Beneficial Ownership: Recent Developments in Canada and China

1. Beneficial Ownership:Recent Developments in Canada and China Jinyan Li April 20, 2010

2. (1) “B.O.” Concept: Importance • Found in DTCs: • all but one Canadian treaties (Canada-Australia uses “beneficially entitled”) • Chinese tax treaties • Canada • Litigation: Prevost Car, Velcro, MIL • GAAR • Forthcoming CRA Guidance • China • GAAR legislation (2008) • State Administration of Taxation Circulars (2009) Jinyan Li

3. (2) Canada: General Context • Judicial approach to tax avoidance • Duke of Westminster (limited only by GAAR) • Textual interpretation • no substance-over-form doctrine • “Treaty shopping” -- not a “dirty term” • Government lost each case: e.g. MIL (treaty shopping re capital gains) • GAAR did not apply • No inherent treaty abuse doctrine • In the absence of explicit LOB, literal compliance Jinyan Li

4. (3) Canada: Prévost Car Shareholder Agreement Facts: Henlys (UK) Volvo (Sweden) 49% 51% • Dividend WHT rate: • 10%, UK treaty • 15%, Sweden treaty (reduced to 5% in 1997) • 5%, Holland • Sh’der agreement: • 80% dividend policy • Re Holdco and Prevost • Henlys and Volvo recorded • as “B.O.” of Prevost in • Corp. Minutes and bank • doc. • Dividends paid directly toHenlys without Holdco’s • Director’s signing Holdco (Dutch) 100% • Notes: • No clear Canadian treaty • policy on dividend wht • gov’t emails indicate • disagreement Prevost(Canada) Jinyan Li

5. (4) Prévost Car Gov’t arguments: • Holdco is a “conduit”, not “BO” • “BO” should have an “ordinary meaning” rather than its legal meaning • English, French and Dutch versions of “BO” require the owner be the “real” “ultimate” beneficiary • Holdco has no “substance” Jinyan Li

6. (5) Prévost Car Tax Court: • “domestic solution”, art.3(2) • Legal meaning: • receives the dividend for his/her own use and enjoyment; • assumes the risk and control of the dividend received” • Canadian law, Quebec civil law, Dutch law, expert opinions • No predetermined flow of funds as a matter of law FCA: - TCC’s meaning “accords with” OECD Materials • Later OECD commentary has weight • “Ultimate beneficiary” interpretation creates uncertainty • Reject “pejorative view of holding companies” Jinyan Li

7. (6) Canada Revenue Agency • Did not apply for leave to appeal to SCC • Preparing guidance on B.O. • Combat abusive treaty shopping by applying:  LOB provision  GAAR  “B.O.” as a specific anti-abuse rule in Arts.10, 11 and 12 Jinyan Li

8. (7) China: General Context • New GAAR in 2008 • Tax policy changed re FDI • Increasing anti-avoidance efforts • No court decisions • SAT Circulars regarded as law • “Treaty shopping” -- not a good word • “Conduit companies” looked through in sourcing capital gains (MIL type of situations) Jinyan Li

9. (8) China: Tax Circulars • Guoshuihan, No.601, 2009: “Beneficial Owner”, • Guoshuihan, No.81, 2009: “Dividend withholding tax” • Guoshuifa, No.3, 2009, Withholding Taxes • Guoshuihan, No.698, Offshore transfer of Equity of Chinese companies • Extensive information reporting obligations • Exchange control • Registration Jinyan Li

10. (9) China: “Beneficial Owner” Circular No.601 Meaning: “A person who has the right of ownership and right of disposal over the income or the income-producing assets” Substance over form Negative factors Jinyan Li

11. (10) China: Negative factors • obligation to pass on all or most (e.g., <60%) of income within a specified period (e.g., 12 months); • little or no business activities (other than holding the assets); • assets, size of operations, and human resources are disproportionately small relative to the income received from China; • No control over income/properties and bears little or no risk; • No tax liability in the “residence” country • back-to-back loan, license structure Jinyan Li