This case concerns the application of the beneficial ownership rule to dividends paid by a French corporation to its Luxembourg parent. The Luxembourg parent company was not considered to be the beneficial owner of the dividends because it did not carry out any activity other than the receipt and further distribution of dividends, and it distributed the full amount of the dividend to its Luxembourg parent one day after receipt; all entities in the chain of ownership were wholly owned; and the two Luxembourg entities had common directors. Click here for English translation Click here for other translation ...

In view of its purpose and the comments made on Article 12 of the OECD Model Convention, the Conseil d’État found that Article 12(2) of the Franco-New Zealand tax treaty was applicable to French source royalties whose beneficial owner resided in New Zealand, even if the royalties had been paid to an intermediary company established in a third country. The Supreme Court thus set aside the previous 2020 Judgement of the Administrative Court of Appeal. The question of whether the company in New Zealand actually qualified as the beneficial owner of the royalties for the years in question was referred to the Court of Appeal. Excerpt “1. It is clear from the documents in the file submitted to the judges of the court of first instance that the company Planet, which carries on the business of distributing sports programmes to fitness clubs, was subject to reminders of withholding tax in respect of sums described as royalties paid to the companies Les Mills Belgium SPRL and Les Mills Euromed Limited, established in Belgium and Malta respectively, in respect of the financial years 2011 to 2014 in consideration of the sub-distribution of collective fitness programmes developed by the company Les Mills International LTD, established in New Zealand. The Planet company is appealing to the Court of Cassation against the judgment of 15 July 2020 by which the Marseille Administrative Court of Appeal, on appeal by the Minister for Public Action and Accounts, annulled the judgment of 18 May 2018 of the Marseille Administrative Court insofar as it had discharged it from these reminders and reinstated these taxes. 2. If a bilateral agreement concluded with a view to avoiding double taxation can, by virtue of Article 55 of the Constitution, lead to the setting aside, on such and such a point, of national tax law, it cannot, by itself, directly serve as a legal basis for a decision relating to taxation. Consequently, it is up to the tax judge, when he is seized of a challenge relating to such a convention, to look first at the national tax law in order to determine whether, on this basis, the challenged taxation has been validly established and, if so, on the basis of what qualification. It is then up to the court, if necessary, by comparing this classification with the provisions of the convention, to determine – on the basis of the arguments put forward before it or even, if it is a question of determining the scope of the law, of its own motion – whether or not this convention is an obstacle to the application of the tax law. 3. Under Article 12 of the Convention of 30 November 1979 between France and New Zealand for the avoidance of double taxation and the prevention of fiscal evasion with respect to taxes on income: “1. Royalties arising in a State and paid to a resident of the other State may be taxed in that other State / 2. However, such royalties may also be taxed in the State in which they arise and according to the laws of that State, but if the person receiving the royalties is the beneficial owner the tax so charged shall not exceed 10 per cent of the gross amount of the royalties / 3. The term “royalties” as used in this Article means payments of any kind received as a consideration for the use of, or the right to use, any copyright of literary, artistic or scientific work, including cinematograph films and works recorded for radio or television broadcasting, any patent a trademark, a design or model, a secret plan, formula or process, as well as for the use of or the right to use industrial, commercial or scientific equipment and for information concerning industrial, commercial or scientific experience. In view of their purpose, and as clarified by the comments of the Tax Committee of the Organisation for Economic Co-operation and Development (OECD) on Article 12 of the Model Convention drawn up by that organisation, published on 11 April 1977, and as is also clear from the same comments published on 23 October 1997, 28 January 2003 and 15 July 2014 and most recently on 21 November 2017, the provisions of Article 12(2) of the Franco-New Zealand tax treaty are applicable to French source royalties whose beneficial owner resides in New Zealand, even if they have been paid to an intermediary established in a third country. 4. It is clear from the statements in the judgment under appeal that, in order to determine whether the sums in question constituted royalties, the court examined the classification of the sums paid by the company Planet to the Belgian company Les Mills Belgium SPRL in 2011 and to the Maltese company Les Mills Euromed Limited from 2012 to 2014, in the light of the stipulations of the Franco-New Zealand tax convention of 30 November 1979 alone. In limiting itself, in holding that this agreement was applicable to the dispute, to noting that the tax authorities maintained that the New Zealand company Les Mills International LTD should, pursuant to an agency agreement signed on 2 December 1998 between that company and the company Planet, be regarded as the actual beneficiary of the sums in dispute paid by the French company to the Belgian and Maltese companies, without itself ruling on its status as the actual beneficiary of the said sums for the four years in dispute, the court erred in law.” Click here for English translation Click here for other translation ...

