In Focus – Beneficial Ownership for Tax Treaty Entitlement

March 10, 2020
What the recently revised beneficial ownership rules of Russia, South Korea, Poland, and Austria mean for investors.

One of the main objectives of tax treaties is to reduce tax barriers to cross-border trade and investment between the contracting countries. To qualify for treaty benefits, in general, the claimant must:

  • Be a person that is resident for tax purposes in the treaty partner jurisdiction.
  • Be the beneficial owner of the income with respect to which benefits are being claimed.
  • Satisfy any anti-abuse rule, such as the US treaty limitation on benefits (LOB) provisions.

As a result, tax treaty benefits are only allowed if the recipient of income located in one of the contracting countries actually beneficially owns the income it receives. If the payee is merely passing the income on to another entity and for another entity, it cannot take advantage of reduced treaty rates.

Determining whether a payee is a beneficial owner of income can be difficult in practice. The concept of beneficial ownership is implicit in tax treaties, even those that do not specifically speak to beneficial ownership. Beneficial ownership is also incorporated into the Organization of Economic Cooperation and Development (OECD’s) Model Convention on Income and Capital, referenced in articles 10 (dividends) and 11 (interest), whereby the recipient of income must be a resident of the contracting country and the beneficial owner of the income in order to enjoy preferential withholding tax rates pursuant to the tax treaty. Since tax treaties do not necessarily speak to beneficial ownership, local laws define beneficial ownership for tax purposes.

If the recipient cannot prove that they are the beneficial owner of the income received, treaty benefits will be denied.

Recently, several countries significantly revised their beneficial ownership rules impacting how investors pursue tax treaty benefits.

In this edition of In Focus, we review the beneficial ownership rules of Russia, South Korea, Poland, and Austria with an aim to educate investors of new requirements.


Beneficial ownership was defined by Russian tax law in 2015, as a person who can exercise the right to use and/or dispose of income or has the right to use the income on behalf of another person, at their discretion, by virtue of having direct or indirect participation in an organization, or control over an organization.

The beneficial ownership requirement would need to be met for every payment.

Russian tax law does not specifically define what constitutes proof of beneficial ownership. Local subcustodians prescribe beneficial owner self-certifications to accompany additional documentation proving beneficial ownership. Such proof includes beneficial owner constitutive documents confirming that the board of directors can make decisions regarding management of assets and profits and that the board is not restricted from making such decision at their own discretion. Further proof includes documentation confirming powers of directors.

Importantly, where a custodian is a Foreign Nominee Holder (FNH) in Russia, the law does not prescribe collection of specific documentation to prove beneficial ownership. However, the Russian tax authorities conduct ad-hoc audits where the documents referenced above can be requested.

In April of 2018, the Federal Tax Service of Russia (FTS) published a letter addressing determination of beneficial ownership. Prior to publication of the letter, the FTS looked to determine:

  • Whether there is independent decision making by the directors.
  • Whether the entity obtains economic benefit from the income.
  • Whether the entity has exposure to commercial risk associated with the assets.

The 2018 letter shifts the analysis to whether the investing entity is a conduit. A conduit does not operate independently. The following criteria is indicative of whether an entity operates independently:

  • The profits of the foreign recipient entity are mainly comprised of income sourced in Russia.
  • The entity’s main business is to pass income on to the owners.
  • The entity’s only business is receipt of dividends.
  • The entity’s operating expenses are immaterial or the entity only incurs administrative expenses.

In proving that an entity engages in business activity, the FTS requires proof that:

  • The entity operates as an independent business.
  • The income it generates is used to create a profit center in the foreign jurisdiction.
  • The income generated is used to attract foreign capital investment in Russia.

The FTS will also consider whether the entity has any source of significant income, besides dividend and interest income.

