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HMRC internal manual

International Manual

Double taxation treaties: Beneficial ownership: Conduit companies

A conduit is an entity through which income, etc, is channelled between other entities, without itself generally having much active input or use of the income. It can serve an administrative, commercial or tax purpose (or a combination of purposes). Examples would include a special purpose vehicle placed between a multiplicity of investors and the objects of their investment for administrative simplicity, a group finance company providing third party lending to the group without itself bearing risk in relation to the debt, or a securitisation vehicle: where contractual debts such as mortgages are pooled and sold on in another form (bonds, securities, etc).

The Commentary on Article 1 of the 2010 Model Tax Convention discusses how a conduit company may create a problem for double tax treaties. It refers to “artificial legal constructions” (Para 8) which increase the risk of treaty abuse, and cites the example of

“a legal entity created in a State essentially to obtain treaty benefits that would not be available directly” (Para 9).

The presence of a conduit company can suggest a potential tax risk, since they might have little or no meaningful ownership of, or independence of strategy in relation to, the assets and income they are handling. Where a company is interposed for the purpose of obtaining the benefit of a reduced level of withholding tax, the arrangements should be examined to determine whether the conduit has beneficial ownership of the income in question. HMRC has successfully pursued unpaid withholding tax and associated interest charges in appropriate cases where UK companies are paying interest to nil tax countries without incurring withholding tax, simply by the interposing of a conduit in a third country.

However, there are circumstances where conduit companies can serve perfectly legitimate commercial purposes. The guidance on the Indofood case, including the examples at INTM332080, distinguishes between arrangements which are for commercial convenience as opposed to being for the avoidance of UK withholding tax. HMRC will not challenge cases where there is no tax avoidance purpose behind the arrangements and, despite the use of an intermediary, treaty benefits would still have been due. In such cases it can be seen that the conduit is not being used to obtain tax treaty benefits which could not have been available without its participation.