A few thoughts on the recent application of the beneficial ownership limitation in tax treaty disputes

Introduction

The application of the beneficial ownership limitation in double taxation conventions (“DTCs”) continues to be a key area of focus in tax treaty disputes. Moreover, court decisions giving effect to the significant additions introduced in the 2014 Commentaries to the OECD Model Tax Convention (“2014 OECD Commentary”) with a view to clarifying the interpretation of beneficial ownership are beginning to emerge. The substance of these additions remained unchanged in the 2017 Commentaries to the OECD Model Tax Convention (“2017 OECD Commentary”), which incorporate the outcome of the Base Erosion and Profit Shifting (BEPS) Initiative. Following this latter update, cross-references to article 29 of the OECD Model Convention (“OECD MC”) (limitation on benefits) were essentially added to the commentaries on articles 10 (dividends), 11 (interest), and 12 (royalties). However, these cross-references did not affect the passages relating to beneficial ownership, which were also left unchanged by the 2025 update of the OECD MC.

Therefore, a proper understanding of the 2014 OECD Commentary on beneficial ownership is of critical practical importance in tax disputes involving both pre-and post-BEPS DTCs. For the purposes of this discussion, post-BEPS DTCs refer to treaties incorporating the Principal Purpose Test (PPT) set out in article 29(9) OECD MC. In addition, the question arises as to whether the 2014 OECD Commentary applies to pre-2014 DTCs. I revert to this latter point below.

It is well known that the language of the 2014 OECD Commentary on beneficial ownership has given rise to some uncertainty. There are, in essence, two main reasons for this uncertainty. First, when referring to the recipient’s right to use the income unconstrained by “a contractual or legal obligation”, the 2014 commentaries state that such an obligation may “be found to exist on the basis of facts and circumstances showing that, in substance, the recipient clearly does not have the right to use and enjoy”1the income unconstrained by a contractual or legal obligation to pass on the payment. The question thus arises as to whether such facts and circumstances may be used solely to establish the existence of a contractual or legal obligation, or whether this constitutes an implicit reference to a substance-over-form approach. Second, how does this passage interact with the language of the 1986 OECD Conduit Report (i.e. a company having “as a practical matter” very narrow powers), which has remained unchanged in the 2014 OECD Commentary?

Recent tax treaty case law

One court which has recently and thoroughly engaged with the foregoing questions is Switzerland’s Federal Supreme Court (“FSC”). In a judgment of 19 May 2020, the FSC held that beneficial ownership is an “open term” subject to evolution which thus had to be interpreted pursuant to the most recent version of the OECD commentaries (i.e. the 2014 update)2. The issue came again up prominently in a judgment of 3 October 2024 (to be published in the official collection of federal judgments)3. There, the FSC clarified that the issue of a contemporaneous or evolutionary interpretation of the beneficial ownership limitation did in fact not have to be settled because the changes introduced in the 2014 OECD Commentary were only meant to clarify the original and proper interpretation of beneficial ownership. Such commentary is therefore applicable to both pre and post 2014 DTCs4. Moreover, the FSC confirmed that “facts and circumstances”5may only be referred to establish a legal or contractual obligation to pass on the income. According to the Court such obligation may well be unwritten (implied). However, and importantly, this is only possible where the applicable contract law permits the establishment or supplementation of contractual obligations in other than written form6. Therefore, the FSC found that it is not correct to consider that the recipient is not the beneficial owner based on a mere “de facto obligation to forward” the income and/or considering the distribution of risks between the parties7.  For the FSC, this outcome is also supported by the ordinary meaning of the term8. As we have already submitted elsewhere, it is thus now beyond doubt that Swiss case law understands the 2014 OECD Commentary as conveying a legal interpretation of beneficial ownership9. Moreover, the nature, level of activities or transfer pricing functions assumed by the recipient of the income are completely irrelevant for purposes of the beneficial ownership limitation.  Interestingly, in a judgement delivered on 26 November 2025 involving the Korea-Ireland DTC and a licensing and sub-licensing structure, the Seoul High Court also expressly referred to the 2014 OECD Commentary in a fashion similar as the FSC and found that a group company incorporated in Ireland was the beneficial owner of royalties10.

