South Africa: Beneficial ownership – not far away (for some) and here to stay (for all)

The term ‘beneficial ownership’ (‘BO’) has a somewhat elusive meaning. The term is particularly relevant in the context of withholding taxes as contained in articles 10, 11 and 12 of the OECD Model Tax Convention (‘MTC’), which deal with dividends, interest and royalties. The term is, however, not defined in either the MTC or the OECD’s commentaries.

According to the OECD’s commentaries, the term BO should not be interpreted according to the narrow technical meaning that it may have under the domestic law of a specific country but should rather be understood in its context and in light of the object and purposes of the MTC, including avoiding double taxation and the prevention of fiscal evasion and avoidance. For example, in article 10 of the MTC (dividends), the BO is the person or the recipient of a dividend who has the right to use and enjoy the dividend unconstrained by a contractual or legal obligation to pass on the payment received to another person. The concept refers to the BO of the dividends and not to the owner of the shares, which may not always be one and the same person.

Under South African (‘SA’) tax law, the term BO does not have a general definition and is defined only in the context of dividend withholding tax in section 64D of the Income Tax Act as "the person entitled to the benefit of the dividend attaching to the share”. This means that the BO will not necessarily be the registered owner of the share. The SA dividends tax definition of BO is therefore similar to that of the meaning advocated by the OECD for purposes of the MTC.

Unlike some other jurisdictions with various additional substantive requirements to evidence BO, SA has a comparably simple and passive BO regime, based on a unilateral written declaration and undertaking by the BO, which is valid for 5 years. This passive approach may change in the future in light of global trends and the recent grey listing of SA by the FATF.

It was evident from a recent WTS Global panel discussion, involving participants from 

various countries, that the represented jurisdictions each have unique and differing approaches to determining and vetting a BO, with the criteria and tests to be applied differing vastly. Poland, for example, has a relatively advanced BO regime, with a strong focus on substantive requirements and various verification checks by the revenue authorities depending on the facts and circumstances. The approach adopted by Poland can therefore be described as an active BO regime, compared to SA’s (current) passive regime.

Notwithstanding the level of sophistication of a jurisdiction’s approach to the BO concept, it is clear that the notion of BO is here to stay and will play an ever more important role in transactions going forward.

If you wish to discuss these topics, please contact:

WTS Renmere