Article 10 of the OECD Model Convention
Dividends
Beneficial ownership
Andrea Prampolini
Bergamo, 23 February 2015
•  «Distributive rules» are laid down in Articles 6- 22 of the OECD MC
•  Their purpose is to classify the various items of income by type and source
and then allocate the taxing rights to the Contracting States
Allocation of taxing rights
Taxing right of the
source State
Allocation of an
exclusive taxing
right
Allocation of a
limited primary
taxing right
Allocation of a
unlimited
primary taxing
right
Exclusion of the
source State’s
taxing right
Taxing right of the
residence State
No taxing right
Concurrent taxing
right
Concurrent taxing
right
Exclusive taxing
right
Income from
government services
Article 19(1)
Dividends
Article 10 (1)(2)
«the tax so
charged shall not
exceed»
«may be taxed»
Income from
immovable
property
Article 6(1)
«may be taxed»
Royalties
Article 12(1)
«shall be taxable
only»
Example
«shall be taxable
only»
Definition of dividends
Article 10(3) → Definition of dividends for treaty purposes
«The term “dividends” as used in this Article means income from shares,
“jouissance” shares or “jouissance” rights, mining shares, founders’ shares or other
rights, not being debt-claims, participating in profits, as well as income from other
corporate rights which is subjected to the same taxation treatment as income from
shares by the laws of the State of which the company making the distribution is a
resident».
•  Treaty definition: examples + general formula
•  Must be «corporate rights»
Article 3(1)(b) MC: definition of «company»
OECD MC Comm.: reference to joint stock companies → does not apply to
partnerships
§  Reference to “corporation”: does not apply to open-ended investment funds
§ 
§ 
•  Must participate in the company’s profits
§  includes income from profit-participating securities other than shares
•  Must not be debt claims → Article 11 (interest)
•  «Same taxation treatment» → Apparently OECD MC assumes that income
can only qualify as dividend if it is not deductible
Allocation of taxing rights
Article 10(1) → Full taxing right of the Residence State
Dividends “paid by a company which is a resident of a Contracting State [Source State]
to a resident of the other Contracting State [State of Residence] may be taxed in that
other State [Residence State]”.
Article 10(2) → Limited primary taxing right of the Source State
“However, dividends paid by a company which is a resident of a Contracting State may
also be taxed in that State [Source State] according to the laws of that State, but if
the beneficial owner of the dividends is a resident of the other Contracting State
[Residence State], the tax so charged shall not exceed [5% or 15% - see below]”
The Residence State of the recipient of the dividend has a non – exclusive
right to tax
→ The taxes levied in accordance with the treaty in the source State can be
credited in the Residence State in order to avoid double taxation (See Article
23A(2) and 23B OECD MC)
The tax charged by the Source State shall not exceed:
•  “5 per cent of the gross amount of the dividends” :
•  if the beneficial owner of the dividend is a company (other than a
partnership)
•  which holds directly at least 25 per cent of the capital of the company
paying the dividends (no reference to voting powers)
•  no minimum holding period required
→ Intercompany dividends
•  “15 per cent of the gross amount of the dividends in all other cases”
It should be noted that:
•  Reduced rates are applicable only if the recipient is the beneficial owner
of the dividend (see below)
•  OECD MC Comm: Article 10(2) does not settle the procedural questions.
Each Source State can either (i) limit its tax to the rates above (e.g.
