Beneficial Ownership under DTAAs - A Pandora's Box?


By CA Vijaykumar Puri ~ Partner, VPRP & Co LLP, Chartered Accountants


a person sitting at a table with a laptop
a person sitting at a table with a laptop


The concept of “beneficial ownership” (BO) plays a crucial role in determining whether a recipient of income qualifies for certain benefits under the Double Taxation Avoidance Agreement (‘DTAA’).

It is quite significant from international taxation perspective as a significant number of tax treaties adopt the condition of BO for granting concessional treatment to a resident of another country; in particular, when it comes to articles dealing with dividend, interest, royalties.

BO under tax treaties is a specific anti-abuse rule incorporated to target specific instances of tax treaty shopping involving the use of agents/ nominees/ conduits i.e. entities which act as mere administrators or fiduciaries of income and have no substance of their own.

From Indian perspective, the concept of BO has gained even more relevance with the abolishment of dividend distribution tax on companies whereby the dividend is now taxable in the hands of the investors with effect from 1 April 2020. The tax rate for a non-resident prescribed under section 115A of the Income-tax Act, 1961 (‘Act’) is 20% (plus applicable surcharge and health and education cess) while many India’s tax treaties typically provide a tax rate of 5-15% subject to BO and certain other shareholding related conditions. Thus, foreign investors exploring to avail benefit under the tax treaty would be required to fulfil the BO criteria.

To understand the methods for evaluating BO, it is imperative to first discuss the evolution of the concept in international tax arena.

Evolution of the concept of BO in tax treaties

The concept of BO was first envisaged in the US-Canada tax treaty of 1942 and has evolved over time.

The expression ‘beneficial owner’ has not been defined under the tax treaties or the Act and must therefore be interpreted based on general commercial understanding, tax commentaries and judicial precedents in this regard.

The Model Commentaries (MC) to the tax treaties and leading international tax lawyers have commented that the term has to be given a purposive interpretation (viz. prevention of tax avoidance) and persons not entitled to treaty protection are to be prevented from obtaining benefits there under by interposing entities between the ultimate beneficiary and the payer.

Further, in evaluating the concept of BO, one has to take cognizance of the ‘substance’ of the transaction and not its ‘form’ duly considering all relevant facts and circumstances. In other words, the meaning of the term “BO”, should be understood in a commercial or general parlance.

Definitions of beneficial owner

With regards to the term ‘beneficial owner’, as per Black’s Law Dictionary[1], the said term is defined as “one recognized in equity as the owner of something because use and title belongs to that person, even though legal title belongs to someone else.”

Law Lexicon defines ‘beneficial owner’ as “one who, though not having apparent legal

title, is in equity entitled to enjoy the advantage of ownership.”

As per Prof Klaus Vogel, among other factors, the issue of control is the most important factor in deciding the BO. Beneficial owner is the person who is free to decide:

  • Whether or not the capital or other assets should be used or made available for use by others; or

  • On how the yield there from should be used; or

  • Both

Further, Klaus Vogel in his commentary[2] also states that “….even a one hundred per cent interest in a subsidiary does not preclude the latter’s ‘beneficial ownership’ in the assets held by it. There would have to be other indications of the fact that the subsidiary’s management is not in a position to make decisions differing from the will of the controlling shareholders. If it were so, the subsidiary’s power would be no more than formal and the subsidiary would, therefore, not qualify as a “beneficial owner” within the meaning of Arts. 10 to 12.

Reference from treaty commentaries

The OECD MC[3], in relation to the ‘BO’ was substantially amended in 2014. The key highlights of the commentary in relation to BO are as under:

  • The meaning of “beneficial owner” should be interpreted as not to refer to any technical meaning that it could have had under the domestic law of a specific country, but it must be understood in light of context and purpose of the tax treaty.

  • In addition to agent and nominees, conduit companies do not satisfy the status of BO.

  • It is considered that a direct recipient of income may not qualify as a “beneficial owner”, if from the very inception of his status, that recipient’s right to use and enjoy the income is constrained by a contractual or legal obligation to pass on the payment received to another person.

  • Reference has been made to the “related” and “unrelated” obligations. In case where the recipient has specific obligation to pass on the income received, such factor is relevant to the BO test.

  • The obligation may be inferred from legal documents or facts and circumstances of the case.

  • The concept of BO and other forms of anti-avoidance principles are applicable simultaneously since BO addresses specific forms of tax avoidance.

