Beneficial ownership – not far away (for some) and here to stay (for all)

By Dr Hendri Herbst and Jané Visagie

The term ‘beneficial ownership’ is a buzz word in current times, making headlines across the world for various reasons and forming the subject of great debate. However, it appears to be somewhat of an elusive term, with the meaning differing based on who you ask and depending in which context it is used. In this article, we will briefly explore the concept of ‘beneficial ownership’ (“BO”) and attempt to shed some light on the topic.

Firstly, great confusion is caused by terms being used interchangeably. The concept of BO must be distinguished from the notion of Ultimate Beneficial Owner (“UBO”). While these are related concepts, they have vastly different meanings and implications.

UBO refers to the natural person who ultimately owns or controls a legal entity. This is most relevant in the context of mitigating financial risk, more specifically adhering to anti-money laundering and anti-terrorist financing legislation. The financial action task force (“FATF”), the Organisation for Economic Cooperation and Development (“OECD”) and other organisations are largely spearheading this global initiative. The concept of UBO will not be further discussed in this article, which focuses instead on the meaning of BO in the context of withholding taxes.

Despite the relevance of the term BO and considering the fact that the term is used in various articles of the OECD’s model tax convention on income and capital (“MTC”), the term is not defined in either the MTC or the OECD’s commentaries. The concept of BO is particularly relevant in the context of withholding taxes as contained in articles 10, 11 and 12 of the MTC, which deals with dividends, interest and royalties, respectively.

According to the OECD’s commentaries, the term BO should not be interpreted according to the narrow technical meaning that it may have under the domestic law of a specific country but should rather be understood in its context and in light of the object and purposes of the MTC, including avoiding double taxation and the prevention of fiscal evasion and avoidance. For example, in the context of article 10 of the MTC dealing with dividends, the BO is the person or the recipient of a dividend who has the right to use and enjoy the dividend unconstrained by a contractual or legal obligation to pass on the payment received to another person. The concept refers to the BO of the dividends and not to the owner of the shares. Thus, one must distinguish between the legal owner and the BO for purposes of the MTC. While this may be one and the same person, it is not necessarily the case.

Under South African tax law, the term BO does not have a general definition and is defined only in the context of dividend withholding tax in section 64D of the Income Tax Act as “the person entitled to the benefit of the dividend attaching to the share”. This means that the BO will not necessarily be the registered owner of the share. The South African dividends tax definition of BO is therefore similar to that of the meaning advocated by the OECD for purposes of the MTC.

The BO of a dividend is liable for South African dividends withholding tax at a rate of 20% that is withheld and paid by the declaring company, unless the withholding rate is reduced by an applicable double tax agreement (“DTA”). South Africa has entered into approximately 80 DTAs with other jurisdictions.

Unlike some other jurisdictions with various additional substantive requirements to evidence BO, South Africa has a comparably simple and passive BO regime, based on a unilateral written declaration and undertaking by the BO, which is valid for five years. In other words, currently the South African Revenue Services would typically accept the BO of a dividend as the person who declares to be the one who receives the dividend for their own use and enjoyment and who assumes the risk and control of the dividend received, without any additional substance checks. While this is the current position, in light of the recent grey listing of South Africa by the FATF and global trends, this position is all but certain to change in the near future. The extent of any anticipated reforms is unclear at this stage.

A recent WTS Global International Corporate Tax panel discussion, hosted by Neethling van Heerden of WTS Renmere (South Africa), involved participants from Argentina, India, Kenya and Poland sharing their respective jurisdiction’s approaches to BO. It was evident from the panel discussion that the represented jurisdictions each have unique and differing approaches to determining and vetting a BO, with the criteria and tests to be applied differing vastly. Poland, for example, has a relatively advanced BO regime, with a strong focus on substantive requirements and various verification checks by the revenue authorities depending on the facts and circumstances. The approach adopted by Poland can therefore be described as an active BO regime, compared to South Africa’s (current) passive regime.

Notwithstanding the level of sophistication of a jurisdiction’s approach to the BO concept, it is clear that the notion of BO is here to stay and will play an ever more important role in transactions going forward.