In 2016 the British company Avon Cosmetics Limited (ACL) became the sole licensor of intellectual property rights for Europe, Africa and the Middle East within the Avon Cosmetics Group and was authorised to issue sub-licences to other group companies, including the Czech subsidiary, Avon Cosmetics spol. s r.o.. ACL charged a fee for issuing a sub-licence equal to an agreed-upon percentage of net sales but was then contractually obliged to pay a similar fee to the US companies, Avon Products Inc. and Avon Internetional Operations Inc. ACL applied for relief from WHT on the royalty payments from the Czech subsidiary. The tax authorities concluded that ACL was not the beneficial owner of the royalty income but only an conduit or intermediary. The legal conditions for granting the exemption were not met. ACL did not obtain any real benefit from the royalty fees and was not authorised to freely decide on use of the income as it was contractually obliged to pay on a similar amount to the US companies. On that basis the application for relief was denied. An appeal was filed by ACL. Judgement of the Municipal Court The court upheld the decision of the tax authorities and dismissed the appeal of ACL. Excerpts “In accordance with the Czech statutory framework enshrined in the Income Tax Act and also with EU legislation, namely Council Directive 2003/49/EC, which is implemented into Czech law by the Income Tax Act, a beneficial owner is not an entity which receives royalty payments for another person as an intermediary. Thus, the real owner of the said income must be the entity whose income increases its assets and enriches it. The beneficial owner uses the income without restriction and does not pass it on, even in part, to another person. The Court of Justice of the European Union came to the same conclusion in its judgment of 26 February 2019 in Joined Cases C-115/16, C-118/16, C-119/16 and C-299/19, where it stated that ‘The concept of “beneficial owner of interest” within the meaning of the Directive must therefore be interpreted as referring to the entity which actually benefits from the interest paid to it. Article 1(4) of the same directive supports that reference to economic reality by specifying that a company of a Member State is to be regarded as the beneficial owner of interest or royalties only if it receives them for itself and not for another person as an intermediary, such as an agent, trustee or principal’, to which the applicant referred in its application. The Supreme Administrative Court also commented on this issue in its decision of 12 November 2019, No. 10 Afs 140/2018-32, where it stated that “The recipient of (sub)royalties is the beneficial owner of the royalties only if he can use and enjoy them without limitation and is not obliged by law or contract to pass the payments to another person (Article 19(6) of Act No. 586/1992 Coll., on Income Taxes)”. Although the applicant refers to those decisions in support of its argument, in the Court’s view those decisions support the interpretation relied on by the defendant and the court in this case. Nowhere in the reasoning of the decisions does it appear that the applicant’s conclusion, which is strongly simplistic, is that the only criterion is whether the recipient of the royalties has an obligation to pass them on to another person.” “In so far as the applicant argues that it exercised other rights and obligations vis-à-vis the individual local companies after taking over the licence rights, which also involved the applicant’s liability for the acts and omissions of the sub-licence holders, and that it is not merely a ‘flow-through’ company, and then ties its argumentation to a possible abuse of rights, the Court observes that the above-mentioned decision of the Court of Justice of the European Union cannot be interpreted as meaning that, unless an abuse of rights is proved, the defendant is obliged to grant the applicant an exemption from royalty tax. Both the law and the above-mentioned case-law define the concept of beneficial owner, which the applicant has failed to prove in the proceedings (the Court refers in detail to the detailed reasoning of the contested decision). Thus, it is not relevant whether the applicant legitimately carries on an economic activity in the more general sense or whether it receives royalties on its own account, but whether it is the beneficial owner of the royalties (it benefits from them itself), which are two different facts. It is therefore relevant to the assessment of the case what the nature of the applicant’s activity is, not whether an abuse of rights is established. In the Court’s view, the applicant’s activity does not satisfy the condition of beneficial owner of the royalties as defined by the case-law referred to above.” “The applicant further points out that it collects royalties from Avon Cosmetics spol. s r.o. in the amount of xxxxx % of net sales for the grant of the sub-licence, whereas it only pays to Avon Products Inc. and Avon International Operations Inc. an amount equivalent to xxxxx % of net sales. In assessing this point of claim, the Court agrees with the defendant, which concludes that the applicant does not derive any real benefit from the royalty income and is not entitled to take a free decision on it, since it is obliged to pay almost all of it to the above-mentioned companies. That conclusion is also supported by other facts on which the defendant bases its conclusion, which are based on the contractual documentation submitted and with the assessment of which the Court agrees (e.g. the payability of the royalty received and the sub-licence fee paid, which is set at a similar level; the fact that ownership of the property rights remains with Avon Products Inc. and Avon International Operations Inc., which, moreover, have reserved the right to carry out inspections not only of the applicant but also of the sub-licence holders). What is relevant for this ...