Reference from domestic and international Judiciary

Key Indian judicial precedents/ circulars etc. in the context of BO are set out below:

Circular No. 789 dated 13 April 2000 issued by the Central Board of Direct Taxes (CBDT) in the context of the Treaty provides that a Tax Residency Certificate (TRC) issued by the tax authorities of a country would be regarded as conclusive evidence regarding residential status and BO of the income earned by Mauritian entities. The validity of the above Circular has been confirmed by the Supreme Court in its decision in the case of Union of India v Azadi Bachao Andolan[4].

In Bharti Airtel Limited[5], the issue before the Income Tax Appellate Tribunal (ITAT) was whether benefit of Article 11 of the India-Sweden tax treaty would be available when interest was paid to an ‘arranger’ of loan (ABN Amro Bank, Sweden) instead of the actual lender. The ITAT held that the provisions of Article 11 shall not be applicable since the arranger is a mere conduit for onward payment to the actual lenders. Even though the arranger produced a TRC to establish their residency in Sweden, the interest received by the arranger was not in its own right but merely as a facilitator and thus the arranger is not the beneficial owner of the interest income.

In HSBC Bank (Mauritius) Ltd.[6], in context of BO of interest income, the ITAT adjudicated the following:

Considering the above, we infer that the 'beneficial owner' can be the one with the full right and the privilege to benefit directly from the interest income earned by the FII-Bank (Indo-food International Finance Ltd vs. J.P. Morgan Chase Bank NA London Branch [2006] EWCA case 158). The income must be attributable to the assessee for tax purposes and the same should not be aimed at transmitting to the third parties under any contractual agreement / understanding. The bank should not act as a conduit for any person, who in fact receives the benefits of the interest income concerned. The recipient of the interest income should be deemed as the 'beneficial owner' unless there is any evidence to suggest that the said interest income is for the benefit of third persons.

  • In the case of Golden Bella Holdings Ltd[7], ITAT held that the mere fact that the investment was funded using a portion of an interest free shareholder loan shall not deprive the Cyprus entity from enjoying the concessional rate of 10% withholding taxes as per Article 11 of India-Cyprus treaty. It was held that the Cyprus entity is not a conduit to be subject to tax at 42% but a beneficial owner of interest income.

Key international judicial precedents in the context of BO are mentioned below:

  • The Canadian Court in the case of Prévost Car Inc. v The Queen[8]concluded that beneficial owner is the person who receives dividends for his own use and assumes the risk and control of the dividend and is not accountable to anyone for how he deals with it. However, where the person receiving the dividend is obligated to pass on such dividends to a third party, such a person would not be considered as a beneficial owner of the dividends.

This decision reaffirms the principle that while examining BO rule, the corporate veil of the entity earning income should be respected unless the corporation is a conduit and has no discretion to deal on its own with the property put through it as a conduit or is acting as an agent, trustee or nominee of its shareholders.

A similar view is taken by the Canadian Court in the case of Velcro Canada v The


  • The UK Court of Appeals in the case of Indofood International Finance Ltd. v JP

    Morgan Chase Bank NA, London Branch[10] held that an interposed entity between the beneficiary and the ultimate payer with a back-to-back debt obligation would not qualify as the beneficial owner of such interest income. The UK Court of Appeals arrived at its conclusion on the application of the ‘substance over form’ approach.

  • The Federal Administrative Court of Switzerland[11]while determining the BO of dividend under DTAA between Switzerland and Denmark, held that the concept of BO as stated in double tax convention, has to be interpreted based on ‘substance over form’ approach. The beneficial owner is defined as a person who has broad discretion to decide how dividend shall be utilised. In the facts of the said case, the Federal Administrative Court observed that, although the taxpayer had a duty to compensate the counterparty of a total return swap for the appreciation of the underlying shares, including dividend payments distributed during the maturity of the derivative, the total return swap did not include any contractual obligation for the taxpayer to hedge its position with the acquisition of the underlying assets. The Court then observed that there was no factual obligation to transfer any dividend income to the counterparty, as the taxpayer was only obliged to pass on an amount equal to the dividend, irrespective of whether it had effectively received a dividend payment. Hence, the fact that the taxpayer, by hedging its exposure from the total return swaps, was able to use the dividends for other purposes played a crucial role in strengthening the BO. The Federal Administrative Court further clarified that the effective holding period of the shares has no impact on the BO.