On November 27, 2018, Federal Law No 424-FZ introduced further changes to the Russian tax code, including amendments to the beneficial ownership concept as it applies on look through basis. Prior to introduction of the law, where the recipient of the income was not the beneficial owner, tax benefits were granted to the beneficial owner only if the recipient of the income was a resident of a country that had established a tax treaty with Russia. Pursuant to the new rules, the recipient no longer needs to be a resident of a country that has established a tax treaty with Russia in order to grant treaty benefits to the beneficial owners on look through basis.


Amendments to the Corporate Income Tax Act, Personal Income Tax Act, and Tax Ordinance became effective on January 1, 2019. Spurred by tax audits conducted by the Polish tax authorities, the amendments aim to tighten supervision over applications for preferential withholding tax rates pursuant to local law exemptions and tax treaties.

The amendments introduced a new, comprehensive definition of beneficial ownership. An investor must meet the following criteria in order to satisfy beneficial ownership requirements:

  • Receive payment on its own behalf.
  • Determine how to utilize the payment and bear the economic risk related thereto.
  • Not act as an intermediary, agent, custodian, or any person obligated to transfer all or part of the payment to another entity.
  • Conduct real economic activity in its country of residence (if the payment is connected to the business activity).

The most significant change being the addition of the requirement to conduct real economic activity, which aims to filter out holding companies receiving dividend income. In determining whether an investor conducts real economic activity, the following criteria may be taken into consideration:

  • Existence of an enterprise within which the entity carries out its operations, including space used for operation, employees, and equipment.
  • Whether the space of operation, employees and equipment is proportional to the activity conducted. 
  • Whether the economic activity is performed utilizing the entity’s own resources.
  • Whether there is sufficient economic justification for the ownership structure.

In order to grant preferential withholding tax rates at source, the local subcustodians, acting in their capacity of tax remitters, are expected to verify whether investors meet the new beneficial owner criteria and to validate investor provided supporting documentation. The tax remitter is held liable for underwithholding if the tax authorities are not satisfied with investor provided supporting documentation. 

In order to grant preferential withholding tax rates at source, the local subcustodians, acting in their capacity of tax remitters, are expected to verify whether investors meet the new beneficial owner criteria and to validate investor provided supporting documentation. The tax remitter is held liable for underwithholding if the tax authorities are not satisfied with investor provided supporting documentation.

Since the Polish tax authorities did not issue guidance on acceptable proof of beneficial ownership, and since the tax remitters are held liable for underwithholding, local subcustodians are not in a position to support preferential withholding tax rates at source.

South Korea

Changes to the Oversees Investment Vehicle (OIV) regime became effective on January 1, 2020. The amendments set forth criteria for determining whether an OIV is a beneficial owner of Korean income for tax treaty purposes. The OIV has to meet the following conditions in order to qualify as a beneficial owner:

(i) The OIV must be in corporate form.

(ii) The OIV must be liable to tax in its country of residence.

(iii) The OIV is not formed for the purpose of tax avoidance.

As it applies to criteria (i), Korean law defines corporate entities as any of the following:

(a) An organization with legal personality pursuant to the laws of the country of its incorporation.

(b) An organization formed only with limited partners.

(c) A foreign organization that is similarly regarded to a domestic corporation under the Commercial Act or any other Act of the Republic of Korea.

As it applies to criteria (ii), a fund should take into consideration whether being liable to tax means that the fund is a taxable entity but is exempt from taxation pursuant to a local law.

As it applies to criteria (iii), the fund would need to have a demonstrated business purpose.

Despite the seemingly positive outcome, when completing new Form 72-5 for OIVs that meet the beneficial owner criteria, the fund would still need to be able to look through to identify its investors by their jurisdiction.

More recently, the Supreme Court ruled on several beneficial ownership cases.

The Supreme Court ruled in favor of Luxembourg SICAV/Fs in a treaty eligibility case. Among other conclusions, the Supreme Court held that based on factual circumstances, Luxembourg SICAV/Fs are beneficial owners of the Korean source income, being engaged in economic activity as collective investment vehicles, such as offering funds to investors, making investments, and distributing investment returns. The SICAV/Fs in this case could execute investment contracts and acquire investment assets at their own discretion, as well receive dividend income, all of which was sufficient proof of beneficial ownership.

