The ‘equivalent beneficiary’ article of foreign tax treaties may require certain groups to restructure to prepare for life after 31 Dec 2020

Mon 09 Nov 2020

In view of the imminent Brexit deadline of 31 December 2020, it may be worth reviewing the ability of groups to access the benefits of foreign tax treaties through the ‘equivalent beneficiary’ provisions.  An equivalent beneficiary will include a member of an EU member state (for example see the provisions of the US/NL treaty in the background below).

It may be possible to restructure a group to avoid the problem of no longer meeting the ‘equivalent beneficiary’ test after 31 December 2020, but due care and attention will need to be given to the substance of any restructuring, particularly following the recent CJEU cases on beneficial ownership (for example see the CFE opinion here). We are aware that the issues highlighted by the Danish cases are being tested in court around Europe.

For a further discussion of the issues involved, please get in touch with a member of the Mazars international tax or transfer pricing teams.

Background

As an example, the 2004 protocol to the US/NL treaty provides that the recipient (in one state) of a dividend paid from a company resident in the other state may be taxed in the state of residence of the company.  However the Protocol limits the tax on that dividend to 5% if the beneficial owner of the dividend is resident in the same state as the recipient and owns at least 10% of the voting power in the paying company.  In cases where the beneficial owner owns less than 10%, the tax is limited to 15%.  In cases where the beneficial owner has held 80% of the voting power for the 12m period prior to the dividend payment, the tax is zero, subject to the beneficial owner being a qualified person.

The limitation of benefits article defines a ‘qualified person’ as a resident of the state for a tax year that is (amongst other things): an individual,  a quoted company or, a company where at least 50% of its shares are controlled by five or fewer companies (there are other conditions).  Even if the beneficial owner is not a ‘qualified person’ they can still access the treaty if they meet a condition applying to an equivalent beneficiary (for example equivalent beneficiaries own at least 95% of the voting power and value).

An ‘equivalent beneficiary’ is (subject to certain other requirements and instances) defined as a person that is a resident of a member state of the European Union or of a European Economic Area state or of a party to the North American Free Trade Agreement.

Currently a resident of the UK could meet the ‘equivalent beneficiary’ test, as the UK is still deemed to be a member of the EU.  From 1 January 2021, however this will no longer be the case.