Determining the impact of the 2014 OECD update to beneficial ownership in equity derivatives and financial instruments transactions

Abstract

Beneficial ownership can be distinguished from legal ownership and is the cornerstone for the granting of treaty benefits under the income articles of the Organisation of Economic Cooperation and Development (OECD) Model Tax Convention (MTC). Until recently, beneficial ownership was determined with reference to the domestic laws of states contracting bilateral tax treaties. Foreign case law provided further information on the meaning of the term. In updating the Commentary to the 2014 MTC, the OECD defined beneficial ownership as having the right to use and enjoy the income unconstrained by any contractual or legal obligation to distribute that income further to another party. In the financial industry, where banks and brokers routinely trade or hedge risk, financial instruments written over equities typically shift economic risks and rewards to contracting parties. As a consequence, the holder of the equity shares is divested from all or selected rights, obligations, risks and rewards that are ordinarily associated with ownership. The question then arises whether the holder of the equity share is the beneficial owner of that share or of the dividend that it produces. This study aims to determine beneficial ownership of equities and dividends where risk offsets have been concluded. It comprises a doctrinal research study that formulates the rule of law in respect of beneficial ownership and then applies it to a selection of transactions involving equity derivatives and financial instruments.