Positioning Beneficial Ownership in Tax Treaties

IN the current international tax landscape, provisions to prevent tax avoidance continue to evolve. One issue drawing considerable attention is the relevance and position of the concept of beneficial ownership in the context of preventing tax avoidance through treaty shopping.

This issue has arisen following the adoption of anti-abuse rules through the Base Erosion and Profit Shifting (BEPS) Action 6 project and the multilateral instrument (MLI).

Where should the concept of beneficial ownership be positioned when the principal purpose test (PPT), limitation on benefits (LOB), and other anti-avoidance provisions are already available? Is the concept of beneficial ownership still necessary, or does it risk creating additional legal uncertainty?

This question is crucial because the status of beneficial ownership can determine whether the recipient of a particular item of income is entitled to benefits in the form of a restriction on the source state's taxing rights under a tax treaty. Differences in the interpretation of this concept will become one of the sources of cross-border tax disputes.

The Function of Beneficial Ownership

The concept of beneficial ownership was first introduced in the 1977 OECD Model, namely in Article 10 on dividends, Article 11 on interest and Article 12 on royalties. However, the OECD Model does not provide a further definition of the concept of beneficial ownership. A brief explanation in the OECD Commentaries states that agents and nominees are not beneficial owners.

According to the OECD Commentaries, the term beneficial owner is not used in a narrow technical sense, but must be interpreted in accordance with the context and purpose of the tax treaty, namely the avoidance of double taxation.

Accordingly, the concept of beneficial ownership is not interpreted on the basis of the meaning under a country's domestic law, but on the basis of its international meaning.

In particular, the beneficial ownership test focuses on whether the recipient of a particular item of income (dividends, interest and royalties) has the right to use and enjoy that income without being bound by a contractual or legal obligation to pass it on to another party.

What is primarily tested, therefore, is the relationship between the recipient and the particular item of income. The concept in tax treaties also cannot simply be equated with the ultimate beneficial owner under ownership transparency regimes and anti-money laundering frameworks.

In the book Beneficial Ownership in International Taxation, Kuźniacki (2022) takes the view that beneficial ownership is more appropriately understood as an income allocation rule — that is, a rule for determining which party is entitled to a particular item of income.

It is therefore not a general anti-abuse provision. In his view, if interpreted too broadly, the concept risks overlapping with other anti-abuse provisions, which would inevitably create uncertainty for taxpayers.

This critique demonstrates that the lack of clear boundaries for a legal instrument can widen its interpretation and trigger disputes. In the same vein, Kuźniacki and Kokott (2025) emphasise the need to separate the beneficial ownership test from the principle of abuse of law, including in relation to the PPT and the general anti-avoidance rule (GAAR).

Both tests operate within the framework of abuse prevention, but have different elements, purposes, and bases for assessment.

Lessons from Disputes

In practice, the assignment of a particular item of income to another company may serve as an initial indicator that the recipient is acting merely as a conduit. However, the onward transmission of a payment does not automatically prove the existence of an obligation to pass on a particular item of income that would eliminate the recipient's discretion.

The concept of beneficial ownership is frequently treated incorrectly as a catch-all rule for tackling tax avoidance. In reality, the test of entitlement to a particular item of income is legally distinct from an analysis of the intent to engage in tax treaty abuse.

The Velcro case (2012), for example, demonstrates that the existence of an intermediary company or the http://news.ddtc.id/webmin/berita/edit/1823201 of payments does not automatically negate beneficial ownership status, provided the recipient retains discretion and control over the income.

Meanwhile, the Danish Case (2019) illustrates that the beneficial ownership test and the abuse of law test have different elements. The absence of beneficial ownership status does not in itself prove the existence of a tax avoidance motive in the form of treaty shopping.

The beneficial ownership test also does not always result in the denial of tax treaty benefits. The Société Planet case (2022) opened the possibility of applying tax treaty facilities through a look-through approach. The Conseil d'État in France applied this approach, allowing tax treaty benefits to continue to be granted based on the domicile of the actual beneficial owner, provided the relevant conditions were met.

These cases confirm the importance of keeping the beneficial ownership test separate from the abuse of law test.

BEPS Action 6 places treaty shopping within a more explicit framework. The PPT may serve as a basis for denying tax treaty benefits where it is concluded that one of the principal purposes of an arrangement or transaction was to obtain a benefit, unless granting that benefit is in accordance with the object and purpose of the tax treaty provision in question.

Meanwhile, LOB, where agreed upon in a tax treaty, employs more objective eligibility criteria, including those relating to the status, ownership, or business activities of the beneficiary.

Maintaining Interpretive Certainty

The function of beneficial ownership is to test entitlement to income, whereas the PPT tests the purpose of a transaction (arrangement) and the LOB tests eligibility based on treaty criteria. The three may overlap on the same facts, but they cannot simply be used interchangeably.

On the basis of the above analysis and facts, a more proportionate approach can be achieved through separate testing. First, the recipient's status as beneficial owner must be tested on the basis of the legal relationship and facts concerning a particular item of income.

Subsequently, compliance with the LOB provision, where applicable, must be verified. The existence of the PPT and other anti-abuse provisions must also be evaluated to determine whether they can serve as an independent basis for denying tax treaty benefits.

Keeping these tests separate does not imply that economic substance can be disregarded by tax authorities. Economic substance remains relevant in the assessment, provided its use is linked to the elements of the specific legal provision being applied.

Ultimately, the most important consideration is not to choose between the beneficial ownership provision and the anti-abuse rule. Both are necessary insofar as they perform the functions conferred upon them by the tax treaty.

The precise application of each test is a prerequisite for effective prevention of tax treaty abuse. It also supports interpretive consistency and legal certainty for both tax authorities and taxpayers. Accordingly, these provisions should be understood as complementary instruments, not as substitutes for one another.