The Administrative Court of Appeal (CAA) set aside a judgement of the administrative court and upheld the tax authorities claims of withholding taxes on royalties paid by Société Planet to companies in Belgium and Malta irrespective of the beneficial owner of those royalties being a company in New Zealand. Hence, Article 12(2) of the Franco-New Zealand tax treaty was not considered applicable to French source royalties whose beneficial owner resided in New Zealand, where they had been paid to an intermediary company established in a third country. Click here for English translation Click here for other translation ...

A beneficial ownership toolkit was released 20. May 2019 in the context of the OECD’s Global Integrity and Anti-Corruption Forum. The toolkit, prepared by the Secretariat of the OECD’s Global Forum on Transparency and Exchange of Information for Tax Purposes in partnership with the Inter-American Development Bank, is intended to help governments implement the Global Forum’s standards on ensuring that law enforcement officials have access to reliable information on who the ultimate beneficial owners are behind a company or other legal entity so that criminals can no longer hide their illicit activities behind opaque legal structures. The toolkit was developed to support Global Forum members and in particular developing countries because the current beneficial ownership standard does not provide a specific method for implementing it. The toolkit covers a variety of important issues regarding beneficial ownership, including: the concepts of beneficial owners and ownership, the criteria used to identify them, the importance of the matter for transparency in the financial and non-financial sectors; technical aspects of beneficial ownership requirements, distinguishing between legal persons and legal arrangements (such as trusts), and measures being taken internationally to ensure the availability of information on beneficial ownership a series of checklists that may be useful in pursuing a specific beneficial ownership framework; ways in which the principles on beneficial ownership can play out in practice in Global Forum EOIR peer reviews; why beneficial ownership information is also a crucial component of the automatic exchange of information regimes being adopted by jurisdictions around the world ...

By Javier Garcia-Bernardo, Jan Fichtner, Frank W. Takes, & Eelke M. Heemskerk Multinational corporations use highly complex structures of parents and subsidiaries to organize their operations and ownership. Offshore Financial Centers (OFCs) facilitate these structures through low taxation and lenient regulation, but are increasingly under scrutiny, for instance for enabling tax avoidance. Therefore, the identifcation of OFC jurisdictions has become a politicized and contested issue. We introduce a novel data-driven approach for identifying OFCs based on the global corporate ownership network, in which over 98 million firms (nodes) are connected through 71 million ownership relations. This granular firm-level network data uniquely allows identifying both sink-OFCs and conduit-OFCs. Sink-OFCs attract and retain foreign capital while conduit-OFCs are attractive intermediate destinations in the routing of international investments and enable the transfer of capital without taxation. We identify 24 sink-OFCs. In addition, a small set of countries – the Netherlands, the United Kingdom, Ireland, Singapore and Switzerland – canalize the majority of corporate offshore investment as conduit-OFCs. Each conduit jurisdiction is specialized in a geographical area and there is signifcant specialization based on industrial sectors. Against the idea of OFCs as exotic small islands that cannot be regulated, we show that many sink and conduit-OFCs are highly developed countries. Conduits-and-Sinks-in-the-Global-Corporate-Ownership-Network.pdf ...