Issuance of Explanatory Decree regarding “the Application of Beneficial Owner under Agreements for the Avoidance of Double Taxation with Respect to Taxes on Income”
In order to enhance the certainty with respect to applying for reduction in or exemption from tax under the provisions of Agreements for the Avoidance of Double Taxation with Respect to Taxes on Income (hereinafter referred to as “Income Tax Agreements”), the Ministry of Finance released the explanatory decree no. 10800577770 on June 24, 2019 (hereinafter referred to as “Decree”) to clarify the application of the term “beneficial owner” under the Income Tax Agreements. The Ministry of Finance pointed out that the content of the Decree, which is summarized in the following, is made with reference to the relevant Commentaries of the OECD Model Tax Convention, the positions adopted by other countries, and its current practice. The Decree, therefore, may ease the obligation of taxpayers when applying the term. The Decree also specifies the situations where a taxpayer will be denied beneficial owner status.
1. Ease the obligation of taxpayers
Where a resident of the other Contracting State applies for reduction in or exemption from tax in accordance with an Income Tax Agreement and relevant regulations that require the submission of supporting documents identifying the said resident of the other Contracting State as the beneficial owner of the income in question, that resident of the other Contracting State may submit a declaration identifying himself/herself/itself as the beneficial owner of the income in question in order to fulfill the aforementioned requirement. When a foreign institutional investor of the other Contracting State investing in domestic securities with the status of a fund or by means of holding a trust relationship derives dividends or interest, and the aforementioned fund or trust is a resident of the other Contracting State, a declaration identifying the fund or trust as the beneficial owner of the income in question may also be submitted to fulfill the aforementioned requirement; the requirements stipulated under each Subparagraph of Paragraph 6 of Article 15 of the Regulations Governing Application of Agreements for the Avoidance of Double Taxation with Respect to Taxes on Income (hereinafter referred to as “Regulations”) which would otherwise be applicable will not apply to this case.
2. Specify the situations where a tax authority may launch its audit
When the tax authority undertaking the aforementioned application finds that the resident of the other Contracting State receiving the income in question acts in the capacity as a person whose right to use or enjoy the income in question is constrained by a contractual or legal obligation which is dependent on the receipt of the income in question to pass on that income to another person, such as an agent, a nominee, or a conduit financing entity, that resident of the other Contracting State is not the beneficial owner of the income in question.
The Ministry of Finance explained that, in reference to the OECD or UN Model Tax Convention, the Dividends, Interest, and Royalties provisions under Taiwan’s 32 Income Tax Agreements stipulate that where the aforementioned income arises in a Contracting State and is paid to a resident of the other Contracting State who is the beneficial owner of the income, the first-mentioned Contracting State may tax the income at a specified lower rate. In accordance with the Commentaries of the OECD and UN Model Tax Conventions, the requirement of the beneficial owner aims at preventing the improper use of tax treaty; however, those model conventions do not provide a definition of the term. In Taiwan, the Regulations stipulate the application in association with the term; the Ministry of Finance has also released explanatory decrees/letters regarding the application of that term when the applicant is an Australian legal person, the United Kingdom Authorised Unit Trust, or the United Kingdom Open-ended Investment Company. In practice, pursuant to descriptions of the relevant application forms, the applicant may submit a declaration identifying himself/herself/itself as the beneficial owner of the income in question in order to fulfill the beneficial owner requirement.
After the release of the final report of BEPS Action 6 “Preventing the Granting of Treaty Benefits in Inappropriate Circumstances” by the OECD, an international consensus has been reached on measures for tackling the treaty abuse situation, and these measures are gradually being implemented. In addition, the relevant Commentaries of the OECD Model Tax Convention has clarified the situations where a person will be denied beneficial owner status, and elaborated that a qualified collective investment vehicle (for instance, an investment fund or trust) and a qualified pension fund may be the beneficial owner of the income received. Therefore, the Ministry of Finance found that now is the right time to issue the Decree, which was drafted by taking the above views into consideration and by reference to the relevant positions adopted by the Netherlands, Singapore, the United Kingdom, and the United States, to clarify that the income recipient may identify himself/herself/itself as the beneficial owner simply by providing a declaration, and to stipulate the situations where he/she/it will be denied being considered the beneficial owner of the income. The Decree also applies to a qualified fund or trust which is invested in Taiwan in the capacity of a foreign institutional investor. Furthermore, the Decree elaborates that the aforementioned decrees/letters regarding the application of beneficial owner when the applicant is an Australian legal person, the United Kingdom Authorised Unit Trust, or the United Kingdom Open-ended Investment Company are being abolished. In the case that an applicant has applied for a case pursuant to these abolished explanatory decrees/letters and that, by the time of the issuance of the Decree, the case has not yet been determined by the tax authority, the provisions of this Decree may be applicable to that case to the extent that they are more favorable to the applicant.
The Ministry of Finance stated that since the content of the Decree adopts and reflects the international consensus and practice, it may bring about multiple benefits such as reducing tax compliance costs, making clear the rules applying to both taxpayers and tax authorities, decreasing disputes over cross-border taxation, and complying with the deregulation policy. In this regard, by the release of the Decree, Taiwan’s investment environment may be improved, which will subsequently attracts more foreign investors, so as to stimulate its financial market (including capital and money markets) and to enhance its international competitiveness.
The content of the Decree is available at here.