withholding tax levied at reduced rates) or (ii) tax in full and make a refund
•  Dividends may not be subject to any tax at source under the Parent
Subsidiary Directive (see below)
Dividends
•  paid by a company which is a resident of a Contracting State
•  to a resident of the other Contracting State
State R
Company A
Dividend: 5% wht
State S- State R DTC applies
State S
Dividend:15% wht
State E- State R DTC applies
≥25%
≤25%
Company B
Company C
State E
Triangular cases:
•  Company A dual resident
•  Company B pays dividends to a permanent establishment of Company A
situated in a third State (State E)
•  Applies to dividends paid by a Subsidiary of EU Member State to a Parent
Company of another EU Member State
•  Application is subject to certain requirements (among others, holding of at least
10% of the capital; 1 year minimum holding period)
•  Objective: to eliminate both juridical and economic double taxation of
dividends
→ Member State of the Subsidiary: shall exempt dividends from withholding tax
→ Member State of the Parent: shall either
(i) exempt dividends from taxation or
(ii) tax dividends and allow Parent to credit the underlined corporation tax
State R (EU Member)
Dividend: 5% wht
State S- State R (DTC)
Company A
NO WHT
10%
State S (EU Member)
Company B
DTCs do not interfere with the application of the Directive
General rule: Article 10 (Dividends) prevails over Article 7 (business
profits)
Art. 7(4) «Where profits include items of income which are dealt with separately
in other Articles of this Convention [e.g. Article 10], then the provisions of those
Articles [e.g. Article 10] shall not be affected by the provisions of this Article
[Article 7]»
Company A
State R
100%
Dividend: max 5% wht
Company B
State S
→ State S can tax the dividend up to 5% of its gross amount. Had Article 7
prevailed over Article 10, State S could have not taxed the dividend (as business
profit), since Company A does not have a permanent establishment in State S
Exception: Article 10 (4) (so called «PE Proviso»): Article 7 applies
«The provisions of paragraphs 1 and 2 [of Article 10] shall not apply if the beneficial
owner of the dividends, being a resident of a Contracting State, carries on business in
the other Contracting State of which the company paying the dividends is a resident
through a permanent establishment situated therein and the holding in respect of which
the dividends are paid is effectively connected with such permanent establishment.
Insuch case the provisions of Article 7 shall apply”.
Company A
Dividend
State R
P.E.
100%
Company B
State S
→ Article 10(4) overrides Article 7(4). Since the dividend income is attributable to
Company A’s permanent establishment in State S, State S can tax such dividend
without limitations under Article 7(1)
Article 10(5): Denial of extra-territorial taxation of dividends
«Where a company which is a resident of a Contracting State derives profits or income from the
other Contracting State, that other State may not impose any tax on the dividends paid by the
company, except insofar as such dividends are paid to a resident of that other State or insofar
as the holding in respect of which the dividends are paid is effectively connected with a
permanent establishment situated in that other State, nor subject the company’s undistributed
profits to a tax on the company’s undistributed profits, even if the dividends paid or the
undistributed profits consist wholly or partly of profits or income arising in such other State».
Company A
Dividend
WHT
State R
100%
Company B
State S
P.E.
State E
→ State E cannot tax dividends paid by Company B to Company A solely because
Company B’s profits, from which the distribution is made, are originated in its
territory (for instance, through a permanent establishment situated therein)
•  The Source State is not obliged to give up taxing rights merely because
the dividends are paid to a resident of the other Contracting State.
•  It is also necessary that the recipient of the dividend qualifies as the
«beneficial owner of the dividends»
•  The term beneficial owner is not defined by the Convention → Art 3(2)
OECD MC → OECD MC Comm (2014 rev.): the term beneficial owner was
intended to be interpreted in the context of the Convention and do not
refer to any technical meaning that it could have had under domestic law
Summary:
1.  1977 Original meaning (OECD MC Comm. 1977 on Article 10, para.12)
→ Formal meaning
2.  2003 revised meaning (OECD MC Comm. 2003 on Article 10, para.12.1)
→ Substantial meaning
• 
Different judicial opinions in International case law (Indofood case, 2006; Prevost Car
case, 2008)
• 
Issue of 2011 OECD Discussion Draft on proposed changes to the Commentary
concerning the meaning of “beneficial owner”. Issue of 2012 OECD Revised Proposals
3.  2014 revised meaning (OECD MC Comm. 2014 on Article 10, para.12.4)
1977 Original meaning (OECD MC Comm. 1977 on Article 10, para.12)
•  « these words are generally understood to exclude intermediaries such as
nominees, agents and mandataries, who might be interposed between
the payer and the ultimate beneficiary »
•  the agent or nominee is denied treaty benefits as « it is not treated as the
owner of the income for tax purposes in the State of residence »
→ formal meaning
2003 revised meaning (OECD MC Comm. 2003 on Article 10, para.12.1)
• 
“It would be equally inconsistent with the object and purpose of the Convention for
the State of source to grant relief or exemption where a resident of a Contracting
State, otherwise than through an agency or nominee relationship, simply acts
as a conduit for another person who in fact receives the benefit of the income
concerned”.
