If two countries enter into Double Taxation Agreement, investors of both countries enjoy special treatment in respect of dividends, interest, and royalties. The State Tax Administration issued the Notice which addresses on identification and determination of a “Beneficial Owner” under the Double Tax Agreement.
Qualification of a “beneficial owner” under the Notice
The Notice defines a “beneficial owner” is a person who owns and controls an income or the rights and property from which an income is derived. A beneficial owner, which can be an individual, a company, or any other group, is generally engaged in substantial business activities, under the Notice.
According to the Notice, an agent or a conduit company is not considered as a beneficial owner. Therefore, Notice defines a “conduit company” as a company that is incorporated for the purpose of the avoidance or reduction of tax, or the transfer or accumulation of profits. This type of company merely registers in a country in order to satisfy a legally required organization form; it does not conduct substantial business activities such as production, trading, and management.
Determination of a Beneficial Owner
The Notice lists the following factors, which are not in favor of positive determination of a “beneficial owner”:
1. The applicant is obligated to pay or distribute the income in full or a majority portion thereof (e.g., 60 percent or more) to residents of a third country or region within a prescribed time period (e.g., within 12 months after receiving the income).
2. The applicant has few or no business activities other than holding the rights or assets that generate the income.
3. If the applicant is a company, the assets, operation scale, and personnel of the applicant are small in size or amount, which does not match the amount of income.
4. The applicant has no or almost no right to control or dispose of the income or the rights or assets generating the income and assumes no or little risk.
5. The contracting country (region) does not tax the income, or the effective tax rate is very low.
6. The lender to a loan agreement that generates interest income has another loan agreement or deposit contract with a third party; the amount, interest rate, and the time of conclusion with respect to the third-party contract is similar to those of the first loan agreement.
7. The licensor to an agreement on copyright, patent, and technology licensing or transfer has a contract to license or transfer those from a third party.
When an applicant applies for tax relief under the DTA, he or she should prove himself as a beneficial owner providing the information relevant to the factors listed. The tax authorities should determine whether the applicant is a beneficial owner by analyzing the above factors relevant to the income. If necessary, they may confirm the information relevant to the identification of a beneficial owner through information exchange with a treaty country