestic tax laws the term ’beneficial owner’ has been included and defined, determined or interpreted in case law. Examples of countries where the term has a domestic meaning are Australia, Canada, the Netherlands, the UK and the US (they are especially common law countries). In these cases, the beneficial owner must be distinguished from the legal owner. Even Ryynanen thinks that interpreting the notion “the meaning given to the term in the common law family of states should be taken into account because the concept originates from that tradition”.

Anyway, in reference to this notion, we can bring the doctrinal elaborations to four different interpretative possibilities:

  1. The notion that can be found in common law countries, transposed into the OCSE Model.
  2. A meaning that excludes only the agent or the nominee, the only examples given by way of example from the Commentary.
  3. Third, the beneficial owner may coincide with the person to whom the income is attributed under the domestic law of the Contracting States.
  4. Finally, an autonomous notion for conventional purposes may be perceived in the light of the purpose and scope of the convention.



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O. Ryynanen “The concept of beneficial owner in the application of Finnish tax treaties”,, (2009).

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