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Beneficial Ownership - South Africa Perspective
The concept of beneficial ownership has been prominent in double tax agreements ("DTA") based on the Organisation for Economic Co-operation and Development ("OECD") model treaties from as far back as 1977. Articles pertaining to dividends (article 10), interest (article 11) and royalties (article 12) all provide for a reduced level of withholding tax provided that such income is remitted to a beneficial owner. Despite its importance there has been, until recently, very little jurisprudence concerning the meaning of beneficial ownership. Taxand South Africa looks at the concept of beneficial ownership in light of the Velcro Canada v Her Majesty The Queen court case and looks at implications for South Africa.
The meaning of the term beneficial ownership was comprehensively discussed in the recent Canadian judgment of Velcro Canada v Her Majesty The Queen 2012 TCC 57. In this case the Court was required to rule whether a Dutch resident company which received royalties from a Canadian resident company was the beneficial owner of such royalties.
Facts of the case
Velcro Industries BV (Velcro Industries), a company resident in the Netherlands, was the owner of Velcro Brands and Technology. In 1987 Velcro Industries concluded an agreement with Velcro Canada Inc. (Velcro Canada). In terms of the agreement Velcro Canada obtained the right to manufacture, sell, and distribute the licensed products, and the right to use the licensed trademarks to promote, sell, and distribute in relation to the licensed products. Velcro industries received a royalty amount in return which was subject a reduced withholding rate of 10%.
In 1995 a reorganisation of the Velcro Group resulted in Velcro Industries changing its residence from the Netherlands to the Netherlands Antilles a country which does not have a DTA with Canada. Velcro Industries then assigned its rights and obligations in relation to its intellectual property to Velcro Holdings BV (Velcro Holdings), a company resident in the Netherlands.
Taxand South Africa discusses Beneficial Ownership in greater detail including the court's ruling
Although the decision in Velcro only holds persuasive value in South Africa, it provides a useful framework for both the taxpayers and the Courts in determining whether or not a recipient of an amount is the beneficial owner. This will be particularly important with the introduction of dividends tax effective from 1 March 2012 and the proposed interest withholding tax.
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