ARTICLE

The 2014 Update to the OECD Commentary: A Targeted

Hybrid Approach to Beneficial Ownership

Adrian Wardzynski*

‘This article argues that application of beneficial ownership test in Articles 10 to 12 of the OECD Model Convention is not a straightforward
question of legal or economic approach. Rather, it is a matter of balance between the two that simultaneously ensures legal certainty and does not
countenance blatant treaty shopping. Accordingly, the article first explores the legal basis and main drawbacks of the two approaches when applied
irrespective of one another. Basing on this analysis, the author advocates a targeted hybrid approach which is to be regulated by the relative
abusiveness of the tax structure in question. The hybridity is manifested through the reliance on the economic approach as an exception to the legal
approach in egregious cases, i.e., targeted cases. It is submitted that the relevant threshold of abuse can be determined on the basis of the 2014 update
to the OECD Commentary on beneficial ownership. This conceptualization cuts through the ostensible inconsistencies of the contemporary
jurisprudence and reveals the implicit public rationale guiding actions of tax authorities and court decisions’.

1 INTRODUCTION one of the two approaches. However, application of the

Beneficial ownership of income constitutes a fundamental
condition for the allocation of taxing rights over
dividends, interest and royalty flows under double tax
treaties (DTTs). Despite its central role in international
investment, or perhaps because of that role, its application
is far from certain. Since its introduction in 1977 by the
Organization for Economic Cooperation and Development
(OECD) into Articles 10–12 of the Model Tax Convention
(OECD MC), the concept has caused considerable
interpretative difficulties and resulted in highly divergent
case law. In recognition of these difficulties the OECD
produced in 2011 and 2012 two public discussion drafts
on the meaning of beneficial ownership,1 which eventually
led to the amendment of the Commentary to the OECD
MC on 15 July 2014.2 This indisputably crucial change
presents an opportunity to revisit the previously held
positions and consider the effects of the new Commentary
on the international tax planning in the area of passive
income.
It is often claimed that ‘the main issue today is whether
the beneficial ownership is a legal as opposed to a factual
or economic substance test’.3 Indeed, the language used by
national judiciaries and tax authorities openly sides with
legal or the economic test to the exclusion of the other is
neither acceptable from the legal perspective nor
reasonable from the public policy view. Therefore, the
thesis of this article advocates a targeted hybrid approach
that is capable to achieve legal certainty and acknowledge
the implicit anti-avoidance role of beneficial ownership. In
pursuance of this argument, first the deficiencies of the
legal and economic approaches are identified, and secondly
compatibility of the new conceptualization is discussed in
context of the updated Commentary.
Accordingly, the second and third parts below address
the questionable legal bases and significant public policy
concerns about the formal and factual approaches
respectively. These parts demonstrate that the OECD
Commentaries have never conclusively supported either of
them. Thus, it is ultimately the policy pursued by a given
State that shifts the balance towards one of the two
approaches. Nonetheless, even from the policy perspective
none of the tests is satisfactory. In this regard, it is
emphasized that the threshold relevant for the finding of
beneficial ownership is either too low or too legally
uncertain. This has important practical implications.
Hence, the fourth part, drawing on these analyses,
considers a hybrid approach that is arguably enshrined in

Notes
*
LSE LLM (Taxation) – the paper was compiled in partial fulfilment of the LLM programme.
1
OECD Public Discussion Draft on the Meaning of Beneficial Ownership (29 Apr. 2011) and the following OECD Revised Public Discussion Draft on the Meaning of
Beneficial Ownership (19 Oct. 2012).
2
2014 Update to the OECD Model Tax Convention available at <http://www.oecd.org/ ctp/treaties/2014-update-model-tax-convention.htm> accessed 16 Jul. 2014. For a
discussion of the legal status of the Commentaries see K Vogel, ‘The Influence of the OECD Commentaries on Treaty Interpretation’ (2000) 12 Bull. Int’l Taxn. 612.
3
C Du Toit, ‘The Evolution of the Term “Beneficial Ownership” in Relation to International Taxation over the Past 45 Years’ (2010) 10 Bull. Int’l Taxn. 500, 501.

INTERTAX, Volume 43, Issue 2

179 © 2015 Kluwer Law International BV, The Netherlands
 Intertax

the 2014 update to the Commentary. Finally, a conclusion The following discussion first assesses arguments made
is offered stating that the proposed approach merely in support of the entirely legal approach to beneficial
recognizes the unvoiced reality behind the ostensibly ownership. Second, a public policy pressure for a
inconsistent worldwide case law. moderated economic approach is elucidated.

2 LEGAL APPROACH
According to the legal approach beneficial ownership is to be
determined on the basis of legal obligations arising from
contracts and other legal instruments, i.e., a person legally
entitled to enjoy an item of income shall be considered its
beneficial owner. Factual or broader economic realities are
given little or no relevance. For example, in Prévost the es-
sential consideration was whether the intermediary was
legally bound to follow the predetermined distribution
stipulated in the shareholders’ agreement.4 Similarly, in
Royal Dutch the Dutch Supreme Court found that a
stockbroker who purchased dividend coupons that were
already declared but not yet made payable was their
beneficial owner since, in legal terms, the stockbroker was
free to avail itself of the dividend income.5
It is important to acknowledge that cases in which
national judiciaries applied the legal approach are vastly
outnumbered by the economic approach decisions.6 This
would seem to suggest that the legal approach ought to be
regarded as an exception rather than a fully-fledged
counterpart of the economic approach. However, this
observation is entirely based on the reported practice. Given
the essential role of foreign holding companies for
international tax planning,7 it is hard to believe that tax
authorities were aware of questionable economic substance
in a bundle of reported cases worldwide and that such
cases arose only in a limited selection of countries.
In other words, it is probable that there are a number of
unreported instances, especially in countries where no
beneficial ownership case has been heard to date, in which
tax authorities either de jure or de facto accept the legal
approach. Alternatively, it may simply mean that there is a
fairly high threshold set by tax authorities before they
decide to challenge the status of an intermediary legally
entitled to the passive income under consideration.
2.1 OECD Legal Basis
There is a substantial body of literature arguing for the
superiority of the legal approach,8 which signals that the
legal approach is not obvious from the Commentary itself.
Its proponents put forward a variety of arguments. A
recurring theme pertains to the original intentions of the
drafters as well as the explanations given in the 1977
Commentary when the concept was introduced into the
OECD MC. Indeed, according to Article 32(a) of the 1969
Vienna Convention on the Law of Treaties (VCLT)
supplementary materials such as the negotiating history
may be consulted if the meaning of the term is
ambiguous.9
More precisely, advocates of the formal definition
maintain that the concept was intended to be constrained
to situations where the intermediary company acts as an
agent or a nominee. Consequently, the analysis should be
based on formal characteristics of the arrangement.10 In
this regard, there are three main claims that may be
discerned:
(1) the UK when proposing introduction of the concept
into the OCED MC envisaged that it would only
address the problem of mere agents and nominees;
(2) the negotiating documents compiled by the OECD
and the 1977 Commentary make primary reference to
agent and nominee situations, which implicitly
defines the intended scope of the concept;
(3) the term was intended to define the meaning of the
expression ‘paid . . . to a resident,’ hence displacing
any allegations of broader anti-avoidance purpose.
All of these assertions are examined in the following
subsections.

