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The Beneficial Ownership in the OECD Discussion Draft – the Cypriot Perspective
On 29th April 2011, the OECD released a Discussion Draft which sets out proposed changes to the Commentary on Articles 10, 11 and 12 of the OECD Model Tax Convention concerning the meaning of the term "beneficial owner".
Although the application for OECD membership submitted by Cyprus in 1995 is still pending due to various political factors, the proposed amendments in the OECD commentary would inevitably affect Cyprus as the majority of its Double Tax Treaties (DTTs) are signed with countries who are OECD members. Taxand Cyprus examines the complex tax-planning structures that affect Cypriot companies.
The OECD proposal is a significant step towards decreasing the confusion in the meaning of beneficial ownership. This initiative, however, needs to be supported by examples and "real life" cases in order to enable the better understanding of the proposed amendments.
In the absence of a formal definition of management and control under the Income Tax Law of Cyprus, we should rely upon the principles laid down by the English Common Law as Cyprus is a common law jurisdiction too.
Conventionally, management and control is said to be established in Cyprus given that:
- the majority of the Directors of the Company are residents in Cyprus
- important company decisions are taken in Cyprus by the local directors
- the headquarters of the company are maintained in Cyprus
- the company has an economic substance in Cyprus
However, additional measures such as employing staff, registering with local business associations etc may need to be taken in order to enhance the substance of the company and the visibility of its business activities in Cyprus.
Based on the above, Taxand Cyprus supports the view that any proposed changes to the OECD commentary should be seen as a method to improve the functioning of the DTTs. We should not forget that these instruments aim at encouraging international business and trade, including via cross-border tax structuring. Therefore, the law-makers should be very careful when balancing the interest of the countries to provide tax incentives only to "genuine" recipients of income and at the same time not to obstruct the normal functioning of the DTT provisions.
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