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Useful Cyprus Information Cyprus Government Websites Currency Converter Cyprus Property News Limassol Marina CyprusNewsReport.comBeneficial Ownership In The OECD Discussion Draft - The Cyprus Perspective
Information for Cyprus Expats on the term Beneficial Ownership for Cyprus companies.
On 29th April 2011, the OECD released a Discussion Draft which sets out proposed changes to the Commentary on Articles 10, 11 and 12 of the OECD Model Tax Convention concerning the meaning of the term “beneficial owner”.
Although the application for OECD membership submitted by Cyprus in 1995 is still pending due to various political factors, the proposed amendments in the OECD Commentary would inevitably affect Cyprus as the majority of its Double Tax Treaties (DTTs) are signed with countries who are OECD members. Although there is not yet a recorded case where the Cypriot Tax Authorities have examined a Cypriot SPV based on allegations of being a mere conduit company, this could happen any time in the future, especially taking into consideration the fact that Cypriot companies are often part of complex tax-planning structures.
To start from, we should greet the OECD proposal for introduction of treaty-based interpretation as opposed to domestic law approach. It is indeed a significant step towards decreasing the confusion in the meaning of beneficial ownership. This initiative, however, needs to be supported by examples and “real life” cases in order to enable the better understanding of the proposed amendments.
What we found as particularly worrying in the OECD Discussion Draft is the possibility to make a distinction between “legal ownership” and “economic ownership”. If this approach is adopted, it would allow the tax authorities to pierce the corporate veil in every single case claiming suspicion in tax evasion. The introduction of the requirement for the recipient to have the “full right to enjoy and use” the income in order to qualify as its beneficial owner is too broad as various legal or factual restrictions may be present in practice without having anything to do with treaty shopping. Moreover, this proposed amendment deviates from the recent case law in various countries which seem to support the perception that the legal owner of the income is also its beneficial owner – a view promoting further international tax planning and especially the use of holding structures.
Another aspect which we need to consider is the impact of the proposed amendments on the substance requirements being enforced in a number of countries, including Cyprus. What is meant by substance here is essentially the introduction of a solid corporate infrastructure which will ensure that the management and control of the company is located in Cyprus, i.e. the residency status of the company. We should bear in mind that the residency status does not automatically coincide with the place where the company is incorporated. That is why it is important to stress out that the residency of a company shall be determined by the place where the “management and control” is exercised. In the absence of a formal definition of management and control under the Income Tax Law of Cyprus, we should rely upon the principles laid down by the English Common Law as Cyprus is a common law jurisdiction too.
Conventionally, management and control is said to be established in Cyprus given that:
- the majority of the Directors of the Company are residents in Cyprus;
- important company decisions are taken in Cyprus by the local directors;
- the headquarters of the company are maintained in Cyprus;
- the company has an economic substance in Cyprus.
However, additional measures such as employing staff, registering with local business associations etc. may need to be taken in order to enhance the substance of the company and the visibility of its business activities in Cyprus.
Last, but not least, we would like to address the question of the interaction between the concept of beneficial ownership with other anti-abuse provisions in the DTTs. What we should be advocating for is keeping the provision-specific/income-specific approach to beneficial ownership rather than turning it into a general anti-avoidance provision. The aim of the DTTs is two-fold - avoiding double taxation and preventing tax evasion. However, if the DTT contains layers of anti-abuse provisions, there is a high risk for it to become inoperable.
Based on the above, we should support the view that any proposed changes to the OECD Commentary should be seen as a method to improve the functioning of the DTTs. We should not forget that these instruments aim at encouraging international business and trade, including via cross-border tax structuring. Therefore, the law-makers should be very careful when balancing the interest of the countries to provide tax incentives only to “genuine” recipients of income and at the same time not to obstruct the normal functioning of the DTT provisions.
Anna Zafirova
Eurofast Taxand, Cyprus website
+357 22 699 222
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