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HMRC internal manual

International Manual

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HM Revenue & Customs
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Double taxation treaties: Beneficial ownership: Practical consideration of claims

Claims under Double Taxation Agreements: points to consider

Practical considerations arise where a conduit is the claimant under a DTA. The following considerations may assist in the determination of beneficial ownership. Each case should be considered on its own facts and circumstances and companies which might be identified as conduits can have perfectly valid functions as commercial enterprises or group finance companies.

Once there is sufficient information to consider whether entitlement to treaty clearance should be challenged, the matter should be referred to the Transfer Pricing Team at CTIAA Business International.

  • In a corporate group context, what is the wider picture of the funding structure? Where is the true source of the funding? Who carries the risk for third party borrowing? Does it appear that the overseas parent (or other group company) has raised funds to lend to the UK, but routed the funds through an intermediary which appears to serve little commercial purpose?
  • Is there evidence that the claimant is acting as agent or nominee for another person, and has no real stake in the income, but is handling it for another party?
  • Is the claimant under a contractual or fiduciary obligation to pay on the specific income it receives to a third party? If so, it is unlikely to be beneficial owner. If there is no legal obligation, but the commercial or practical terms of the arrangements mean it is probable that that the claimant will pay the income on, the circumstances would require closer examination before reaching a conclusion.
  • What discretion does the claimant have as to the use of the funds which pass through its hands? What control does the claimant have over what it does with the money which comes to it, whether that be the principal of the loan or the interest on it? Is the use of either genuinely discussed and decided by the board of the claimant company or does this seem predetermined? How far was the claimant actively involved in the sourcing and application of the funding i.e. did it create the investment opportunity and devise how it would be funded, at the time the structure was set up or at the time of later payments.
  • Where there is doubt over beneficial ownership, it is useful to consider the substance of the claimant. Does it have employees, offices or domestic activities within the country of residence? What expertise do its employees have? Are its responsibilities in practice discharged by other group companies or outsourced to third parties? Even if the claimant company has substance, complex operations, etc, is the income which is subject to the claim part of those activities or is it still recognisable as part of a conduit function? However, a company with few or no employees in its territory of residence is not precluded from being recognised as beneficial owner. Special purpose companies and holding companies established for commercial purposes may be recognised as such despite limited function.
  • Have the funds actually passed through the claimant’s hands and in what manner? If not, was the claimant clearly entitled to the payment and have they chosen to direct payment to another party?
  • How closely dependent is the claimant on the relevant income source to meet the relevant liabilities? Could the claimant fund interest payments from another source of income, and if so, for how long?
  • What do the documents say - the loan agreements, any side agreements and less formal items such as correspondence and emails? Do these show that the loans (UK-to-conduit and conduit-source) have common or interlinking features? It is important to consider whether the claimant independently considered the merits of entering into the arrangements, rather than simply being directed to do so.
  • There may be claims that the conduit has been set up for a wider-ranging purpose, that it is “looking for investment opportunities”, or that it may be a future European hub of some sort. This might be the case, but what is relevant is the state of affairs at the time the income is paid.
  • Do the local tax rules applying to the claimant make it impossible or unlikely that it would be beneficial owner? Some jurisdictions have specific treatment for certain categories of company (see INTM335000).
  • Is information about other parts of the same group helpful? Follow the money. Can it be traced through the intermediary to a tax haven source, where direct lending to the UK would entail suffering withholding tax on the interest, with no treaty to relieve any double taxation?
  • Has the interposition of the intermediate recipient reduced the rate of withholding tax paid by the UK borrower? If the UK borrower could have paid without withholding to the ultimate recipient of the interest paid, HMRC may not challenge beneficial ownership, even if the recipient has very little legal or practical discretion over the use of the interest received. See the guidance atINTM355000 onwards.