• 
“a conduit company cannot normally be regarded as the beneficial owner if, though
the formal owner, it has, as a practical matter, very narrow powers which render
it, in relation to the income concerned, a mere fiduciary or administrator acting
on account of the interested parties”
→ substantial meaning
Indofood International Finance Ltd v. JP Morgan Chase Bank NA (English Court of Appeal, 2006)
Interest
(10% wht under
Indonesia –Netherlands
DTC)
Indofood
(Indonesia)
Loan
No beneficial owner
of interest paid by
Indofood
NewCo
(Netherlands)
Loan
Interest (no wht)
Finance
(Mauritius)
JP Morgan
(UK) (trustee)
Bond
Interest (no wht)
Bondholders
•  Indoofood interposed a Netherlands subsidiary
(NewCo) benefitting from the 10% reduced wht
provided by Indonesia – Netherlands DTC, in order to
avoid Finance to be subject to a 20% Indonesian wht
on interest paid out of Indonesia (→”Treaty
shopping”)
•  The loan taken by Newco was in identical amount and
at an identical rate of interest, payable a few days
after the interest payable on the loan of Indofood. In
practical terms, there was no possibility for
NewCo to do anything with the interest it received
from Indofood other than pay that interest on to the
lenders
•  The English Court ruled that NewCo was not the
beneficial owner of the interest it received from
Indofood:
The concept of beneficial ownership is incompatible with that of
the formal owner who does not have “the full privilege to
directly benefit from the income”. “In practical term it is
impossible to conceive of any circumstances in which [Finance/
NewCo] could derive any “direct benefit” from interest payable
by [Indofood] except by funding its liability to [JP Morgan]. Such
an exception can hardly be described as the full privilege”
needed to qualify as the beneficial owner, rather the position of
[Finance/NewCo] equates to that of an “administrator
14 of the
income”
Prevost Car Inc. v. Her Majesty the Queen 2008
Henlys
(UK)
Volvo
(sweden)
51%
Dividends
49%
Prevost BV
(NL)
100%
Dividends
5% wht
Canada –
NL treaty
Prevost Car
Inc.(CAN)
Dividends
•  Prevost BV is a holding company with no employees
and no assets other than the shares of Prévost Car (no
substance)
•  A shareholder agreement between Volvo and Henlys
provided that at least 80% of the profits of Prévost Car
and Prevost BV were to be distributed to Volvo and
Henlys
•  The Canada Revenue Agency took the view that
Prevost BV was not the beneficial owner of the
dividends paid by Prévost Car and that therefore
higher tax rates of 10% and 15% provided by CanadaSweden and Canada – UK DTC should have applied
•  The Tax Court of Canada considered that the holding
company was not a conduit because the shareholder
agreement between Volvo and Henlys did not impose
any legal obligation to Prevost BV distribute
dividends to its shareholders, as such company was
not a party to the agreement:
“When corporate entities are concerned, one does not
pierce the corporate veil [and deny beneficial
ownership] unless the corporation is a conduit for
another person and has absolutely no discretion as to
the use or application of funds put through it as conduit,
or has agreed to act on someone else’s behalf pursuant
15
to that person’s instructions without any right to do
other than what that person instructs it”.
2014 revised meaning (OECD MC Comm. 2014 on Article 10, para.12.4)
“In these various examples (agent, nominee, conduit company acting as a
fiduciary or administrator), the direct recipient of the dividend is not the
“beneficial owner” because that recipient’s right to use and enjoy the dividend
is constrained by a contractual or legal obligation to pass on the
payment received to another person. Such an obligation will normally
derive from relevant legal documents but may also be found to exist on
the basis of facts and circumstances showing that, in substance, the
recipient clearly does not have the right to use and enjoy the dividend
unconstrained by a contractual or legal obligation to pass on the payment
received to another person. (…)”
•  Meaning of the reference to «facts and circumstances» and «substance»
2014 revised meaning (OECD MC Comm. 2014 on Article 10, para.12.4)
“This type of obligation would not include contractual or legal obligations that are
not dependent on the receipt of the payment by the direct recipient such as an
obligation that is not dependent on the receipt of the payment and which the direct
recipient has as a debtor or as a party to financial transactions, or typical distribution
obligations of pension schemes and of collective investment vehicles entitled to treaty
benefits under the principles of paragraphs 6.8 to 6.34 of the Commentary on Article 1.
Where the recipient of a dividend does have 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 recipient is the “beneficial owner” of that dividend.
It should also be noted that Article 10 refers to the beneficial owner of a dividend as
opposed to the owner of the shares, which may be different in some cases”.
•  Related obligations → no beneficial ownership
•  unrelated obligations → beneficial ownership
Unrelated obligations: examples
•  the recipient of the dividend uses the cash to repay the existing financial
debt
•  the recipient of the dividends is an investment fund that is subject to
typical distribution obligation to unit holders