It remains to be determined whether the Supreme Court’s decision will be interpreted broadly to apply to other types of funds.

The Supreme Court also ruled in favor of a German asset manager in a treaty eligibility case. The Supreme Court concluded that an asset manager was the beneficial owner of Korean dividend income sourced through a German fund because it had the beneficial right to use the dividends without any legal or contractual obligation to transfer the dividends to the general investors of the fund. The asset manager was therefore eligible to claim treaty benefits pursuant to the tax treaty between Germany and Korea.

In another case, dividends were paid by a Korean manufacturing company to its Hungarian parent company, which was established to function as a shared service center and intermediary holding company. The Supreme Court concluded that the Hungarian company was the beneficial owner of the dividend income because it did not have a legal or contractual obligation to transfer the income and was therefore eligible to claim benefits pursuant to the tax treaty between Hungary and Korea. The Supreme Court also concluded that Korean General Anti-Avoidance Rules (GAAR) should not apply because there was a commercial purpose for establishing the Hungarian holding company. It is worth noting that the concept of beneficial ownership guides treaty eligibility, while the concept of substantive ownership applies pursuant to Korea’s GAAR. Nevertheless, both criteria must be satisfied for treaty entitlement.


Austrian law defines beneficial ownership as economic ownership, where the economic owner has the right to use, consume, encumber, or sell the income producing assets. The economic owner also bears the risks associated with the income producing assets.

Sections A and B of former reclaim Form ZS-RE1A (currently sections 6A -General Information and 6B – Special Information for Legal Entities of the electronic reclaim application) require that claimants answer a set of questions confirming the presence of elements of beneficial ownership.

Claimants are requested to confirm the following:

  • Whether they have the right to use the dividend paying shares and whether they collect the yields therefrom on their own account.
  • Whether they received the shares under a contract option or other arrangement that could require resale or a transfer of such shares or an equivalent investment.
  • Whether they perform operational activities that exceed the scope of asset management. Applicants are requested to indicate the scope of business
  • Whether they employ their own workforce and have their own premises to conduct its activities.

In 2014, the Austrian Tax Authorities issued guidance with respect to transfers of beneficial ownership in the event of transactions taking place on or around ex-dividend date. Dividends arising from such transactions do not include entitlement to reclaim the associated withholding tax. Applicants are entitled to reclaim tax when their positions are settled and booked on their account before the dividend entitlement date. Where shares are acquired shortly before ex-dividend date, delivery to the custody account of the acquirer must be completed before ex-dividend date in order for the acquirer to be eligible to the withholding tax reclaim.

Question 6 of former reclaim Form ZS-RE1A (currently section 6A – General Information) inquires whether the repayment request concerns dividends due to the profit distribution of a publicly traded corporation. If the answer to this question is yes, the claimant is required to enclose documentation stating on which securities account the shares were noted on the day before the ex-date and the owner of the securities account on that date.

OECD Commentary

The OECD’s commentary to the model tax treaty is influential in interpreting tax treaties. With respect to beneficial ownership, the commentary states that, “In these various examples (agent, nominee, conduit, company acting as a fiduciary or administrator), the direct recipient of the interest is not the beneficial owner because the recipient’s right to use and enjoy the interest is constrained by a contractual or legal obligation to pass on the payment received to another person…” The obligation to pass payments can be derived from legal documents and based on facts and circumstances. A conduit company receiving income on behalf of other persons who derive the benefit of the income, is not regarded as the beneficial owner of the income and therefore is not a treaty eligible investor. Where the recipient of the income has a right to use the income unconstrained by a legal or contractual obligation to pass the payment, then the recipient may be deemed the beneficial owner of the income.


IIn light of a recent string of tax reclaim scandals, local tax authorities are scrutinizing whether claimants are the beneficial owners of income for tax treaty entitlement purposes. In a renewed effort to identify tax claimants as the rightful beneficiaries of income, rules requiring proof that elements of beneficial ownership are met are becoming more stringent.

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