Another recent case worth mentioning is C&W Offshore Ltd decided by the Tax Court of Canada on 4 March 2026.  The case involved a Canadian taxpayer (“C&W Offshore”) which had subleased mooring chains from a UK company (“InterMoor UK”), which, in turn, leased the chains from its Norwegian affiliate (“InterMoor Norway”). Under the Canada-UK DTC rental payments paid to InterMoor UK were treated as royalties and subject to a 10% withholding tax whereas such payments if seen as derived directly by InterMoor Norway would have been characterized as business profits under the Canada-Norway DTC and would thus not have been taxable in Canada11. Pursuant to its agreement with InterMoor UK, C&W Offshore was required to take delivery of the chains from InterMoor Norway12. InterMoor Norway retained authority over the Chains13. InterMoor Norway invoiced InterMoor UK on 30-day payment terms, while InterMoor UK invoiced C&W Offshore on 60-day terms14. The taxpayer argued that InterMoor Norway (and not InterMoor UK) was the beneficial owner of the royalties and, therefore, that the Canada-Norway DTC was applicable15. The Court disagreed and held that InterMoor UK was the beneficial owner. The Court relied on the test established in Prévost Car Inc v R16and found that InterMoor UK had possession17, controlled18, assumed the risk associated with the rental payments19and that no agency relationship was in place between this entity and InterMoor Norway20. In support of its reasoning, the Tax Court did not refer to the 2014 OECD Commentary. In my view, however, this outcome which is in line with a legal understanding of beneficial ownership would have been the same under an analysis based on the 2014 OECD Commentary. 

Relation with the PPT supports legal interpretation of beneficial ownership

Finally, and as already argued, the relationship with the PPT in post-BEPS DTCs provides further retrospective support for the conclusion that beneficial ownership was always intended to have a legal meaning21. Economic conduit cases are indeed to be addressed by the PPT and not the beneficial ownership limitation22. This is thus only possible if beneficial ownership is understood in a legal fashion. Otherwise, one would indeed never get to the PPT (tax treaty benefits being already denied based on a broad and economic interpretation of beneficial ownership).  From a practical standpoint, one may ask: does it make a difference if tax treaty benefits are denied based on beneficial ownership or the PPT? It may make a practical difference because the standard is not the same.  Under a PPT analysis, tax treaty benefits may still be granted in the case of a structure economically regarded as a conduit as long as such structure is justified by proper commercial reasons. The 2017 OECD Commentary refers for example to a licensing and sub-licensing structure and concludes that: “there is no indication that RCO established its licensing business in order to reduce the withholding tax payable in State S. Because RCO is conforming to the standard commercial organization and behaviour of the group in the way that it structures its licensing and sub-licensing activities and assuming the same structure is employed with respect to other subsidiaries carrying out similar activities in countries which have treaties which offer similar or more favourable benefits, the arrangement between SCO, RCO and TCO does not constitute a conduit arrangement”.23 A proper delineation between the PPT and the beneficial ownership limitation thus provides further evidence that a legal understanding of this notion is the correct one.

