Definition of a ‘beneficial owner’ in implementing double taxation deal

Thursday May 16 2019

Ms Zabali is a lawyer and tax advisor working

Ms Zabali is a lawyer and tax advisor working with Ernst & Young 

By Rita L. Zabali

Reduced tax rates and tax exemptions as provided for under the Double Taxation Treaties (DTTs) entered by Uganda are restricted to a person who, among others, receives that income in the capacity of a “beneficial owner”. This restriction is embedded under Uganda’s tax treaties (particularly on taxation of dividends, interest and royalties) and Section 88(5) of the Income Tax Act to minimise inefficiencies in the tax treaty regime that create opportunities for abuse and consequential revenue loss. Currently, the term ‘beneficial owner’ is not defined in the Income Tax Act, but is rather left to the meaning accorded to it by each tax treaty.
Uganda has concluded tax treaties with Mauritius, South Africa, UK and Ireland, India, Italy, Netherlands, Norway and Denmark. None of these provide a concrete definition of a “beneficial owner,” making the application of the beneficial owner restriction unclear. This also creates uncertainty and potential for disagreements between the URA and taxpayers who rely on the tax treaties when planning their tax affairs.
The Organisation for Economic Co-operation and Development’s (OECD) commentary on the Model Income Tax Convention on which these DTTs are based, has historically not been of much assistance since it provides general interpretative guidance.
However, in its March 2019 toolkit on beneficial ownership, the OECD notes that “the beneficial owner is the individual or individuals who effectively owns or controls a legal vehicle”. The OECD explains that in order to minimise the use of companies and trusts to hide the beneficial owners of assets, information relating to natural persons behind a legal entity or arrangement, is now a key requirement of international tax transparency and the fight against tax evasion, corruption and other financial crimes.
In line with the above guidance and to safeguard against treaty abuse, the Ugandan government has proposed to define a “beneficial owner” in the Income Tax (Amendment) Bill, 2019, to mean “a natural person who owns or has a controlling interest over a legal person other than an individual, and who exercises control over the management and policies of a legal person or legal arrangement directly or indirectly whether through ownership or voting securities, by contract or otherwise”.
While the spirit of the amendment is welcome as it is aligned with the approach of Uganda’s Anti-Money Laundering legislation as well as the recent international jurisprudence, its restrictive nature may yield controversy and more tax disputes. This is because some tax treaties envisage corporate entities in addition to individuals as beneficial owners thus potentially creating challenges in the application of the provisions of the DTTs. For instance, Article 10(3)(a) of Uganda’s tax treaty with the Netherlands exempts from tax dividends paid by a Ugandan resident company, if the beneficial owner of the dividends is a company resident in the Netherlands which holds at least 50 per cent of the capital of the company paying the dividends.
Furthermore, the proposed definition would impose additional administrative burdens on ordinary taxpayers seeking to apply the treaty since they will be required to obtain and keep records pertaining to the underlying ownership of every entity with which they transact in a tax treaty country. This is likely to be burdensome, particularly where such entities are part of a group spanning multiple jurisdictions or where the taxpayer has numerous non-repetitive transactions with residents of such countries.
While Uganda may argue that it has unfettered sovereign power to tax and that the proposed amendment is in line with one of the core objectives of the tax treaties of preventing fiscal evasion, legal challenges may be mounted to determine whether at the time of conclusion of the tax treaties, the contracting countries envisaged that the unilateral domestic law provisions would act as amendments to the application of bilateral tax treaties in general.
The new definition may also scare away potential international institutional investors which may not be in the interest of Uganda. In fact, it is arguable that the individualistic focus of the proposed amendment is contrary to the OCED’s prior guidance that the term beneficial ownership should not be viewed in a narrow technical sense.

Ms Zabali is a lawyer and tax advisor working with Ernst & Young.

Mr Karoli Ssemogerere’s column returns next week.