Notes
4
CAN: Prévost v. The Queen (2008) TCC231 (CanLII) affirmed in Prévost Car Inc v. Canada (2009) FCA 57.
5
NE: Royal Dutch (1994) BNB 1994/217. For a discussion of the case see DS Smit, ‘The Concept of Beneficial Ownership and Possible Alternative Remedies in Netherlands
Case Law,’ in M Lang et al. (eds), Beneficial Ownership: Recent Trends (IBFD Online Books 2013) ss 5.2.1–5.2.4.
6
AM Jiménez, ‘Beneficial Ownership: Current Trends’ (2010) 2 WTJ 35, 47.
7
For example R Eicke, Tax Planning with Holding Companies – Repatriation of US Profits from Europe: Concepts, Strategies, Structures (Wolters Kluwer 2009).
8
For example R Fraser and JDB Oliver, ‘Beneficial Ownership: HMRC’s Draft Guidance on Interpretation of the Indofood decision’ (2007) 1 BTR 39; Jiménez (2010) (n. 6);
J Berenstein, ‘Thoughts on the OECD Discussion Paper on Beneficial Ownership’ (2011) Tax Notes Int’l 49; R Collier, ‘Clarity, Opacity and Beneficial Ownership’ (2011) 6
BTR 685; R Vann, ‘Beneficial Ownership: What Does History (and Maybe Policy) Tell Us,’ in M Lang et al. (n. 5) s. 19; J Gooijer, ‘Beneficial Owner: Judicial Variety in
Interpretation Counteracted by the 2012 OECD Proposal?’ (2014) 42(2) INTERTAX 204. JF Avery Jones, R Vann and J Wheeler, ‘Response to the OECD Discussion Draft
2011’ (2011) available at <http://www.oecd.org/tax/t reaties/48420432.pdf> accessed 2 Jun. 2014, 2.
9
For a discussion of the VCLT in context of DTTs see R Rohatgi, Basic International Taxation (2nd Ed Richmond Law and Tax Limited 2005) 39–43.
10
For example, Vann (n. 8), s. 19.4.2; Collier (n. 8) 687.

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2.1.1 Limited Intentions of the UK interpretation the legal etymology of a term is of

The term beneficial ownership in relation to Articles
10–12 OECD MC was used for the first time in the 1966
Protocol to the DTT between the United Kingdom (UK)
and the United States (US). It replaced the previous UK
treaty practice of inserting a subject-to-tax clause in the
passive income Articles.11 It was also the UK that
proposed to insert either a subject-to-tax or beneficial
ownership requirement into the OECD MC.12 The second
proposition was preferred by the Working Party dealing
with the suggested modification, since the first option
would seem to be ‘contrary to the spirit and general
economy’ of the Model.13 Eventually, the beneficial
ownership requirement was introduced into the 1977
OECD MC and an elaboration of the concept was added in
the corresponding Commentary.14
Therefore, the role of the UK in introducing the term
into the OECD MC cannot be disputed.15 It also seems
correct to observe that the UK was at the time concerned
with granting of withholding tax treaty benefits to
nominees and agents who exploited its tax treaty network
without being subject-to-tax in the UK.16 However, even
assuming that the UK intended the concept to be limited
only to agents and nominees, it does not automatically
follow that this conceptualistion was ultimately endorsed
by all of the other OECD Member countries. In fact, such
a limited scope of the term was not even accepted by UK
treaty partners who inserted the term into their DTTs
prior to 1977. For example, the US noted in its Technical
Memorandum to the 1966 Protocol that ‘[a] trust could
qualify as the beneficial owner of dividends received by it
which is not required to, and does not in fact distribute’.17
This presupposes something more than a purely legal
analysis over the recipient’s entitlement to the income.
Furthermore, the choice of the expression ‘bénéficiaire
effectif’ in the French version, which being the second
official language of the Model is equally binding as
the English version,18 suggests that a wider understanding
was contemplated. After all, it should be reiterated that
especially in the international contexts of treaty
secondary importance to its ‘ordinary meaning’.19
2.1.2 Express Reference to Agents and Nominees
The second argument insists that it is both the legislative
history and the finalized 1977 Commentary that point to
the legal approach. There are two alternative lines of
reasoning here. First, the express reference only to agents
and nominees in the Commentary precludes application to
any other forms of intermediaries in accordance with the
maxim expressio unius est exclusio alterius. Second, the
examples of agents and nominees are instructive as to
the intended scope of the provision. These claims are
addressed in turn below.
2.1.2.1 Application Only to Agents and
Nominees
The original drafts of the Commentary explaining the
application of beneficial ownership in treaty context would
seem to discredit the strictly limited application to agents
and nominees. The 1970 draft Commentary on Articles 11
and 12 stated that ‘[t]he purpose of the condition [is] to
ensure that the relevant residential qualification shall
be residence in the other State by the person beneficially
entitled to the interest and not residence there by
any trustee or other intermediary standing between him
and having the legal right to such income’.20 The
agent and nominee situations seem to be within the
range of situations envisaged by the term
‘any . . . intermediary’ rather than being the only objectives
of the concept.
This observation is consistent with the 1971 redrafting,
which deleted reference to trustees and added examples of
agents and nominees. The relevant passage stated that
‘intermediaries such as an agent or nominee’21 should not
be regarded as beneficial owners of the income. The
succinct explanation was preserved in the 1977
Commentary. As positioned by de Broe, this expression

Notes
11
On UK treaty practice prior to 1977 see JF Avery Jones, ‘The United Kingdom’s Influence on the OECD Model Tax Convention’ (2011) 6 BTR 653, 677–682.
12
FC/WP27(68)1 (1968) 14; DAF/FC/69.10 (1969) 6. The historical documents referred to are available at <www.taxtreatieshistory.org> accessed 15 Jul. 2014.
13
FC/WP27(70)1 (1970) 13.
14
For detailed historical analysis leading to the introduction of the requirement see Vann (n. 8), ss 19.3–19.4.
15
JF Avery Jones et al. ‘The Origins of Concepts and Expressions Used in the OECD Model and their Adoption by States’ (2006) 6 Bull. Int’l Taxn. 220, 246–249.
16
For example, JF Avery Jones, ‘The Beneficial Ownership Concept Was Never Necessary in the Model,’ in M Lang et al. (n. 5) s. 20.
17
Excerpt reproduced in Vann (n. 8) s. 19.3.2 (emphasis added).
18
Article 33(1) VCLT.
19
Article 31(1) VCLT; cf. Art. 32 VCLT.
20
FC/WP27(70)2 (1970) 2 and 9.
21
FC(71)1 (1971) 4 and 13; CFA/WP1(73)2 (1973) 2.

