Equivalent beneficiaries – the “grey cardinals” of tax treaties

Abstract

The subject. The article is devoted to the study of the legal structure of the Simplified Limitation on Benefits Provision (SLoB clause) in the Multilateral Convention to Implement Tax Treaty Related Measures to Prevent Base Erosion and Profit Shifting (MLI). The author's attention is focused on tax residents of the Contracting States who are recognized as qualified persons for the purposes of double taxation agreements, as well as the concept of an “equivalent beneficiary”.

The purpose of the study is to critically analyze the Simplified Limitation on Benefits Provision (SLoB clause) in the Multilateral Convention to Implement Tax Treaty Related Measures to Prevent Base Erosion and Profit Shifting (MLI), considering both the conceptual and practical aspects inherent in its main elements. The study is based on empirical methods of comparison and description, theoretical methods of formal and dialectical logic.

The main results. The author reveals the legal construction of the Simplified Limitation on Benefits Provision (SLoB clause). The article compares the concept of an “equivalent beneficiary” with the concept of a “beneficial owner” (a person who has the actual right to income). The author reveals the sequence of application of the main purpose test and the simplified provision on the limitation of benefits provided for in Article 7 of the multilateral tax convention.

Conclusions. The author concludes that the analyzed rule is designed in such a way that the SLoB clause does not restrict access to preferences that are not the result of reciprocity between partner states based on the status of a tax resident of a Contracting State. The concept of an “equivalent beneficiary” is based on a comprehensive assessment of the system of double taxation agreements (other international agreements) and related parties (“test groups”). The SLoB clause takes a slightly different approach to providing tax benefits than is provided for by the classical concept of the beneficial owner (Articles 10 (Dividends), 11 (Interest), 12 (Royalties), less often – Article 21 (Other income)). At the same time, the SLoB clause design also relies on “test groups”. And this is evident not only in relation to an equivalent beneficiary, whose potential right to benefits – similar or more beneficial – opens access to benefits for a resident of a Contracting State in whose authorized capital equivalent beneficiaries participate (directly or indirectly, at least 75%). A similar approach can be observed in the sub-item “b” clause 10 of Article 7 of the Multilateral Convention to Implement Tax Treaty Related Measures to Prevent Base Erosion and Profit Shifting (MLI), where the income of a “connected persons” is interwoven into the permissive perimeter.