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

Jinyan Li2 (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 Li3 (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 Li4 (3) Canada: Prévost Car Facts: Prevost (Canada) Holdco (Dutch) Henlys (UK) Volvo (Sweden) 49%51% 100% Shareholder Agreement 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 to Henlys without Holdco’s Director’s signing Dividend WHT rate: 10%, UK treaty 15%, Sweden treaty (reduced to 5% in 1997) 5%, Holland Notes: -No clear Canadian treaty policy on dividend wht -gov’t s indicate disagreement

Jinyan Li5 (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 Li6 (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 Li7 (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 Li8 (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 Li9 (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 oExtensive information reporting obligations oExchange control oRegistration

Jinyan Li10 (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 Li11 (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