However, it is pertinent to note that in respect of the above decision, on further

appeal by the Swiss Federal Tax Authority (SFTA), the Federal Supreme Court (FSC)[12] reversed the decision of the Federal Administrative Court and upheld the view of SFTA. The FSC observed that there also is an implicit BO requirement in treaties that do not explicitly mention BO. BO requires, as a first element, that at the time of receiving a dividend, the recipient of a dividend has an unconstrained right to use, enjoy and dispose of the dividend received. If the recipient has a (legal or factual) obligation to pass on the dividend received to a third party under a derivatives contract, BO is denied.

Furthermore, the beneficial owner must bear the economic risk of whether a dividend is distributed or not. Where such risk is passed on to a counter-party to a derivatives contract, BO is denied. The derivatives contracts entered into by the Danish banks were accurately matching their investment in the underlying, both in volume and timing. The derivatives were entered into when the underlying shares were acquired and were terminated when the shares were sold. At the time when the dividend was received by the Danish banks, they had an obligation to pass it on to third parties under the total return swap or futures contracts, so that both the risks and rewards of the investment in the Swiss shares were substantially with the third parties and not with the Danish banks, which made only a small profit from these transactions.

Factors for determining BO – The PURC Matrix

Based on the meanings and judicial decisions discussed above, the PURC (Possession, Use, Risk, Control) matrix is a widely regarded test of BO. The elements of the PURC matrix need to be cumulatively fulfilled in order to satisfy the BO condition.

A brief discussion on each element is tabulated below:


This refers to possession of income which is substantiated by factors like receipt of income, exercise of dominion over income and property and valid economic, commercial purpose for the transaction.

Further, the recipient should not be acting as a mere conduit, nominee or agent.

Legal ownership, ultimate control and holding period of shares are irrelevant factors for fulfilling this element


The recipient must have full right to directly benefit from the income and must be free to decide the manner of using the income so earned i.e. there should not be any contractual/ legal obligation to pass the income so earned

An adverse factor denoting lack of use by the recipient is that the right to use and enjoy is constrained by interdependency between obtaining an income and an obligation to pass it on.


The recipient must bear the business risk of the income in order to satisfy this element of the matrix. The recipient must be the economic owner i.e. he must bear the consequences of loss as well as enjoy the fruits of income. Further, his liability towards creditors must not be affected by lack of receipt of the income.

Any contractual agreement to pass on the risk of bad debt, loss, exchange fluctuation is indicative of lack of risk of the recipient.


The recipient must retain full control over the income. Even in absence of explicit contractual agreements, the Revenue Authorities have regarded common Board of Directors (between the recipient and the alleged beneficial owner) as a sufficient factor for determining that the recipient does not have control over the income.

However, merely because of a holding-subsidiary relationship, it should not be assumed that the subsidiary company does not retain control of the income.

Based on the above, it can be concluded that the evaluation of BO is a highly fact specific exercise and there is no one-size-fits-all approach for the evaluation.

Way forward – Is evaluating BO a Pandora’s box?

The evaluation of BO requires a careful study of the facts of the case and is an evolving matter in the courts of law. For instance, as discussed above, in some cases Revenue Authorities have held that merely having a common director leads to non-fulfilment of the ‘Control’ element; however, having common directors across group entities is a normal business practice and driven by commercial considerations – all of which are seldom considered by the Revenue Authorities.

Given the recent amendment on taxation of dividends in the hands of the investors, the BO test would be required to be fulfilled by foreign investors seeking to avail tax treaty benefits for such dividend income. Thus, litigation around the overall concept of BO may increase.

Also, the determination of BO will be a time-consuming activity, both for the Assessing Officer (in terms of understanding complex multinational group structures and applying the concept of BO) and the taxpayer (in terms of collating documentation). Similar to approach adopted under GAAR, the Indian Revenue Authorities should release a guidance on the BO to provide certainty on the matter.

Chartered Accountants are also required to issue certificate in Form 15CB certifying applicability of beneficial rate under DTAA which will include satisfying the BO test. CAs must ensure that there is adequate documentation on record to substantiate that the foreign investor is indeed fulfilling the BO test. Where BO has not been evaluated, it would be a worthwhile exercise to undertake the same before certifying applicability of beneficial rate under DTAA.

One can equate BO test as being akin to Pandora’s box – once it is opened i.e. BO is evaluated, it can bring upon unexpected troubles and hurdles to the taxpayer in the form of never-ending litigation. That being said, just like Pandora’s box, there does remain ‘hope’ – that the tax authorities are able to provide clarity around the issue to promote Ease of doing business in India instead of resorting to frivolous litigation!