Beneficial ownership (or beneficial entitlement) concepts are used across the UK tax code in relation to domestic provisions as well as in the application of double tax treaties. Since the Court of Appeal’s decision in Indofood in 2006, the majority view has been that there are two different tests for beneficial ownership (or entitlement), one in respect of domestic law and one in respect of double tax treaties. But the recent Upper Tribunal decision in Hargreaves Property Holdings Limited (discussed in this earlier post) has cast a measure of doubt on this proposition.

Domestic test

Examples of beneficial entitlement tests can be found in the provisions on intra-group loss relief (where the beneficial entitlement to distributions and assets on a winding up are considered as part of the grouping test) or the ownership condition that forms part of the eligibility criteria for the qualifying asset holding company regime that was introduced in 2022. Certain domestic exceptions from the duty to withhold income tax from e.g. interest payments also operate by reference to the characteristics of the person beneficially entitled to the payment.

For the purposes of domestic law, Bupa Insurance made clear (in the context of the predecessor legislation to the current intra-group loss relief regime) that the legal owner of an asset would generally also be its beneficial owner unless it received the property as a mere legal shell. This sets a relatively high threshold for challenging beneficial ownership/entitlement. In Bupa Insurance, an obligation on a (substantial) company to pay on an amount equal to any dividends received, within 10 working days of receipt, did not deprive it of beneficial ownership of those dividends.

The parties in Bupa Insurance agreed (after the court had requested submissions on the point) that the “international fiscal meaning” of the term “beneficial ownership”, as construed by the Court of Appeal in the case of Indofood in relation to the application of the Interest Article in the Indonesia/ Netherlands double tax treaty, was not relevant in the domestic context.

International fiscal meaning

The Court of Appeal’s decision in Indofood is authority for the proposition that, in the context of the application of double tax treaties, one would apply an “international fiscal meaning” of the term “beneficial ownership” (rather than one derived from UK domestic law), requiring one to consider whether the recipient enjoys “the full privilege to directly benefit from the income”.

This is a more stringent test than the one applicable under UK domestic law, but the UK tax authority’s published guidance (INTM332050) states that it is unlikely to lead to a different result unless “the substance of an arrangement amounts to an improper use of the relevant [Double Taxation Convention] in the light of the DTC’s object of prevention of fiscal evasion and avoidance, for example “treaty shopping””. It suggests that, where the recipient is not the beneficial owner, but the beneficial owner is resident in a jurisdiction with which the UK has a double tax treaty that provides the same benefits as the one between the UK and the recipient’s jurisdiction, it would not seek to require UK withholding tax based on the recipient’s lack of beneficial ownership in an Indofood sense.

The way in which this is expressed is, however, somewhat unsatisfactory because it could appear to imply that the domestic test for beneficial ownership can be used unless there is evidence of “treaty shopping”, in which case one has to switch to the Indofood definition. It does seem odd that, in this sense, it appears that “beneficial ownership” in a treaty context could have two different meanings. Moreover, the guidance does not explicitly confirm whether, where the beneficial owner’s jurisdiction has a less generous tax treaty with the UK than the recipient’s jurisdiction, one could at least look through to apply the less generous treaty (instead of having to apply withholding tax at the statutory rate).

Hargreaves Property Holdings Limited

In Hargreaves Property Holdings Limited, the Upper Tribunal considered the meaning of the term “beneficially entitled” for the purposes of the domestic exemption from withholding tax in respect of payments made where “the person beneficially entitled to the income in respect of which the payment is made is a UK resident company” (section 933 of the Income Tax Act 2007).

The Upper Tribunal broadly concluded that where the interposition of an entity has “no commercial function other than to sidestep the withholding provisions”, it could not be regarded as “beneficially entitled” to the relevant payment for these purposes: “Purposively construed, the exception is drawn for the benefit of UK companies who are substantively entitled to receive and enjoy the income, not those who are beneficially entitled only in the narrower technical sense used to distinguish between legal and equitable interests in English common law.”

As pointed out in my colleague’s more detailed post, it will be interesting to see how far this reasoning may be pushed – or whether the decision should essentially be confined to its own facts. For now, however, it has muddied the waters in respect of what seemed a clear distinction between the beneficial ownership tests applicable for UK domestic and international tax purposes, by effectively suggesting that, depending on the legislative context and factual circumstances, a test closer to the Indofood international fiscal meaning could be applied instead of the narrower domestic test in Bupa Insurance.