Effectiveness of the Beneficial Ownership Test in Conduit Company Cases

Abstract

Countries enter into double tax agreements with the economic objective of preventing double taxation of cross-border transactions. To achieve this objective, the contracting states agree reciprocally to restrict their substantive tax law. That is, a major policy of double tax agreements is to reduce double taxation of residents of states that are parties to the agreement. Residents of third states sometimes contrive to obtain treaty benefits typically by interposing a person or a conduit entity in one of the contracting states. In order to ensure that a resident of a contracting state who claims treaty benefits is entitled to them in substance, double tax agreements should be interpreted according to their substantive economic effect. Generally, double tax agreements follow the pattern of the 'OECD Model Tax Convention on Income and on Capital'. ... This book suggests an alternative approach for deciding conduit company cases. It proposes that courts should consider an arrangement as a whole and investigate reasons for the existence of an immediate recipient of passive income in the specific corporate structure. It also recommends amendments in the official commentaries on articles 10, 11 and 12 of the OECD Model in order to address the conceptual shortcomings inherent in those articles.