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‘only purports to illustrate the (negative) meaning of the
term, not define it exhaustively’; had the drafters ‘wished
to restrict the denial of treaty benefits to agents and
nominees, [they] could have used those words explicitly’
in the Model.22
2.1.2.2 Application to Intermediaries Similar to
Agents and Nominees
Alternatively, the choice of examples, ‘agent or nominee’,
inserted after the general term ‘intermediary’ is argued to
be informative as to the intended purview of the concept.
In particular, the specific nature of these examples is
claimed to imply that legal rather than economic factors
are to be considered.23 However, this interpretation is
somewhat contentious. There could be more pragmatic
reasons relating to the differences of public policies
pursued by the various OECD Member States that could
explain this choice of explicit examples. The deletion of
the reference to trusts in the 1971 draft might shed some
light on this argument.
It is apparent from the bilateral negotiations of the
beneficial ownership condition prior to its inclusion in the
OECD MC that there was no uniform approach amongst
common law countries on the treatment of trusts. While
the UK and the US were not particularly concerned about
the treatment of trusts as beneficial owners, Australia and
New Zealand expressed their doubts over the potential
over- or under-inclusiveness. Later, New Zealand even
entered a specific observation to Article 3 OECD MC
stating that trusts can be beneficial owners within the
meaning of Articles 10–12.24 Undeniably, the issue was
and still is particularly troubling to many civil legal
system that do not recognize the institution of trusts.
Therefore, presumably, the matter was not straightforward
during the negotiations at the OECD.
When compared to the 1970 draft Commentary the
changed wording in the revised 1971 version (later
implemented in the 1977 Commentary) could be seen as a
compromise to accommodate the conflicting positions
held on the entitlement to treaty benefits by trusts. The
redrafted stipulation no longer denied treaty benefits to
‘any trustee’ receiving passive income and effectively left it
to the States to decide on whether, or in what
circumstances, trusts should be perceived as beneficial
owners. In more recent times it seems generally acceptable
that a trustee can be the beneficial owner of income,25 but
the circumstances in which it is possible still vary across
countries.26
A similar consensus-related difficulty could have been
the reason leading to the addition of only the agent and
nominee examples. Arguably, these two types of situations
could be regarded as the ‘safest’ options that were likely to
attract acceptance from all States providing input on the
Commentary. Pursuant to this proposition the phrase ‘such
as’ should not be necessarily seen as conclusively
restricting the meaning of the preceding expression
‘intermediary’. Indeed, the Commentary provides an as
detailed explanation of the terms used in the OECD MC
as is possible in the multilateral environment of the
OECD Council, i.e., precision is dependent on the extent
of multilateral consensus (subject to reservations and
observations).27
In short, the public policy sensitivities related to the
passive income provisions in the Model, are likely to have
influenced the choice of examples used to illustrate the
application of beneficial ownership. It follows that
particular caution needs to be exercised when inferring any
definite conclusions as to their impact on the overall scope
of these provisions. This could explain the confidence of
some Member States28 and the 2010 OECD Report on
Collective Investment Vehicles that the exact application
of beneficial ownership is a matter of domestic interpre-
tation.29
2.1.3 Explanation of the Concept ‘Paid To’
The third argument relies on the fact that the principal
purpose of beneficial ownership is to explain the term
‘paid to’ used in Articles 10–12 OECD MC.30 This
understanding effectively equates beneficial ownership
with ‘an attribution-of-income rule rather than an anti-
avoidance rule’.31 It could be, however, questioned
whether such a limited role was intended as it does not
seem to add anything new.

Notes
22
L De Broe, International Tax Planning and Prevention of Abuse (IBFD 2008) 664, 682–683.
23
For example Collier (n. 8) 690.
24
Vann (n. 8) s. 19.3.2.
25
OECD Commentary (2014) on Art. 10, fn. 1 to [12.1].
26
For example, JF Avery Jones, ‘The Treatment of Trusts under the OECD Model Convention’ (1989) 2/3 BTR 8-102.
27
Decisions in the Council are taken by consensus. See OECD website <http://www.oecd.org/ about/whodoeswhat/> accessed 15 Jun. 2014. On the role of observations and
reservations inserted into the Commentary see OECD Introduction to Commentary, [30]–[32].
28
US Model Technical Explanation (2006), [149].
29
OECD CIV Report 2010, [31].
30
OECD Commentary, [12].
31
Smit (n. 5) s. 5.1.

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It is sometimes argued that a non-literal reading of the
term ‘paid to’ was already implicit in the OECD MC.32
For example, in the 1971 case of Aiken Industries the US
Tax Court denied treaty benefits to a Honduran
intermediary interposed between a US debtor and a
Bahamian creditor based on the non-literal reading of the
parallel expression ‘received by’. According to the Court,
the Honduran company could not have been considered to
‘receive’ the income, since it was contractually obliged to
pass on the exact amount to its parent. A prerequisite of
‘dominion and control’ was held to be implicit in the word
‘receive’.33 Although this case forms a persuasive authority
that the expressions ‘received by’ or ‘paid to’ are not to be
interpreted literally, it is disputable whether its ratio can
be extrapolated to other cases.
First, it is debateable whether the expression ‘received
by’ used in the US-Honduran DTT can be equated with
the term ‘paid to’ from the OECD MC. Second, in some
countries these sort of implicit conditions as to the
qualities of the recipient, i.e., control over the income
received, could be regarded as treaty override. Especially
that there is no international consensus as to the situations
in which Article 3(2) OECD MC permits referral to
domestic meanings of undefined treaty terms.34 Third,
from a practical perspective, expansionary interpretations
could cause unnecessary diplomatic frictions. Indeed, the
Commentary when explaining the concept of ‘payment’
(but not ‘paid . . . to a resident’) solicits ‘a very wide
meaning’ without making any conditions as to the
recipient.35
Given the above mentioned issues, the addition of an
explicit requirement of beneficial ownership to the text of
the OECD MC and an explanation in the Commentary is
useful in dispelling doubts over the literal reading of the
expression ‘paid . . . to a resident’. Moreover, it should be
acknowledged that, strictly speaking, beneficial ownership
is a condition to the already existing attribution-of-income
rule. As noted by Kleist, ‘the purpose of requiring
beneficial ownership is to clarify that it is not sufficient
that dividends, interest or royalty is paid to a person in the
other Contracting State in order for treaty benefits to
apply’.36 Hence, there are certain anti-abuse overtones. In
any case, even the attribution-of-income rules must be
interpreted in good faith in accordance with the treaty
objectives.37 Accordingly, the legal approach is not
unqualified.
2.2 Potential for Blatant Treaty Shopping
A restrictive understanding of beneficial ownership could
be perceived as an invitation to treaty shopping. This form
of tax avoidance ‘concerns a situation in which a person
who is not entitled to the benefits of a tax treaty makes
use of another (normally legal) person to obtain those
treaty benefits that are not available to him directly’.38
In both Prévost and Royal Dutch the only condition that
the taxpayer had to satisfy in order to gain access to the
treaty is that the intermediary had the legal right to enjoy
the income concerned, irrespective of any factual
constraints.39 In Velcro the Canadian Tax Court moved
even further and found that a legal obligation to pass on
the income after thirty days from receipt meets the
beneficial ownership test. The crucial consideration for the
Court was the fact that the intermediary commingled the
funds received with other amounts.40 According to Arnold
this understanding ‘renders the concept of beneficial
owner essentially meaningless because the commingling of
the amount is completely within the control of the
recipient’.41 Arnold further expresses the view that Prévost
and Velcro left Canada ‘relatively defenceless against blatant
treaty shopping’.42 This statement captures the essence of
the impact of legal approach on treaty abuse.
The adverb ‘relatively’ denotes that there is some
protection offered after all. Indeed, the ordinary meaning
of the expression ‘paid . . . to a resident’ does not
necessarily presuppose any conditions as to the legal or
economic entitlement of a resident to the passive income
at issue.43 Accordingly, demanding that the income is paid
to beneficial owner, even if defined solely on the basis of

Notes
32
J Wheeler, ‘The Attribution of Income to a Person for Tax Treaty Purposes’ (2005) 11 Bull. Int’l Taxn. 477, 479.
33
US: Aiken Industries Inc v. Commissioner of Internal Revenue (1971) 56 TC 925. For a discussion of the case see Y Brauner, ‘Beneficial Ownership in and outside US Tax
Treaties,’ in M Lang et al. (n. 5) s. 9.2.
34
For example, JF Avery Jones et al. ‘The Interpretation of Tax Treaties with Particular Reference to Article 3(2) of the OECD Model’ (1984) 1/2 BTR 14.
35
OECD Commentary on Art. 10, [7].
36
D Kleist, ‘First Swedish Case on Beneficial Owner’ (2013) 41(3) INTERTAX 159, 162 (emphasis added).
37
Article 31(1) VCLT.
38
De Broe (n. 22) 5.
39
Supra s. 2.
40
CAN: Velcro Canada Inc v. The Queen (2012) TCC 57.
41
BJ Arnold, ‘The Concept of Beneficial Ownership under Canadian Tax Treaties,’ in M Lang et al. (n. 5) s. 3.3.3.
42
Arnold (2013) (n. 41) s. 3.4 (emphasis added).
43
Supra s. 2.1.3.

