Effectiveness of the Beneficial Ownership Test in Conduit Company Cases

Abstract

The thesis evaluates the effectiveness of the beneficial ownership test, under Articles 10(2), 11(2), and 12(1) of the OECD Model tax convention, as a counter-measure against improper use of tax treaties through conduit companies. It argues that the notion of beneficial ownership is logically not capable of being applied to conduit companies. The beneficial ownership test is meant to be used as a test of economic substance in the OECD Model. It determines who is ultimately better off as the result of the payment rather than who is the immediate recipient. That is, the beneficial ownership test ascertains the economic reality of the relationship between the parties. In cases of closely held corporations, such as subsidiaries established as conduit companies, shareholders control when and if they will to realise the corporate income in their personal capacity. Conduit companies are not economically independent of their shareholders because they pass on their profits to them. That is, although conduit companies may be the legal owners of income, in economic reality their shareholders own the income. It follows that, logically and in an economic sense, conduit companies can never be the beneficial owners of income. In the context of Articles 10(2), 11(2), and 12(1), conduit companies can never be entitled to treaty benefits.