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The proposed changes are similar in each case.  They deal with the following points:

• First, the term "beneficial owner" in these articles has a special meaning which is taken from its context.  It does not have the technical meaning that it may otherwise have under the trust law of many common law countries.  The beneficial owner is the person who has the "full right to use and enjoy" the payment "unconstrained by a contractual or legal obligation to pass the payment to another person".
• Second, the recipient of the dividend, interest or royalty payment will not be treated as the beneficial owner if the recipient is simply an agent or nominee of the true owner or simply acts as a conduit for another person, who in fact receives the benefit of the income.

The operation of these articles is important in many financing structures. They often determine whether a particular payment will benefit from a reduced rate of withholding tax under a double tax treaty.

In the UK, some doubt was cast over this area by the decision of the Court of Appeal in the case of Indofood International Finance v J P Morgan Chase in 2006. In that case, the court held that the term beneficial owner in a double tax treaty had to be given an international fiscal meaning and not its technical meaning as a matter of English law.  The court did not set out precisely the meaning of the term - in particular, it remained unclear whether the concept of beneficial ownership in treaties should be read as incorporating anti-abuse principles.  So, for example, it was not clear whether the fact that, although the recipient of a payment was under no legal duty or obligation to pass on the payment, as a commercial matter it was almost inevitable that he would do so was sufficient to deprive the recipient of a payment of beneficial ownership for the purposes of a double-tax treaty.  HMRC published guidance which set out some aspects of practice, but it did little to clarify the underlying principles.

The new draft commentary states that the recipient of a payment will be treated as the beneficial owner where he has the full right to use and enjoy the dividend "unconstrained by a contractual or legal obligation to pass the payment to another person".  Although some further clarification may assist, the drafting suggests that the commercial (but not contractual or legal) pre-determination of the funds flow may not deprive the recipient of beneficial ownership.  That, however, is not the end of the story.  The draft commentary goes on to state that anti-abuse concepts may still be relevant to deny the benefit of the treaty to the recipient of the payment under other provisions even if he is the beneficial owner under this test.

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