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formal documents, places a considerable limitation. In this
sense, although beneficial ownership could be seen as an
attribution-of-income rule only, it has at least incidental
anti-avoidance effect.
At the same time, the adjective ‘blatant’ is also suitable
as there may be some particularly egregious treaty
shopping arrangements that would easily satisfy the
formal beneficial ownership test. Assuming that there is
no other domestic or treaty mechanism to counter this sort
of structures the country in question could be considered
‘defenceless’.
Thus, on the one hand, the restrictive legal approach
offers protection against treaty shopping, i.e., protects
against agency and nominee conduit arrangements. But,
on the other hand, it affords scope for ‘blatant’ treaty
shopping to take place since factual and economic
interrelations are disregarded. Therefore, unease about the
potential to which this requirement can be circumvented
is somewhat understandable.
Admittedly, the restrictive legal interpretation seems
consistent with the general principles of legal certainty as
well as the aim of promoting international investment and
movement of capital.44 However, a strictly legal approach
may not always be entirely justifiable in terms of the
VCLT and the Commentary. A good faith reading of the
treaty provisions, as required by Article 31(1) VCLT,
would seem to suggest that particularly in cases of
egregious treaty abuse the surrounding factual
circumstances are to be taken into consideration. This is
sometimes referred to as an inherent treaty anti-abuse
rule.45 The OECD backing for good faith considerations is
implicit in the 2003 changes to the Commentary which
clarified that ‘[i]t is also a purpose of tax conventions to
prevent tax avoidance’.46 Accordingly, the good faith
interpretation was expressly relied on in treaty shopping
cases such as Yanko-Weiss Holdings,47 A Holdings ApS48 and
most recently in X Sarl.49 In the two latter cases it directly
reinforced factual analysis of beneficial ownership.
Yet, whether the abuse is determined under the guise of
good faith or otherwise it cannot be inferred lightly.50
Conscious that legal certainty is paramount to the
facilitation of international trade and even assuming that
beneficial ownership is primarily an attribution-of-income
rule, the anti-avoidance argument should be reserved to
cases widely perceived as abusive, i.e., cases displaying
exceptionally aggravating circumstances. Importantly, the
good faith interpretation ought to apply both ways –
besides offering assistance to the tax authority, it should
also protect taxpayers against the arbitrariness of that
authority.
2.3 Interim Conclusion
The negotiating history and the 1977 Commentary does
not conclusively state that only the formal factors are
relevant to the determination of beneficial ownership.
Legal aspects of the tax structure are objectively verifiable
and easily administrable, and thus they should form the
focal point of any examination. However, the more
subjective factual aspects should not be ignored in
egregious treaty shopping cases.
3 ECONOMIC APPROACH
At the opposing end of the continuum is the economic
approach which was applied in court decisions in countries
such as France,51 Spain,52 Denmark,53 Sweden,54 or
Switzerland.55 Arguably, it is also the position endorsed in
the UK.56 Similarly, the emerging economic powers such

Notes
44
OECD Commentary on Art. 1, [7]. See also OECD Introduction to Commentary, [1].
45
For a discussion on the inherent anti-abuse rule see DG Duff, ‘Responses to Treaty Shopping: A Comparative Evaluation,’ in M Lang et al. (eds) Tax Treaties: Building Bridges
between Law and Economics (IBFD 2010) 75, 90–94. See also S van Weeghel, ‘Tax Treaties and Tax Avoidance: Application of Anti-Avoidance Provisions,’ Cahiers de Droit
Fiscal International, General Report, Vol. 95a (IFA/SDU 2010) 35–43.
46
See infra s. 2.1.
47
ISR: Yanko-Weiss Holdings Ltd v. Holon Assessing Office (1996) 207 10 ITLR 254.
48
CH: A Holdings ApS v. Federal Administration (2005) 8 ITLR 536.
49
CH: X Sarl. v. Federal Administration (25 Jun. 2014) Cour I 4689/2013, [4.1].
50
OECD Commentary on Art. 1, [9.5].
51
FRA: Bank of Scotland (Counseil d’Etat, 29 Dec. 2006, Case 283314). For a discussion see BG Bruno and Y Ouamrane, ‘Beneficial Ownership – A French Perspective’
(January 2008) European Taxation 2.
52
SPA: e.g., Real Madrid FC (2006) Case 1110/2003. For a discussion of the case and Spanish perspective see AM Jiménez, ‘Beneficial Ownership as a Broad Anti-Avoidance
Provision: Decision by Spanish Courts and the OECD’s Discussion Draft,’ in M Lang et al. (n. 5) ss 8.2–8.4.1.
53
DEN: e.g., HHU case SKM 2011.57. For a discussion of the case and Danish approach see J Bundgaard, ‘The Notion of Beneficial Ownership in Danish Tax Law: The
Creation of a New Legal Order with Uncertainty as a Consumption,’ in M Lang et al. (n. 5) s. 6.
54
SWE: HFD (21 May 2012) not. 24. For a discussion see Kleist (n. 36).
55
CH: See cases in notes 48, 49 and A (2012) A-6537/2010. For a commentary see R Matteotti and FM Sutter, ‘Switzerland: Broad vs Narrow Interpretation of the Beneficial
Owner Concept,’ in M Lang et al. (n. 5) s. 4.
56
UK: Indofood International Finance Ltd. v. JP Morgan Chase Bank NA [2006] EWCA Civ 158 and consider the following policy applied by HMRC as expressed in
INTM332050, [1] and [3]. For a commentary see also Baker Philip, ‘Beneficial Ownership: After Indofood’ (2006) 1(1) GITC Review 15 and Fraser and Oliver (n. 8).

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 The 2014 Update to the OECD Commentary: A Targeted Hybrid Approach to Beneficial Ownership

