Circular on How to Interpret and Recognise the “Beneficial Owner” in Tax Agreements

1. The term “beneficial owner” means a person who has ownership or control over income or the rights or property from which income is derived. Beneficial owners, in general, engage in substantive business activities and may be individuals, companies or any other entities. Agents, conduit companies, etc. are not beneficial owners.

The term “conduit company” means a company that is established for the purpose of avoiding or reducing taxes, or diverting or aggregating profits. Such companies are only registered in the residing country to satisfy the organisational form required by law and do not engage in manufacturing, distribution, management or other such substantive business activities.

2. When determining status as a beneficial owner, the same cannot be interpreted solely from the technical aspects or from the perspective of domestic laws, but shall also be considered from the objectives of the Tax Agreements (namely avoidance of double taxation and prevention of fiscal evasion). An analysis shall be conducted and a determination reached based on the principle of “substance over form” while taking into account the actual circumstances of the specific case. Generally speaking, the following factors are not conducive to the recognition of an applicant's status as a beneficial owner:

(1) the applicant is obliged to pay or distribute all or the great majority (e.g. at least 60%) of the income to residents of a third country (or region) during a specified period of time (e.g. within 12 months of receipt of the income);

(2) the applicant has no or almost no business activities other than holding the property or rights from which the income is derived;

(3) where the applicant is a company or other such entity, its assets, scale and staffing are small (or few) and are out of proportion to the amount of income;

(4) the applicant has no or almost no control over, or right to dispose of, the income or the property or rights from which the income is derived, and bears no risk thereof or rarely bears risk;

(5) the contracting state (region) does not tax or exempts tax on income or, although it does levy tax, the actual tax rate is very low;

(6) in addition to the loan contract on the basis of which interest is generated and paid, there is another loan contract or deposit contract between the creditor and a third party that is similar in amount, interest rate and time of execution; or

(7) in addition to the contract for the transfer of the right to use a copyright, patent, technology, etc. on the basis of which royalties arise and are paid, there is another contract concerning the transfer of the right to use, or of the ownership of, the relevant copyright, patent, technology, etc. between the applicant and a third party.

With respect to different types of income, if, after a comprehensive analysis of the foregoing factors, it is deemed that the applicant does not comply with Article 1 hereof, the applicant shall not be recognised as a beneficial owner.

3. When a taxpayer applies for treatment under a Tax Agreement, it shall submit documentation evidencing its status as a beneficial owner and relating to the factors set forth in Article 3¹ hereof.

When examining the application of a non-resident for treatment under relevant provisions of a Tax Agreement, the issue of the recognition of the applicant's status as a beneficial owner shall be handled in accordance with the foregoing provisions and, when necessary, relevant information may be confirmed through the information exchange mechanism. Experiences shall, in a timely manner, be distilled and problems discovered in the course of specific implementation. Difficult cases may be submitted through the hierarchy to the (International Tax Department of the) State Administration of Taxation for resolution.

Footnote:

1. It appears there is a typographical error in the original text, and that the words should read “Article 2”.