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Beneficial Ownership of Intangible Assets and Royalties in the Light of the OECD Model Tax Convention

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Title: Beneficial Ownership of Intangible Assets and Royalties in the Light of the OECD Model Tax Convention
Author(s): Tolvanen, Tuukka
Contributor: University of Helsinki, Faculty of Law
Discipline: Fiscal law
Language: English
Acceptance year: 2018
Beneficial ownership is a concept used in the OECD Model Tax Convention to deny the treaty benefits under Articles 10, 11 and 12 in artificial arrangements. The term has never been defined exactly in international tax context and thus, the meaning of the concept has remained somewhat vague during the past 50 years. The concept was never designed to be a wide general anti-avoidance provision. It was designed to be a tool with limited scope to interfere to treaty shopping schemes that do not comply with the economic nature of the arrangement. Despite the fact that the term originates from common law system, it should be interpreted as an individual treaty concept apart from the meaning it has in the common law legal praxis. The beneficial ownership of royalties is connected with beneficial ownership of intangible assets. Beneficial ownership of intangible assets requires that the owner is the legal owner of the asset and has sufficient level of economical ownership in addition to the legal ownership. If one of the requirements is not fulfilled, the owner should not be regarded as beneficial owner of the asset and thus, not the beneficial owner of the royalties. The legal ownership of an intangible asset is rather easy to determine. Economic ownership, on the other hand, may be harder to define due to the economic reality in which e.g. the multinational enterprises operate in globalized business world. The courts of different jurisdictions have taken different kind of approaches to interpreting beneficial ownership. The approaches can be divided into legal and economic approaches depending on the circumstances the courts take into account. Legal approaches concentrate on the formal facts under private law e.g. if the receiver of the income has a legal or contractual obligation to pass on the income or if one will have the right to the income instead of the creditors in case of bankruptcy of the receiver. Economic approaches are less formal than the legal approaches and concentrate on the economic reality instead of the formal facts under private law. Nearly all of the economic approaches use substance over form doctrine as the starting point. Some of the approaches go further and use e.g. transfer pricing methods in order to determine the level of economic ownership of the owner. It is not sufficient to fulfil the requirements set by the beneficial ownership limitation in order to receive the treaty benefits. Beneficial ownership is just one provision amongst many other anti-avoidance provisions. Even one provision is enough to deny the treaty benefits from a taxpayer and thus, an arrangement has to comply with other provisions in addition to the Article 12 of the OECD Model Convention.

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