as China,57 Brazil58 and Indonesia,59 which do not have to
fear any outflow of investors in the foreseeable future, are
decisively supporting a factual investigation of the
beneficial ownership status.
The basic premise of this approach is a substance-over-
from examination that inquires into the commercial
rationale of the intermediary arrangements. The legal
factors, such as the contractual and statutory entitlement
to income, could be at most viewed as one of the
components of this assessment and can never be decisive
on their own. For example, in Indofood the Court examined
the legal, commercial and practical characteristics of the
arrangement.60
Certain commentators suggest that despite the explicit
substance-over-form language in the case law, the legal
factors remain the pivotal consideration.61 It would follow
that the legal allocation of ownership constitutes a strong
presumption that is not easily overturned by purely factual
arguments. The importance attached to legal factors could
be seen as the reason why in the two out of three recent
beneficial ownership cases in Switzerland the courts felt
the need to explicitly support their economic analysis by
the good faith requirement from Article 31(1) VCLT.62
Nevertheless, there are also cases where the legal factors
are largely disregarded in the court’s analysis. For instance,
Jiménez observes that in Real Madrid the Court did not
consider the legal powers of the recipient, but simply
‘presumed that since the [intermediary] Hungarian
entities received and immediately paid royalties out to the
Netherlands or Cypriot companies, they did not have any
control over the income’.63
This part of the article addresses the OECD legal basis
that could be said to support a substance-over-form
reading of beneficial ownership. Second, the public policy
issue of the potential arbitrariness is evaluated.
3.1 OECD Legal Basis
The advocates of the economic approach attach primary
importance to the contemporary amendments of the
Commentary on beneficial ownership rather than the
vague original intentions of the drafters. In particular,
reference is made to the 2003 Commentary.64
In general, when discussing changes to the
Commentary it is of key significance to emphasize that
States do not necessarily accept the most recent
Commentary as a valid guide to interpretation of the
previously concluded treaties.65 Although OECD
countries in principle committed themselves to apply the
current version of the Commentaries,66 the application
may be made conditional on whether the changes are
‘eliciting, rather than contradicting, views previously
expressed’.67 This is a relevant remark since the 2003
Commentary is sometimes perceived as ‘a diversion from
the view that the beneficial ownership is a question of
law’.68 Nonetheless, rejecting the 2003 Commentary on
the basis of static interpretation would be a rather short-
sighted argument, since, regardless of whether an
ambulatory interpretation is applied, in the end all of the
DTTs will be renegotiated.
The 2003 Commentary made two main elucidations on
the meaning of beneficial owner. First, it noted that the
term is not to be used ‘in a narrow technical sense, [but]
rather, it should be understood in its context and in light
of the object and purposes of the Convention, including
avoiding double taxation and the prevention of fiscal evasion and
avoidance’. Second, it amplified that treaty benefits should
not be granted to agents and nominees as well as other
residents of a Contracting State that ‘simply act as a
conduit for another person who in fact receives the benefit
of the income’.69 It explained, by reference to the 1986

Notes
57
CHN: See esp. Guoshuihan [2009] No. 601 (Circular 601). For a discussion of the Circular and pertinent most recent developments see CJ Finnerty Cand B Lai,
‘Strengthening Cross-Border Tax Enforcement and the Evolving General Anti-Avoidance Rule’ (2012) 9/10 Asia-Pacific Tax Bull. 377.
58
BRA: s. 26(1) of Law 12249/2010. For a discussion see SA Rocha, ‘Treaty Shopping and Beneficial Ownership under Brazil’s Tax Treaties’ (2012) 66(7) Bull. Int’l Taxn.
351. For unilateral tendencies to international tax avoidance in Brazil see JM de Melo Rigoni, ‘A Brazilian View on Base Erosion and Profit Shifting: An Alternative Path’
(2014) 42(11) INTERTAX 730.
59
IDN: See esp. Regulation PER-62/PJ/2009 of November 2009. For a discussion see D Kaur and K Susarla, ‘Anti-Tax Avoidance Developments in Selected Asian
Jurisdictions’ (2011) 6/7 Asia-Pacific Tax Bull. 256, 265–267.
60
Indofood (n. 56) [42]–[44].
61
For example Gooijer (n. 8) 216; RS Avi-Yonah and CHJI Panayi, ‘Rethinking Treaty Shopping: Lessons for the European Union’, in M Lang et al. (n. 45) 36–37.
62
See supra s. 2.2
63
Jiménez (2010) (n. 6) 40.
64
De Broe (n. 22) 685.
65
For a discussion see JF Avery Jones, ‘The Effects of Changes in the OECD Commentaries after a Treaty is Concluded’ (2002) 3 Bull. Int’l Taxn. 102.
66
OECD Commentary Introduction, [35].
67
For example Prevost (n. 4).
68
Toit (n. 3) 504. Cf. Collier (n. 8) 690; Gooijer (n. 8) 209.
69
OECD Commentary (2003) on Art. 10, [12] (emphasis added).

185
 Intertax

OECD Conduit Companies Report (Conduits Report),
that ‘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’.70 The italicized expressions made a strong
suggestion that factual assessment is necessary, or at least
permitted.
This contention is supported by the fact that the
Commentary not only legitimatized application of
domestic anti-abuse rules but, more fundamentally,
indicated that a similar anti-avoidance objective could be
achieved by purposive interpretation of the existing treaty
terms.71 Presumably, the second option is more likely to
be utilized because it makes the troubling issue of treaty
override less apparent.72 The purposive interpretation also
creates a comfortable pretext to circumvent the procedural
safeguards and substantive guidance germane to domestic
anti-avoidance provisions.73
From a practical viewpoint, some commentators claim
that a material shift can be observed in the way courts
handle the post-2003 beneficial ownership cases.74
Jiménez even speaks about a ‘mutation’ of the analysis
applied by the Spanish courts after 2003.75 Yet, as a
matter of fact, the economic approach to beneficial
ownership would seem to have been in contemplation
already before the 2003 amendments. The 1986 Conduits
Report expressly stated that a person is not to be regarded
as beneficial owner if it ‘economically’ was not entitled to
the income.76 Likewise, the 1998 OECD Harmful Tax
Practices Report noted that the beneficial ownership test
denies treaty benefits to companies ‘with no real economic
function’.77 Nonetheless, what is clear beyond any doubt is
that since 2003 there has been a steady increase in the
number of cases in which tax authorities are pursuing
beneficial ownership challenges.
It would seem fair to conclude that the 2003
Commentary has markedly changed the perception on
beneficial ownership in many States. However, there are
two main reasons that make it doubtful whether the
OECD envisioned a broad substance-over-form approach.
First, a comprehensive anti-avoidance role for beneficial
ownership would make the whole list of optional treaty
anti-abuse measures proposed in the 2003 Commentary on
Article 1 redundant.78 Indeed, amongst those proposals
beneficial ownership is defined as being of ‘some’79 or
‘rudimentary’80 significance.
Second, the purposive interpretation of DTTs is subject
to its objectives and good faith considerations. As adduced
to above, the good faith requirement would authorize only
a limited economic approach in order to protect legal
certainty.81 Similarly, the ‘principal purpose’ of the
OECD MC is the promotion of international trade and
investment.82 This goal would be compromised, if there
were no uniformity in application of its substantial
provisions.83 In particular, where Contracting States
disagree over the application of jurisdiction to tax rules, a
viable risk of double taxation exists.84
3.2 Risk of Arbitrariness
Legal uncertainty can to some extent be legitimized by the
need to tackle tax avoidance. As it was put by Reimer, in
order to ‘effectively prevent smart tax avoidance . . .
beneficial ownership [should] be reliant on a certain degree
of unpredictability – otherwise, it would not work’.85
Principally, given the potential for abuse in the area of
highly mobile passive income flows, it is justifiable to
contemplate some form of substance-over-form approach.86

Notes
70
Ibid., [12.1] (emphasis added).
71
OECD Commentary (2003) on Art. 1, [9.2–9.4].
72
D Gutmann, ‘Beneficial Ownership as Anti-Abuse Provision: The Bank of Scotland Case,’ in M Lang et al. (n. 5) s. 11.5.
73
See infra s. 3.2.1.
74
Gooijer (n. 8) 216.
75
Jiménez (2010) (n. 6).
76
OECD Conduits Report 1986, [14(b)].
77
OECD Harmful Tax Practices Report, [119].
78
OECD Commentary on Art. 1, [13]–[21].
79
Ibid., [10].
80
OECD Conduits Report 1986, [15].
81
Supra s. 2.2.
82
OECD Commentary on Art. 1, [7] (emphasis added).
83
OECD Introduction to Commentary, [2] and [15].
84
For example R Danon, ‘Clarification of the Meaning of “Beneficial Ownership” in the OECD Model Tax Convention – Comment on the April 2011 Discussion Draft’
(2011) 8 Bull. Int’l Taxn. 437, 438.
85
E Reimer, ‘How to Conceptualize Beneficial Ownership,’ in M Lang et al. (n. 5) s. 18.2 (emphasis added).
86
See supra s. 2.2.

