What is the definition of “Beneficial Owner”?
The SAT set forth guidelines for determining beneficial owner status under tax treaties in its Circular on How to Interpret and Recognize the “Beneficial Owner” in Tax Agreements (Guo Shui Han [2009] No. 601) (“Circular 601”) issued on October 27, 2009.
Tax treaties between China and foreign countries (including the tax arrangements entered into by Mainland China with Hong Kong and Macao; hereinafter collectively referred to as Tax Agreements) have long contained the concept of a “beneficial owner.” For example, in the Agreement between the Mainland of China and the Hong Kong Special Administrative Region for the Avoidance of Double Taxation and the Prevention of Fiscal Evasion with respect to Taxes on Income, (which is the Tax Agreement between Mainland China and Hong Kong), the Chinese withholding tax rate on the payment of dividends may be reduced to a 5 percent rate from the statutory 20 percent rate if the “beneficial owner” of the PRC payor is a Hong Kong company which owns at least 25 percent of the payor. Chinese withholding taxes on interest and royalty payments are similarly entitled to a reduced withholding rate of 7 percent if the “beneficial owner” is resident in Hong Kong. However, the Mainland-Hong Kong Tax Agreement and other Tax Agreements do not contain a definition of “beneficial owner.”
Circular 601 generally defines the term “beneficial owner” to be a person who has ownership or control over income or the rights or property from which income is derived. The Circular states that beneficial owners, in general, engage in substantive business activities and may be individuals, companies or other entities.
However, agents and “conduit companies” are not beneficial owners. Circular 601 identifies a “conduit company” as being a company that is established for the purpose of avoiding or reducing taxes, or diverting or aggregating profits. According to the Circular such companies are only registered in their jurisdiction of incorporation to satisfy the organizational form required by law and do not engage in manufacturing, distribution, management or other substantive business activities in this jurisdiction.
Circular 601 indicates that the determination of a person’s status as a beneficial owner cannot be determined solely from the technical aspects or from the perspective of domestic laws, but also should be considered from the objectives of the Tax Agreements (namely the avoidance of double taxation and prevention of fiscal evasion). In determining beneficial owner status the Circular provides that an analysis should 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.
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