• 1              2014 OECD Commentary, para. 12. 4 ad art. 10; para. 10.2 ad art. 11; para. 4.3 ad art. 12; 2017 OECD Commentary, para. 12. 4 ad art. 10; para. 10.2 ad art. 11; para. 4.3 ad art. 12
• 2              FSC Judgment 2C_880/2018 of 19 May 2020 published in English in 23 International Tax Law Reports (ITLR) 864, at 899 : « the contracting states of the DTC CH-UK must have had acknowledged already at the moment of concluding the treaty that the meaning of the term beneficial owner (…) would change over the years and that this change would be mirrored in the works of the OECD. Thus, the term can be interpreted in an ambulatory manner as a term of public international law (compare the decision of the International Court of Justice of 13 July 2009 Différend relatif à des droits de navigation et des droits connexes [Costa Rica against Nicaragua], C.I.J. Recueil 2009 ». More broadly, on the application of the principle of evolutionary interpretation to DTCs, see D. Gutmann, Static Versus Evolutionary Interpretation of Tax Treaty Terms and R. J. Danon, Tax Treaty Interpretation and the International Legal System: A Necessary Link, 1.4.2 in: R.J. Danon/G. Maisto/A. Martin-Jiménez (eds): Tax Treaty Interpretation of the Vienna Convention on the Law of Treaties, International Fiscal Association, IBFD publishing, forthcoming
• 3             FSC Judgment 9C_635/2023 of 3 October 2024 and published in English 2025 ITLR 644
• 4             2025 ITLR 644, 701
• 5              2014 OECD Commentary, para. 12. 4 ad art. 10; para. 10.2 ad art. 11; para. 4.3 ad art. 12; 2017 OECD Commentary, para. 12. 4 ad art. 10; para. 10.2 ad art. 11; para. 4.3 ad art. 12
• 6               2025 ITLR 644, 705
• 7             2025 ITLR 644, 704
• 8             2025 ITLR 644, 701-702
• 9              R.J. Danon/B. Malek in: R.J Danon/T. Obrist/T. Bornick/B. Malek (eds): La jurisprudence du Tribunal fédéral en 2024, Revue de droit administratif et de droit fiscal - Droit fiscal (RDAF) 2025 II, p. 173
• 10             Seoul High Court, Administrative Panel 11-1, Judgment of 26 November 2025, 2023Nu34509,
• 11             InterMoor Norway did not maintain a permanent establishment in Canada
• 12             C & W Offshore Ltd. v. The King, 2026 TCC 40, para. 26
• 13             C & W Offshore Ltd. v. The King, 2026 TCC 40, para. 29
• 14             C & W Offshore Ltd. v. The King, 2026 TCC 40, para. 29
• 15             See also in this regard 2017 OECD Commentary, para. 4.6 ad art. 12
• 16             Prévost Car Inc v R, 10 ITLR 736; 11 ITLR 757
• 17             C & W Offshore Ltd. v. The King, 2026 TCC 40, para. 95: «The evidence is that InterMoor UK had possession of the Rental Payments. C&W Offshore paid all invoices directly to a UK bank account that was under InterMoor UK’s exclusive control»
• 18             C & W Offshore Ltd. v. The King, 2026 TCC 40, para. 96: «The payments were deposited into InterMoor UK’s exclusive bank account, granting InterMoor UK unrestricted control over the funds”
• 19             C & W Offshore Ltd. v. The King, 2026 TCC 40, para. 98: «The evidence also shows that InterMoor UK assumed the risks associated with the Rental Payments. The lease agreement for the Chains was concluded between InterMoor UK and C&W Offshore. InterMoor UK invoiced C&W Offshore on 60-day terms, while its separate lease agreement with InterMoor Norway required InterMoor UK to remit payment within 30 days. This demonstrates that InterMoor UK was liable to InterMoor Norway even if C&W Offshore failed to pay, thereby exposing InterMoor UK to financial risk”
• 20             C & W Offshore Ltd. v. The King, 2026 TCC 40, paras. 108 and 109
• 21             R.J. Danon/B. Malek in: R.J Danon/T. Obrist/T. Bornick/B. Malek (eds): La jurisprudence du Tribunal fédéral en 2024, Revue de droit administratif et de droit fiscal - Droit fiscal (RDAF) 2025 II, p. 175
• 22             2017 OECD Commentary, para. 187 ad art. 29
• 23             2017 OECD Commentary, para. 187 ad art 29, Example E.