186
 The 2014 Update to the OECD Commentary: A Targeted Hybrid Approach to Beneficial Ownership

Yet, there is something deeply unsettling over the
confusing manner in which that potentially more than
merely incidental anti-avoidance role is communicated to
the taxpayers. In particular, concerns may be expressed
that this disguised nature of beneficial ownership
prevented an effective international debate about its scope
and impact on the national tax treaty policy. The resulting
mist over its application could have tipped the
interpretative balance too far towards tax authorities, i.e.,
created scope for arbitrariness. The resulting uncertainty
over its relationship with the domestic and treaty anti-
abuse provisions is addressed in the two sections below.
3.2.1 Relation with Domestic Anti-abuse Provisions
Tax avoidance may be broadly defined as the minimization
of tax liability according to the letter of law but contrary
to its spirit. It is sometimes referred to as ‘creative
compliance’ since it is not plainly illegal.87 In extreme
cases unacceptable avoidance is rather easily
distinguishable from legitimate tax planning. However,
the real problem is posed by the borderline situations, i.e.,
the grey area cases. Precisely for this reason, domestic
general anti-avoidance rules (GAARs) are often coupled
with various procedural and administrative safeguards that
endeavour to ensure a balanced and reasoned assessment of
the tax structure in question.88 Conversely, as it was
remarked by Jiménez, ‘a broad reading of beneficial
owner . . . permit[s] tax authorities to achieve the same or
similar effects of applying the domestic GAAR without
having to follow “the nuisance” of special procedures or
requirements . . . that usually are connected with the
GAAR’.89
Furthermore, besides the lack of procedural safeguards,
the 1977 and 2003 Commentaries on beneficial ownership
suffered from rather laconic guidance as to the extent of its
substantive purview. Arguably, this problem was rectified
by the 2014 update.90 In contrast, domestic GAARs are
often accompanied by a fairly detailed guidance that
assists taxpayers in evaluating their tax structures against a
set of typically non-exhaustive criteria and/or examples.91
This tax policy does not necessarily have to defeat the anti-
avoidance purpose of tackling ‘creative compliance’, since
the guidance is usually fashioned along general principles
rather than a definite check-list. Clearly, such guidance
provides a balanced approach to the rule of law and legal
certainty as well as fosters a friendly business environment.
Its main advantage is the reassurance that it provides to
bona fide structures as well as protection against sweeping
presumptions. In other words, making advanced guidance
available to taxpayers could help to establish a relationship
of trust with tax authorities.
In contrast, the lack or generality of substantive
guidance could create an atmosphere of mistrust and
uncertainty over the actions of tax authorities. However,
supplementing explanations given in the Commentary by
detailed domestic regulation would create the risk of
defeating the ‘international fiscal meaning’92 imparted in
the Commentary and create opportunity for divergent
national conceptualizations which could lead to double
taxation.93 Nonetheless, some form of domestic
interpretation is inevitable.94 It is perhaps even desirable,
provided that it ensures a thorough analysis along the lines
of the guiding principle requiring that treaty abuse is not
‘lightly assumed’,95 and does not contradict the
Commentary.
In this respect the UK should be hailed for its approach
that seems to legitimize the substance-over-form approach
only in cases where there is an abuse of tax treaty.96
Although admittedly this may lead to interpretative
difficulties, it establishes a certain threshold that needs to
be satisfied before beneficial ownership can be invoked as
an anti-avoidance rule. Similarly, in China, the recent
Note 30 underscored that the seven negative factors
enumerated in Circular 601, which are decisive for the
determination of beneficial ownership, should be assessed
‘collectively’.97 Even though the economic approach in
China is relatively broad and liberally applied, this
development should be welcomed as it in principle solicits
more elaborate analysis.
The above mentioned procedural and substantive
weaknesses may be thought to be remedied by the
ultimate judicial decision, which will adjudicate the case

Notes
87
D McBarnet and C Whelan, ‘The Elusive Spirit of Law: Formalism and the Struggle for Legal Control’ (1991) 54 MLR 848, 848.
88
J Freedman, ‘Designing a General Anti-Abuse Rule: Striking a Balance’ (2014) 3/4 Asia-Pacific Tax Bull. 167, 168 and 172–173.
89
Jiménez (2013) (n. 52) s. 8.4.3.
90
Infra s. 4.
91
For example see explanation in ss 207(2)–207(6) FA 2013 of ‘abusive’ tax arrangements falling foul of the UK GAAR as well as the examples in the accompanying HMRC
GAAR Guidance (Part D).
92
The expression was popularized by Professor Baker, see P Baker, Double Taxation Conventions (Sweet and Maxwell 2006) [10B-14].
93
De Broe, (n. 22) 670; Toit (n. 3) 509; Danon (n. 84) 438.
94
BJ Arnold, ‘The Interpretation of Tax Treaties: Myth and Reality’ (2010) 1 Bull. Int’l Taxn. 2.
95
OECD Commentary (2003) on Art. 1, [9.5].
96
HMRC INTM332050, [3]; Weeghel (2010) (n. 45) 51.
97
CHN: Notice [2012] No. 30 from 29 Jun. 2012. For a discussion see Finnerty and Lai (n. 57) 378–380.

