Double taxation treaties: Beneficial ownership: Importance of beneficial ownership
Concept of beneficial ownership
This guidance sets out HMRC’s views on the application of the beneficial ownership concept in the context of relief under DTAs. It is meant to complement the material at INTM332000 which explains the meaning of beneficial ownership in greater depth.
The concept of beneficial ownership is a complex one and this guidance can only highlight some of the issues. Challenges based on beneficial ownership, should not be pursued beyond the fact-gathering stage without referral to the Transfer Pricing Team at Business International. Generally, claims for relief under a DTA should not be challenged where the purposes of the overall arrangements are commercial and do not include the avoidance of UK withholding tax.
Yearly interest arising in the UK and paid overseas is subject to deduction of income tax at source, under ITA07/S874. However, if the recipient’s country of residence has a DTA with the UK, and that DTA has an Interest Article with the appropriate wording, the recipient may be able to claim to receive the interest without deduction of tax or at a lower rate than that otherwise provided for in the Taxes Acts. The success of this claim will depend upon the resident of the other state meeting certain conditions and, in the vast majority of the UK’s DTAs, these conditions include that the resident of the treaty partner is the beneficial owner of the interest. For more detail on claims to relief under a tax treaty and the conditions that must be met see INTM542160 to INTM542190.
The UK’s DTAs are generally based on the OECD Model Tax Convention on Income and on Capital (the “OECD Model”), where the Interest Article (Article 11) says that:
- Interest arising in a Contracting State and paid to a resident of the other Contracting State may be taxed in that other state.
- However, such interest may also be taxed in the State in which the income arises, but if the beneficial owner of the interest is a resident of the other Contracting State, the tax in the source State shall not exceed 10 per cent of the gross amount of the interest.”
So an overseas person making a claim to receive interest without deduction of withholding tax under most of the UK’s double taxation treaties will be obliged to certify that:
- they are resident in the country under whose treaty (with the UK) the claim is made, and
- they are the beneficial owner of the interest which is the subject of the claim.
Where both of these conditions are met, then subject to any other conditions that are present, the source state’s domestic charge is reduced to a lower rate as set by the DTA. In many of the UK’s treaties the withholding rate is reduced to nil rather than the 10% provided in the OECD Model, but this varies from DTA to DTA.
Beneficial ownership of the income is therefore a crucial issue. However, many of the UK’s tax treaties also contain other provisions aimed at preventing treaty shopping, which should also be considered when examining any claim to relief. These include:
- provisions that deny relief where a person has a main purpose of taking advantage of the provisions of the treaty; and
- in the case of the UK’s tax treaties with the USA and Switzerland, anti-conduit provisions.
The “subject to tax” condition
A handful of UK treaties that do not have a beneficial ownership condition have instead a “subject to tax” clause. For example, the Interest Article of the Greece/UK Treaty begins:
- Any interest or royalty derived from sources within one of the territories by a resident of the other territory, who is subject to tax in that other territory in respect thereof and does not carry on a trade or business in the first territory through a permanent establishment situated therein, shall be exempt from tax in that first territory.
The treaties in question are those between the UK and Gambia, Greece, Israel, Kenya, Lesotho, Nigeria, Portugal, Sudan, Thailand and Zimbabwe.
“Subject to tax” does not signify that the person receiving the income must actually pay tax on the income in their country of residence. A person is regarded as “subject to tax” if, for example, he or she does not pay tax because their income is covered by personal allowances, or there are deductions allowed against the income that are sufficient to cover the liability. For more detail on what is meant by “subject to tax” in the context of a tax treaty see INTM332200.
In embarking on work which involves the application of a tax treaty, it is essential to read the relevant parts of the treaty concerned, plus such parts of the OECD Commentary on the Model Treaty as enhance understanding of the treaty provisions in question.