The OECD has published the comments received from interested parties on its revised proposals in respect of the meaning of “beneficial ownership” for the purposes of Articles 10 to 12 of the OECD Model Tax Convention. The comments relate to the revised discussion draft published by the OECD on 19 October 2012. Interested parties were given until 15 December 2012 to submit their comments.

The issue of beneficial ownership is important because the OECD Model Tax Convention refers in Articles 10, 11 and 12 on dividends, interest and royalties to situations where the beneficial owner is a resident of the other contracting state. As the comments received on the original discussion draft were almost identical in respect of Articles 10, 11 and 12 the revised discussion draft focused on proposed revisions to the commentary on Article 10.

The beneficial owner of the income is not necessarily the same person as the person to whom the payment is directly made, and the source state is not obliged to give up taxing rights over the income merely because the income is directly received by a resident of a state that is a treaty partner.

The original discussion draft referred to the situation where the recipient was not the beneficial owner because the recipient did not have the full right to use and enjoy the dividend. Commentators considered that this wording was too broad and could encompass too wide a range of recipients. For example, this could include a situation where the recipient has an obligation to pass on the income to satisfy a debt or to pay it over as part of a financial arrangement.

Where the recipient of dividend income in a contracting state is acting as an agent, nominee or conduit company the recipient of the dividend is not the beneficial owner because that person’s right to enjoy the income is restricted by the legal obligation to pass on the income to another person. This legal obligation would normally be evidenced from legal documents but may also be evident from the facts and circumstances.

The revised discussion draft makes changes to paragraph 12.4. of the commentary on Article 10 to clarify the position. The legal obligation that requires the recipient of the dividend to pass it on to another person must relate directly to the payment received. Legal obligations relating to another matter may also result in the recipient using the payment to fulfil legal obligations but would not necessarily mean that the recipient is not the beneficial owner for the purpose of Article 10 of the treaty. Such unrelated obligations may include a situation where the recipient is a debtor, involved in financial transactions, a pension scheme or a collective investment vehicle that is entitled to treaty benefits.

The revised discussion draft also clarifies that the beneficial owner of the dividend is not necessarily the same person as the owner of the shares. Changes proposed to paragraph 12.6. of the commentary to Article 10 explain that the clarification of the meaning of the term “beneficial owner” for the purposes of the treaty is related to difficulties arising from the recipient of the dividend rather than the ownership of the shares. The meaning of “beneficial owner” for this purpose cannot therefore be connected to the ultimate ownership of the shares.

The OECD has received 18 responses to the revised discussion draft and these are available on the OECD website. The comments are to be considered by Working Party 1 of the OECD’s Committee of Fiscal Affairs at its February 2013 meeting.