187
 Intertax
fairly on its merits and independently from the tax
authority. Nevertheless, leaving aside the question of
feasibility of lawsuits in some countries, the taxpayer is
generally exposed to additional costs, damaged reputation
and, given the uncertainties about beneficial ownership,
runs a real risk of the judiciary ruling in favour of the
Revenue on some novel ad hoc basis.
3.2.2 Relation with Treaty Anti-abuse Provisions
Another form of arbitrariness on the part of tax authorities
can emerge from the conjectures arising from the lack of
specific anti-abuse provisions in DTTs. In theory, not
inserting a limitation on benefits (LOB) rule or a principal
purposes test (PPT) clause in DTTs, especially with
countries that are notorious in providing a preferential tax
regime for intermediary holdings, seems like a deliberate
policy decision.98 For example, in Andolan the Supreme
Court of India after contrasting the lack of LOB provision
in the India-Mauritius DTT with the existence of such a
clause in the India-US DTT drew inferences to the benefit
of the taxpayer.99 However, in many other cases it is ‘a
point of reference that, arguably, does not exist in a legal
sense’.100 In those cases, the benefit of doubt will work to
the advantage of the tax authority, which in absence of
specific conditions for access to treaty benefits retains ‘a
wide margin of manoeuvre’ over whether or when to
deploy a broadly defined beneficial ownership.101
Thus, taxpayers may have legitimate fears over erratic or
highly selective challenges. Conversely, the tax authority
may be paralysed by the demands of consistency in ‘like
circumstances’ which are heavily disputable in a widely
diverse business environment. Perhaps then LOB
provisions could be seen as releasing tax authorities from
the strenuous burden of difficult value judgments.
Alternatively, in absence of a LOB rule, consistency could
be achieved by challenging only those egregious abuses,
which disclose certain particularly contrived or abnormal
features.
Nevertheless, these concerns are likely to become
largely irrelevant with the OECD Base Erosion and Profit
Shifting (BEPS) Action Item 6 proposing introduction
into the OECD MC of both LOB rule and, if accepted by
the treaty partners, a form of PPT clause.102 These anti-
Notes
98
Arnold (n. 41) s. 3.2.3.
99
IND: Union of India v. Azadi Bachao Andolan (2004) 10 SCC 1, 85–86.
100
J Li, ‘Beneficial Ownership in Tax Treaties: Judicial Interpretation and the Case for Clarity’ (7 Feb. 2012) Osgoode CLPE Research Paper No. 4/2012, available at
<SSRN:http://ssrn.com/ abstract=2000816> accessed 10 Jul. 2014, 192.
101
Jiménez (2013) (n. 52) s. 8.4.3.
102
OECD Report, BEPS Action 6: 2014 Deliverable – Preventing the Granting of Treaty Benefits in Inappropriate Circumstances (16 Sep. 2014).
103
A Wardzynski, ‘The Limitation on Benefits Article in the OECD Model: Closing Abusive (Undesired) Conduit Gateways’ (2014) 9 Bull. Int’l Taxn. 68.
104
See discussion in infra s. 4.2.1.
105
OECD Commentary (2014) on Art. 10, [12]–[12.7].
188
avoidance provisions are likely to diminish reliance on
beneficial ownership as a default treaty anti-avoidance
mechanism in treaty abuse cases. However, given that
LOB is not watertight in dealing with conduit
arrangements,103 it is the PPT clause, if any, and, to a
significantly more limited extent, beneficial ownership
that will fill in the gap.104 Notably, assuming that a tax
structure in question has passed the LOB sift, the pressure
to find a particularly clear evidence of abuse will only
increase. Hence, the question of abusive threshold is likely
to be at the centre of legal challenges.
3.3 Interim Conclusion
Undoubtedly, the 2003 Commentary amendments
prompted a more confident economic approach towards
beneficial ownership. There was however lack of guidance
as to the reasonable limits of this approach. Many
jurisdictions opted for a broad substance-over-form
approach. Given the detrimental effects on legal certainty
as well as increased risk of double taxation and
arbitrariness, it is not a desirable development. Yet, a
targeted factual approach should be authorized in patently
abusive cases.
4 TARGETED HYBRID APPROACH
The foregoing discussion in the first and second chapters
made a strong claim that neither the legal nor the
economic approach applied on its own can reasonably
balance the legal certainty with the good faith application
of DTTs. A targeted hybrid approach could be a solution
that would significantly lessen the shortcomings identified
above. This approach recognizes that beneficial ownership
is not an ideal anti-avoidance tool, and thus asserts the
preponderance of the legal factors (legal approach).
However, it also acknowledges the need for factual
examination in order to prevent obvious treaty shopping
cases (economic approach). It is submitted that such a
compromise between the two sets of factors is entrenched
in the 2014 update to the Commentary on beneficial
ownership.105 Therefore, the thrust of the following
analysis is on the operation and legal basis of the hybrid
approach in light of the 2014 Commentary.
 The 2014 Update to the OECD Commentary: A Targeted Hybrid Approach to Beneficial Ownership
Broadly, the 2014 Commentary advocates a dominant
legal approach coupled with expressly endorsed anti-treaty
shopping ‘safety valve’ in the form of factual examination.
Although this safety valve is to be considered in every
case, its utility is reserved to situations were a certain
threshold of abuse is satisfied. Hence, this
conceptualization is best defined as a targeted hybrid
approach. Invariably, the aspect of international tax
competition, the sheer number of questionable structures,
administration costs involved and still limited access to
information held abroad supports departing from the
confines of the legal approach only in the most egregious
instances of treaty abuse. The ‘grey area’ cases are better
addressed by the plethora of available treaty or domestic
anti-abuse measures employed in accordance with the
public policy pursued by a given State.
Accordingly, the first section below provides a more
detailed explanation on the application of the hybrid
approach as evident in the 2014 Commentary. Thereafter,
the critical issue of the factual target, i.e., implied
threshold of abuse, is addressed.
4.1 OECD Legal Basis
In general, according to the 2014 Commentary beneficial
ownership is dependent upon the recipient having ‘the
right to use and enjoy the [passive income] unconstrained
by a contractual or legal obligation to pass on the payment to
another person’.106 This is the crux of the beneficial
ownership test that evidently embodies the legal approach.
It pertains to two sets of situations: (1) agent and nominee
cases,107 and (2) conduit cases where the formal owner acts
as a mere fiduciary or administrator.108
The Commentary also requires that consideration is
given to the economic approach. This is conceded in the
following passage:
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 [passive income] unconstrained by a
contractual or legal obligation to pass on the payment received
to another person.109
The underlined words, ‘facts and circumstances’ and
‘substance’, do not leave any doubt that factual inquiry is
relevant for the determination of beneficial ownership.
However, the italicized words indicate that the economic
Notes
106
OECD Commentary (2014) on Art. 10, [12.4] (emphasis added).
107
Ibid., [12.2].
108
Ibid., [12.3].
109
Ibid., [12.4] (emphasis added).
110
OECD Commentary on Art. 1, [9.5].
189
analysis is of subsidiary importance to the legal aspects of
the arrangement. In particular, the choice of words
‘normally’ as compared to ‘may also’ when referring to the
legal and economic approaches in the same sentence
creates a presumption that the formal approach is of
dominant relevance. This is further reiterated by the
emphasis put on the expression ‘contractual or legal
obligation’ and the consistent use of the word ‘obligation’
throughout the relevant parts of the Commentary.
The point differentiating the relative relevance of legal
or economic factors is arguably the burden of proof. The
bolded word ‘clearly’ discloses that a high standard of
proof is expected for the factual circumstances to override
the conclusion reached on the basis of the legal
instruments. There is no corresponding adjective used in
relation to the standard of proof relevant for the legal
assessment. Yet, it may be claimed that a similarly high
standard of proof is required for both the legal and
economic factors by virtue of the general guiding principle
cautioning that abuse is not to be lightly inferred.110
Nonetheless, it is difficult to speak about different
standards of proof for information readily verifiable on the
basis of legal instruments. Conversely, the guiding
principle makes the word ‘clear’ in relation to the
economic approach redundant, unless it is intended to
denote a contextual meaning specific to the Commentary
on beneficial ownership. Indeed, contextually it would
seem to impart a certain additional condition of certainty
which would be sufficient to counterbalance the primary
reliance on the legal aspects of a tax arrangement. In other
words, the beneficial owner examination is to be
conducted on the basis of contractual or legal obligations,
subject to facts and circumstances ‘clearly’ pointing to
abuse, i.e., reaching a certain threshold.
Thus, the legal value carried by the facts and
circumstances are subjected to a threshold and to the
general supremacy of the legal factors. Nonetheless, this
approach is best defined as hybrid, since both sets of
factors are to be considered in each and every case.
4.2 Threshold of Abuse
A crucial aspect of the targeted hybrid approach is the
determination when the factual circumstances are capable
