Beneficial
Ownership of Income

  “Actual right” to income (“Beneficial ownership”) rules

• The Law introduces the concept of the “actual right” to income (“beneficial ownership”) as a condition for tax treaty relief with most of EU countries and allows payers of income to request relevant confirmations (in addition to tax residency certificate).

• A person will have the “actual right” to income if it:
  • is a “direct beneficiary” of income (i.e., it benefits from income and determines its economic destiny), and
  • has the right, on its own, to use’ or dispose of income (by virtue of direct/indirect participation, control or other circumstances) or another person is authorized to dispose of-income for such person’s benefits.

• On the contrary, a foreign person will not have the “actual right” to income if it has

 (i) limited powers to dispose of the income,

 (ii) performs intermediary functions for the benefit of another person (without performing any other functions or accepting any risks, and directly / indirectly transferring income fully/partially to that other person), and

(iii) that other person, if received the income directly would not be entitled to tax treaty reliefs.

Where a foreign recipient of income is resident in a tax treaty country, but has no “actual right” to the income, the EU Tax Code permits taxation of the income on the basis that they are income of the person that has the “actual right” to such income.

In this case that person will be taxed by withholding tax at source in accordance with the

applicable tax treaty (if any) or under the provisions of domestic legislation in the absence of a treaty.

Beneficial ownership of dividends 

Not an agent/nominee: the company must be both legal and ‘economic owner. Do the directors act upon instructions, which make them mere “nominees”?

Not a conduit: essentially, an analysis into the disposition powers of management what could the term ‘unconstrained powers” mean in dividends context? (Must not have “narrow” ‘powers over dividends received)

The right to use the dividends: must be unconstrained by a contractual/legal or factual obligation to pass them on to the [offshore] parent? Are the holding company’s directors exercising a real decision-making authority with respect to dividends?

Board of Directors: Does the Board actually exercise the necessary decision-making in Cyprus, or there are “shadow” decision-makers, not on the Island, but elsewhere?

Example:

“Actual right” to income Russian (“Beneficial ownership”) rules

If a Russian holding company owns various Russian operating companies through various foreign sub-holding companies and the Russian holding company is the beneficial owner of the income, the Russian holding company would be taxed the same way as it had received the income directly from the Russian operating companies (ignoring the existence of sub-holding companies).

In such a case Russian domestic rules would apply and there will be no withholding taxes as long as the Russian tax authorities are informed accordingly.

For more information and/or advice, feel free to contact us via email at [email protected]