IEIM730030 - Obscuring Beneficial Ownership

An arrangement involves an Opaque Offshore Structure if it meets the criteria in Rule 1.2 of the Model Rules.

(a) An Opaque Offshore Structure means a Passive Offshore Vehicle that is held through an Opaque Structure.

(b) Subject to paragraph (c) below, a “Passive Offshore Vehicle” means a Legal Person or Legal Arrangement that does not carry on a substantive economic activity supported by adequate staff, equipment, assets and premises in the jurisdiction where it is established or is tax resident.

(c) A Passive Offshore Vehicle does not include a Legal Person or Legal Arrangement (i) that is an Institutional Investor or that is wholly-owned by one or more Institutional Investors or (ii) where all Beneficial Owners of that Legal Person or Legal Arrangement are only resident for tax purposes in the jurisdiction of incorporation, residence, management, control and establishment (as applicable) of the Legal Person or Legal Arrangement.

(d) An Opaque Structure is a Structure for which it is reasonable to conclude that it is designed to have, marketed as having, or has the effect of allowing, a natural person to be a Beneficial Owner of a Passive Offshore Vehicle while not allowing the accurate determination of such person’s Beneficial Ownership or creating the appearance that such person is not a Beneficial Owner, including through:

(i) the use of nominee shareholders with undisclosed nominators;

(ii) the use of means of indirect control beyond formal ownership;

(iii) the use of Arrangements that provide a Reportable Taxpayer with access to assets held by, or income derived from, the Structure without being identified as a Beneficial Owner of such Structure;

(iv) the use of Legal Persons in a jurisdiction where there is:

· no requirement to keep, or mechanism to obtain, Basic Information and Beneficial Owner information, as defined in the latest Financial Action Task Force Recommendations, on such Legal Persons that is accurate and up to date;

· no obligation on shareholders or members to disclose the names of persons on whose behalf shares are held; or

· no obligation on, or mechanism for, shareholders or members of such Legal Persons to notify the Legal Person of any changes in ownership or control;

(v) the use of Legal Arrangements organised under the laws of a jurisdiction that do not require the trustees (or in case of a Legal Arrangement other than a trust, the persons in equivalent or similar positions as the trustee of a trust) to hold, or be able to obtain, adequate, accurate and current Beneficial Ownership information regarding the Legal Arrangement;

where it is reasonable to conclude that the Structure is designed to have, marketed as having, or has the effect of allowing a natural person to be a Beneficial Owner of a Passive Offshore Vehicle while not allowing the accurate determination of such person’s Beneficial Ownership or creating the appearance that such person is not a Beneficial Owner

If beneficial owners can reasonably be identified by relevant tax authorities, including HMRC that will be usually sufficient for the arrangement not to be an Opaque Offshore Structure. The identity of the beneficial owners does not have to be publicly available, but the tax authorities in the relevant jurisdiction(s) need to be aware of the beneficial ownership or be reasonably able to find out.

Where beneficial owners are reported under the CRS such an arrangement would not be reportable as an opaque offshore structure. For example, if a structure involved only jurisdictions that are CRS participating jurisdictions and only entities that are CRS reporting financial institutions, then provided that the beneficial owners are reported under the CRS then such a structure would not be reportable.

Examples where beneficial owners are made unidentifiable include where undisclosed nominee shareholders are used, or where control is exercised indirectly, rather than by means of formal ownership. In the situation where control is exercised by a general partner in a partnership who has a formal ownership of the assets in the partnership, then providing that this general partner is a natural person who can be traced as resident in a particular jurisdiction, that person will be a beneficial owner. The partnership will not be an opaque offshore structure if the beneficial owner is identifiable to the tax authorities. However, if the general partner is not a natural person, then the rules will need to be considered to see whether there is a natural person who is a beneficial owner whose identity has been obscured.

Beneficial ownership is also likely to be obscured where arrangements use jurisdictions where there is no requirement to keep information on beneficial ownership, or no mechanism to obtain it, or where there are no obligations or mechanisms to disclose the beneficial owners of shares held by nominees, or to notify the entity of changes in the ownership or control of the entity or shares in it.

Whether an arrangement is an Opaque Offshore Structure is viewed from the standpoint of a hypothetical, informed observer, it is reasonable to conclude that the arrangements have the effect of allowing an individual to be a beneficial owner of assets while not allowing that person to be identified as such or creating the appearance that the person is not a beneficial owner.

Under MDR, institutional investors, and entities wholly owned by one or more institutional investors, are not considered to be structures which obscure beneficial ownership.(Rule 1.2(c) in the model rules.) However, where such a structure is not wholly owned by Institutional Investors, these structures do not benefit from the exemption in rule 1.2(c). For a specific fund management structure that has not been designed, marketed or has the effect of allowing a natural person to be a beneficial owner of a passive offshore vehicle without allowing accurate determination of the beneficial ownership, it would be unlikely that such a structure would be an opaque offshore structure. Also, as stated in the OECD commentary, actively traded shares of widely held entities held in nominee name by brokers and custodians would not typically make an arrangement an Opaque Offshore Structure.

The OECD commentary makes clear that ‘beneficial ownership’ and ‘beneficial owner’ should be interpreted in accordance with the latest Financial Action Task Force Recommendations and include ‘any natural person who exercises control over a Legal Person or Legal Arrangement’. HMRC intends to interpret these terms in accordance with the OECD commentary.

Where a person is obliged to identify beneficial ownership under Anti-Money Laundering legislation in accordance with FATF, and successfully does so, this would generally mean that the test of whether the structure is an Opaque Offshore Structure is not met as beneficial owners would not be unidentifiable. However, where it is clear that the arrangement has been designed to obscure beneficial ownership from the tax authorities then it is reportable, even if the intermediary has been able to identify the beneficial owners. This would often be evident from the intermediary’s knowledge of the client and the reason for entering into the arrangement, coupled with the intermediary’s own knowledge and expertise. It would therefore not generally be expected that potential intermediaries need to do further investigations, unless they had suspicions that beneficial ownership was being obscured from the tax authorities. Also, where a beneficial owner is not identified because, for example, their ownership interest falls below the required ownership threshold, that would not in itself mean that the structure is an Opaque Offshore Structure. However, if there was a suggestion that an owner was deliberately keeping their interest just below the threshold to avoid being identified, then this could be evidence of an Opaque Offshore Structure.

In some circumstances the obligation to identify beneficial ownership under Anti-Money Laundering legislation is outsourced to reputable third party. This circumstance in itself would not mean such an arrangement would become an opaque offshore structure.

In relation to trusts, where the beneficiaries are named, or identified by class, the beneficiaries would not be considered to be made unidentifiable. For example, a trust where the beneficiaries were Ms X and her future lineal descendants would not automatically meet the definition of being an Opaque Offshore Structure. Similarly, where there is the possibility of beneficiaries being added to a trust in the future, this would not necessarily trigger this hallmark, unless people were deliberately excluded from the trust temporarily to try to avoid being identified.

An Opaque Offshore Structure is always reportable even if the main reasons for setting up the structure are not tax related. The test in the OECD Model Rules is about whether beneficial ownership is obscured, rather than why it has been obscured