to displace the legal factors. As it was already pointed out
in the section above, this is a matter of threshold of abuse
as disclosed by the facts of the case.
 Intertax
The Commentary sets a general standard of ‘the right to
use and enjoy’ the income. Although the plain reading of
this expression does not reveal any hints as to the general
threshold, it needs to be recalled that it is a change from
the 2011 Draft which required ‘the full right to use and
enjoy’ the income. It is implicit in the 2012 Revised Draft
that this amendment was prompted by calls claiming that
the adjective ‘full’ could incite a broad substance-over-
form approach, and thus exclude numerous legitimate
structures from access to treaty benefits.111 Therefore, the
standard of use and enjoyment without the word ‘full’ is
not intended to be absolute.
It is against this background that the qualifying word
‘clearly’ relevant to the economic approach needs to be
evaluated. This ultimately places a higher burden to
effectively trigger the economic factors, since it is not
enough to merely prove that the recipient of the income
‘clearly does not have the full right to use and enjoy’. To
the contrary, the use and enjoyment may be in some way
factually restricted and still satisfy the beneficial
ownership test.
The Commentary gives certain implicit indicators
which are instructive as to the intended threshold required
for the economic approach to prevail. This is apparent
from the expressly stipulated limited anti-avoidance role
of beneficial ownership and the nature of the safe harbour
situation included in the Commentary. These implicit
indicators seem sufficient to reserve the application of the
economic test only to the most abusive conduit
arrangements.
4.2.1 Limited Anti-avoidance Role
The Working Party charged with the clarification of the
meaning of beneficial ownership ‘strongly disagreed’ with
suggestions that the concept should have no anti-
avoidance dimension.112 However, it is evident from the
2014 Commentary that beneficial owner is classified more
as an attribution-of-income rule than a proper anti-
avoidance condition.
First, it is emphasized that when conducting a
contextual interpretation particular attention must be paid
to the fact that beneficial ownership was introduced to
clarify the expression ‘paid . . . to a resident’.113 The
Notes
111
2012 OECD Revised BO Draft (n. 1) [12]–[13].
112
Ibid., [20].
113
See discussion in supra s. 2.1.3.
114
OECD Commentary (2014) on Art. 10, [12.1].
115
Ibid., [12.5].
116
See discussion in supra s. 3.1.
117
OECD Commentary (2014) Art. 10, [12.4] (emphasis added).
118
Eicke (n. 7) 52–53; MN Kandev, ‘Treaty Shopping in Canada: The Door is (Still) Open’ (2008) 62(10) Bull. Int’l Taxn. 463, 468.
119
Consider OECD Commentary (2014) on Art. 10, [12.4] in particular context of the observations made in [14] of the 2012 Revised BO Draft (n. 1).
190
reference to the objectives of the treaty, including the
prevention of avoidance, is consigned to the second
plan.114 Second, the relevance of specific anti-avoidance
provisions in treaties and domestic law is expressly given
priority to the ‘some’ anti-avoidance potential of beneficial
ownership.115
Thus, a broad substance-over-form approach to
beneficial ownership is unlikely to be acceptable. This
expressly reaffirms the position that was argued earlier to
be implicitly envisioned by the OECD.116
4.2.2 Safe Harbour and Targeted Economic
Approach
The Commentary for the first time laid down a safe
harbour in relation to the beneficial ownership test. In
particular, an obligation concerned with passing on of
payment that is ‘not dependent on the receipt of the [first]
payment’ is considered compliant with beneficial
ownership.117 Notably, payments dependent on one another
may still satisfy the beneficial ownership test. Hence, it is
interesting to consider whether the safe harbour rule can
give some indication as to the depth of economic activity
that would be necessary to fulfil the economic test in
scenarios falling outside its remit.
The core observation that can be made is that the safe
harbour does not consider the business substance but
rather the ability of the intermediary to generate passing
on of an independent payment. Therefore, in principle, a
company that only holds shares in another entity and lacks
physical substance, i.e., does not have employees and
office, can satisfy the safe harbour test. By analogy, such a
company should also be able to become the beneficial
owner where it passes on a dependent payment and there
are valid commercial reasons behind the structure; for
example, choosing a neutral holding jurisdiction for an
international joint venture investment.118
Accordingly, the safe harbour rule by relying on the
dependency between payments rather than physical
substance gives a strong signal that beneficial ownership is
predominantly about the legal obligations and the facts
strictly relating to these payments. This is further
underpinned by the emphasis that payments must be
passed on119 as well as that the intermediary does not need
 The 2014 Update to the OECD Commentary: A Targeted Hybrid Approach to Beneficial Ownership
to own the asset generating the income.120 Consequently,
the economic analysis is not entirely comparable to that
conducted under domestic GAARs or broad substance-
over-form rules. In other words, in case of holding
companies it is not the lack of physical substance but the
undeniable dependency between payments that is decisive
under the beneficial ownership assessment.
4.2.3 Further Clarification
Given the importance of the threshold for the substantive
relevance of the factual factors, its merely impliedly
construed meaning seems somewhat disappointing.
Nonetheless, the unbounded variety of the different
intermediary arrangements that it aims to address,
presupposes an abstract and general language.
In particular, care needs to be taken to ensure that
beneficial ownership is flexible enough to accommodate all
kinds of egregious situations that are not susceptible to
concrete definition and that new bona fide structures in the
evolving business environment are not caught. Attempts to
define the threshold more precisely could create ‘a trap’ that
‘may eventually harm both tax authorities (if they occasion-
ally find the definition to be too restrictive) and taxpayers
(when they realize that they may be denied tax treaty benefits
while they have not set up any artificial structures in order to
avoid taxes)’.121 Likewise, giving examples addressing
directly the difficult cases ‘would need to be extremely fact-
specific and would raise additional questions concerning
similar but not identical situations’.122
Furthermore, setting forth a list of factors that are to be
considered under the economic approach could be overly
limiting, but above all, could give wrong impressions.
Namely, it may divert the attention from the primary focal
point of the beneficial ownership inquiry, i.e., contractual
and legal obligations.
In sum, the guidance given in the 2014 Commentary
seems to be sufficiently instructive, especially when
compared with the 1977 and 2003 Commentaries. It
makes it significantly more likely that beneficial
ownership will be interpreted in a manner autonomous
from domestic law.
4.3 Interim Conclusion
The 2014 Commentary constitutes a major amplification
of the term beneficial owner. It comes across the perceived
Notes
120
OECD Commentary (2014) on Art. 10, [12.4].
121
D Gutmann Daniel, ‘The 2011 Discussion Draft on Beneficial Ownership: What Next for the OECD,’ in M Lang (n. 5) s. 21.
122
OECD Revised BO Draft 2012 (n. 1) [31].
123
Baker (2006) (n. 56) 24–25.
191
drawbacks associated with the legal and economic
approaches and proposes a targeted hybrid approach.
Pursuant to this approach the economic factors may only
override the conclusion based on the formal characteristics
in exceptional cases.
5 CONCLUSION
Circumscribing the condition of beneficial ownership from
Articles 10–12 OECD MC to either exclusively legal or
economic inquiry would be arbitrary and detrimental to
the pursuance of a balanced public policy. First, there is
no compelling basis in the past or present OECD
legal materials that would favour one approach to
the exclusion of the other. Second, while acknowledging
that there are other dedicated anti-avoidance mechanisms
and noting the inherently less objective nature of
economic analysis, beneficial ownership should not be
immune from any factual circumstances clearly pointing to
abuse.
On construction of the 2014 update to the Commentary
the proposed targeted hybrid approach seems to form
a legally viable solution. Moreover, conditioning subs-
tantive relevance of the factual circumstances on the
threshold of abuse is appealing from the policy
perspective. In particular, limiting application of the
economic approach to egregious cases attains the benefit of
relative certainty of bilateral enforcement of the DTTs and
offers reassurance that blatant treaty shopping will not be
countenanced.
Interestingly, the hybrid approach advanced in this
article is not necessarily a novel conceptualization, but
rather a recognition of the practice already applied in
many countries vociferously adhering to the economic
approach. This can be deduced from the type of cases that
are being challenged under the beneficial ownership
condition. For example, Baker is highly critical of the
factual reasoning applied in Indofood and yet admits that
one can hardly be ‘surprised’ by the outcome of that case.
Since, ‘[i]f beneficial ownership had any meaning at all,
surely it would exclude the type of interposed entity
which had no function whatsoever but to receive income
and pay on the identical amount of income: in fact, [the
intermediary in Indofood] had so little function
that . . . the actual flows of money missed it out
completely’.123