The Beneficial Owner Concept in Civil Law Countries. Scandinavian Perspective.

Abstract: Free movement of goods, capital, workers and services have stimulated economic and social interaction between Member States of the European Union. At the same time international trade and globalization go far beyond the scope of the EU and have a tremendous impact on various countries in the world. Capital mobility encourages companies to look for business opportunities world-wide in order to meet intense competition and strengthen their own positions both at domestic and international markets. This development over the international economic landscape has effect on national treasuries as multinational enterprises engage in structuring their business in a way that it ultimately has repercussions on taxing powers of different countries. Due to a great diversity of legal systems both within European countries and world-wide, inevitable conflicts and collisions emerge when a certain situation or a term receives different interpretations and consequently different treatments in different countries. That might lead to situations of double taxation or double non-taxation which either hinders the international economic development by neutralizing incentives for companies to involve into cross-border transactions or results in tax avoidance and tax evasion which erodes tax bases of national states respectively. In order to mitigate this problem countries conclude bilateral tax treaties. The OECD’s Model Tax Treaty represents a benchmark in the area of tax treaty negotiations. However, the OECD Model Treaty does contain a number of undefined terms which are being regularly applied in an international context. The concept of beneficial owner is a vivid example of a white spot in the area of taxation. It is generally used in conjunction with payments of dividends, interests, royalties and is commonly employed in international tax treaties. The reason for inserting beneficial owner concept into double tax treaties is to restrain access to treaty benefits only for residents of the other contracting state and to limit opportunities for taxpayers in third countries to indirect enjoy benefit to which they are not eligible by setting up intermediate companies in the resident state. To determine the beneficial owner is a matter of importance since treaty benefits, mainly lower withholding tax rates or exemption from the withholding requirements altogether are granted only to the beneficial owner of such income. The term was first introduced into the OEDC Model Convention in 1977 and today, 35 years later, there seems to be the same air of mystery surrounding the beneficial owner concept. The fundamental freedoms laid down in the TFEU accommodate for high mobility of resources within the EU, but at the same time it contributes to the emergence of tax planning schemes taking advantage of inter alia undefined terms, such as beneficial owner. Thus it is a matter of concern for every state to protect its tax base, to prevent tax avoidance and tax evasion in view of the increase in cross-border investments and high value of financial flows between different states. The absence of a clear-cut definition of the term implies ambiguities arising from a situation when two different legal systems interpret the beneficial owner concept according to their own traditional juridical approaches. The main distinction here lies between common law and civil law countries. Due to the fact that the beneficial owner concept originates from the common law countries; the civil law countries do not have an equivalent term in their domestic legislations. Nevertheless, the term is frequently applied both in civil law and in common law countries. Thus the situation seems to be paradoxical: the beneficial owner term is widely used in double tax treaties and is significant in determining whether treaty benefits would apply, although the uniform definition of the term is missing. It therefore appears to be of interest to investigate into how beneficial ownership is interpreted in civil law countries, such as Denmark and Sweden, since the concept is not familiar to them. Is it more challenging for civil law countries to deal with this concept? What method of interpretation of beneficial owner term is normally used? And does it really matter that the term is alien?